The Rule Breakers in Beauty M&A
As American historian Laurel Thatcher Ulrich once said, “Well-behaved women never make history.” Now, with the world of beauty M&As on his mind, Kline’s Vice President of Management Consulting Services in Consumer Products Yann Pencolé has taken the famous quote and applied it to the current state of affairs in beauty M&A.
“Ulrich meant that a person who follows the rules will never make history, and this is certainly true for the beauty industry and, in particular, indie brands,” Pencolé said in a new podcast, during which he opined on all things M&A in the beauty world with Vice President of Global M&A and Corporate Development Hardeep Parmar. “Indie brands are often rule-breakers; their founders grow their businesses with a passion to address unmet consumer needs. They break established industry codes. They take risks that major companies are unable to take.”
That willingness to throw caution to the wind may be the reason that, as Parmar noted, mega M&A deals aren’t seen on the horizon, and instead, “the real opportunities in beauty M&A, going forward, can be found with indie brands and the growth opportunities they offer.”
There’s plenty of data to prove this point, with Pencolé rattling off a list of indie success stories: Drunk Elephant was acquired by Shiseido for $845 million in 2019, a valuation of 8.5 times its sales; Estée Lauder closed a deal for a majority stake in Deciem, the parent company of The Ordinary, in 2021 (the transaction valued the company at $2.2 billion, making it the largest deal in Estée Lauder’s history); Drybar was acquired by WellBiz Brands in February 2021; eSalon was acquired at 51% by Henkel in 2019; Kylie Cosmetics was acquired by Coty in 2019 in a deal valued at more than $600 million; and Olaplex was acquired by Advent International in November 2019.
Why indie brands are desireable
So how are indies attracting such strong M&A interest?
“They position themselves on key trends that resonate with their target consumers,” said Pencolé. “If we take a step back and look at the evolution of the beauty industry, we can clearly see that a new generation of consumers is drastically reshaping the industry’s landscape. They’re interested in scientific innovation with proven efficacy. They’re interested in wellness. They want the brands they purchase to be sustainable, cruelty-free, inclusive, and have social responsibility. They also want personalized products. And indie brands provide that.”
Those aren’t the only secrets to an indie’s success.
“Trust is key – indies have earned consumers’ faith through ingredient transparency; clear messaging; and purpose-driven, community-focused initiatives. Without trust, a brand will fall short and fail. And we’ve seen some examples and controversies that clearly destroyed — and the word ‘destroyed’ is not too strong — a brand.”
Another important factor for success: a connection across the value chain, meaning suppliers, retailers, and consumers. “Indie founders are often very well connected with beauty and personal care industry participants,” Pencolé said. Investment and funding are also essential, as Pencolé notes that many indies “are not able to manage their own growth alone.” Investment can be provided by PE firms, venture capitalists, and funding backed by celebrities (think Gwyneth Paltrow and clean beauty brand Goop).
It’s also critical, Pencolé said, “to have the right distribution channel or the right retailers to reach the consumers that are being targeted. There are specialty channels such as Sephora, Ulta, and Anthropologie, but often, indie brands are going direct to the consumer, making them so-called ‘digitally native.’”
A company’s M&A goals
Examining a different part of the equation, Pencolé and Parmar also discussed what most companies want to achieve with an acquisition – namely, growing market share and/or eliminating the competition, diversifying their portfolio, and creating synergies with their own operations.
“A typical example of ‘growing market share’ is Henkel’s recent acquisitions in the professional hair care space,” Pencolé said. “One purpose, clearly, was to fill the market share gap with L’Oréal and Wella, which are, respectively, the #1 and #2 players.”
Meanwhile, an example that illustrates the diversification of a portfolio are the acquisitions made by Colgate-Palmolive in the professional skin care market. “The company acquired EltaMD and PCA Skin, both leaders in medical-grade and physician-dispensed skin care products,” Pencolé said. “This clearly helped Colgate-Palmolive diversify its portfolio by entering professional skin care and offered the company the chance to enter the premium market. Such acquisitions allow companies to create synergies with its own operations — optimizing sales, marketing approach, and more.”
Why private equity is admired and feared
As for who’s snapping up beauty indies, Pencolé noted that private equity (PE) while always active in beauty, has stepped up its competitiveness to be on par with strategic buyers. “The term ‘private equity’ continues to evoke admiration, envy, and — in the hearts of many public company CEOs — fear,” Pencolé said. “PE firms have pocketed huge and sometimes controversial sums while stalking ever-larger acquisition targets, such as the KKR-Coty deal with Wella in October 2021.”
According to Pencolé, PE’s ability to achieve high returns is typically attributed to a number of factors: high incentives both for PE managers and the operating managers of businesses in the portfolio; the aggressive use of debt, which provides financing and tax advantages; a focus on cash flow and margin improvement; and some degree of freedom from restrictive public company regulations.
“As private equity firms have shown, their strategy is ideally suited to realize a one-time or short- to medium-term value-creation opportunity,” Pencolé said. “For this, they must take outright ownership and control. PE opportunities most often arise when a business has not been aggressively managed and is underperforming. They can also be found with businesses that are undervalued because their potential is not readily apparent.”
Once the necessary changes to achieve the uplift in value have been made—usually over a period of two to six years—it makes sense for the owner to sell the business and move on to new opportunities. Case in point: Olaplex.
“The shampoo and conditioner maker was founded in 2014,” Pencolé recalls. “Advent International bought the business in November 2019 and worked on improving margins. Olaplex’s sales climbed sharply during the first half of 2021 compared with a year earlier, reaching a profit of $95 million on net sales of $270 million. This is compared to a net loss of $22 million on about $100 million in sales during the same period in 2020. Just two years after the acquisition, Advent launched an IPO valuing Olaplex at $16.2 billion on the first day.”
With that in mind, Parmar asked Pencolé which indie brands could be the next Olaplex – and, indeed, the latter swiftly revealed the two of the top contenders while noting that Kline accurately made such predictions in the past via our Beauty Indies: U.S. Analysis of Booming Independent Brands report. So which brands could be the next billion-dollar buyouts? For latest M&A news and to learn more about Kline’s M&A consulting services, click here.