M&A in the beauty category has been on fire for several years, and while the chatter of a beauty bubble continued, 2019 proved to be another strong year. Everything seemed to get bigger this year—the investments, the deals, and without question, the exits. As of 21 November, beauty deal activity for 2019 had already outpaced 2018 by 19%, according to investment bank Capstone Headwaters.
Strategic buyers, venture capital firms, and private equity companies have all been active, with many newcomers entering into the space. Beauty unicorns emerged, there were a number of billion-dollar deals, and bets were made on the next crop of indies with smaller capital raises in the $5-$10 million range.
The number of transactions and valuations remained high, creating challenges for potential acquirers as a result. Susan Babinsky, Senior Vice President of Kline Group, says: “The flurry of M&A activity over past several years has reduced the pipeline of good-sized opportunities (eg $100m- plus brands or companies) thus companies are snatching up small and sometimes less proven businesses—often for quite a premium.”
As predicted, activity in skincare was prolific, with Shiseido acquiring buzzy clean indie brand Drunk Elephant for $845 million after months of speculation. The year kicked off with L’Occitane paying $900 million for the UK professional brand Elemis and ended with Estée Lauder Companies Inc. making its first acquisition of an Asia-based beauty brand, acquiring the remaining two-thirds of Have & Be Co. Ltd., the holding company of Dr. Jart+, for about $1.1 billion.
Haircare also saw significant activity as predicted across the category, with some significant deals happening among brands that straddle professional and consumer distribution, like Advent International’s acquisition of Olaplex for a reported billion dollars, to Henkel’s acquisition of DevaCurl. Madison Reed entered a joint venture for franchising their color bar concept, and VMG made a minority investment in Briogeo, as the next crop of haircare indies fuel growth.
2019 was the year of CBD and hemp, with the industry going from a trend to a Wild West land grab and settling into a wait-and-see approach for many traditional beauty investors. Those with an appetite for risk have placed their bets, but most beauty investors are on the sidelines for the moment, while investors on the cannabis side of the equation snapped up high-profile brands like Lord Jones, Beboe, and This Works that could be leveraged to build out the CBD beauty category.
Beauty, wellness, and now health have converged, expanding the investment opportunities and potential distribution points. Supplement brands like Olly and Moon Juice, meditation apps like Calm, and telehealth brands like Hims have found their way into traditional beauty channels. We began to see categories like oral care and health find their way into the beauty ecosystem in a meaningful way.
In the wake of the “retail apocalypse,” a retail revival is happening as DTC brands 2019 saw these brands looking for growth offline given the skyrocketing costs of online customer acquisition. Communities and causes are giving rise to new ventures like Naked Poppy and Grove Collaborative, while retailers like Neighborhood Goods and Showfields are reinventing multi-brand retail through curation and experience.
Influence and celebrity continue to be compelling investments, with money flowing into influencer-backed indie start-ups as well as the incubation of brands at scale for mass retailers by the likes of Masea and Beach House.
Activity on the supply side happened at a rapid clip. With valuations on the brand side at a premium, there was a significant uptick of activity on the supply side. We’ve seen the consolidation of contract manufacturers and packaging companies, as well as strategic investment in technology and suppliers, focused on innovation in sustainability.
“I’ve been doing M&A for 30 years in the consumer space,” John Berg, Chief Executive Officer of investment banking firm Financo Inc., summed up the drivers of the current M&A landscape to WWD. “Traditional M&A and what drove it, versus what’s driving M&A today is very different. The convergence of data, products, and services makes the consumer industry more complex than ever. With the speed of change, companies usually can’t handle or react to change on their own. We are seeing lots of different kinds of M&A today. Why did Macy’s buy Story? Because Rachel Shechtman is a special person who knows how to bring a store environment to life and they needed that capability. Why did Amazon buy Whole Foods? For distribution capabilities for perishable items, they never had before. M&A is a far more strategic weapon than ever before and more complicated and diverse than ever.”
Will the historic boom continue in 2020? The consensus is that the market will continue to be healthy with many investment bankers reporting robust pipelines of beauty deals for 2020. Other experts don’t expect 2020 to be as robust as 2019 because the pool of mature independent brands of scale is quite small while valuation expectations remain high. Some are predicting it will take two to three years for the next crop of indies to surface as the next beauty leaders. With this in mind, smaller capital raises in the $5-$10 million range will continue.
The decade also begins with a new environment with investors looking for profitability and practicality rather than the high-flying bets on disruptors focusing on growth before profitability. “Where we are in M&A today, there’s a cautionary tale between the past and present,” said Andrew Shore, Managing Director at Moelis. When the makeup category was strong, purchase prices for brands went way up, Shore noted. “You found that every year, lower-quality assets were sold at higher prices, and now strategics are being more selective.”
Clean Color: The overarching color cosmetics category continues to struggle, and consequently transaction activity will continue to be slow with the exception being the clean color segment. Formulation technology has evolved, allowing clean color brands to compete on long-lasting wear, performance, and payoff. Clean color brands are going to be a hot commodity in 2020, breaking out of their niche status.
Personal Care: The traditional back-aisle personal care category is undergoing a rapid evolution with taboo-breaking brands tackling period care, sexual wellness, menopause, and body acceptance redefining the category. With investment, indie brands will continue to grow and take or create market share. The P&G acquisition of Billie is the prime example of what is in store for this category.
Purpose-Driven Brands: Simply selling products is not enough. Consumers want brands that stand for something that aligns with their beliefs. Activist brands like Beautycounter and Milk Makeup will continue to be acquisition targets for the strategics because of the authenticity and community that are at the core of these businesses.
Increase in Asian Activity in 2020 with strategics in the region getting more active in overseas deals. The Asia-Pacific region is the largest skincare and cosmetics market in the world—partnering with an APAC-fluent company is an interesting and potentially lucrative way to fuel growth.
Beauty Tech: Shifting consumer preferences have changed the relationship between consumers and products. The demand for transparency, personalization, experiential retail, and community are all powered by technology working in the background across the value chain of the category. There is no end to the need for tech innovation, so investment and strategic acquisitions will continue.
Supply Side: Consolidation of smaller players, especially those in the organic and natural value chain, will remain attractive targets as will those innovating on the sustainability front like Sulapac. There is tremendous opportunity for packaging companies capable of commercializing and scaling sustainable materials. Other B2B focused companies working behind the scenes innovating fulfillment technology, e-commerce experience, and retail staffing will become interesting investments. The competition will heat up as funds that are typically brand- and consumer-focused are now looking at these assets.
We’ve put in the time and have done the work for you compiling beauty and wellness deal activity in 2019.
Inside the 433-page BeautyMatter 2019 Year-End Report:
- 267 transactions captured across the beauty and wellness space and across the value chain
- Identification of trends that surfaced in 2019 and predictions for 2020
- Expert insight on the investment landscape
- List of business on the market or exploring options
- Tribe Dynamics’ analysis of EMV on key deals
- Compilation of 2019 deals with full transactional insight
- Recaps and details of individual transactions
- Easy-to-reference charts including transactions by category with high-level details and financial players involved
Photo: Jp Valery via Unsplash