The COVID-19 crisis has shown us just how quickly the world can change. Since March, consumers have been in a state of constant adjustment when it comes to beauty, health, and wellness routines. On the deal front, the optimism and momentum of 2019 that led to a very active market for M&A and investment activity in beauty and wellness carried over to the early part of 2020, but March saw activity come to a screeching halt as investors shored up portfolio companies and the industry adjusted their playbooks and diligence processes to our new Zoom reality. As the industry regained its footing after pandemic-induced lows in April, transaction activity gained momentum through Q3.
As with past economic downturns, the beauty category, for the most part, is proving to be resilient. Consumer behavior and preferences may have changed, but they remain engaged and the brands that are meeting them where they are at this moment are experiencing growth. The pandemic has been an accelerant, rapidly increasing the pace of innovation and adoption. As the crisis continues to evolve, companies must act on multiple fronts to protect their employees, customers, supply chains, and financial results. Brands that are not only weathering the pandemic but also thriving, are well-positioned in this environment and will be attractive targets because of the stability and growth they can provide a portfolio.
For big beauty, this crisis has led consumers to return to brands they know and trust. According to McKinsey & Company, while large consumer-goods manufacturers represented 50 percent of sales in 2018, they accounted for only 16 percent of growth in 2015–18. That share of growth rose to 39 percent in 2018– 19 and reached 55 percent in the first three weeks of April 2020. On the flip side, Adweek reported that since COVID-19, consumers have become more open to trying new brands for products they see as comparable. One study estimates that 81% of consumers intend to purchase from a DTC brand by 2023. Both these data points bode well for the beauty industry at large.
In Q2 we saw the confluence of the operational and cash-flow issues of the pandemic merge with the questioning of values and diversity of beauty and wellness businesses as the Black Lives Matter movement took hold. In Q3 the tribalism and uncertainly of the US election and financial implications were added to the mix. But, through all of the chaos, the current crisis will create pockets of opportunity for smart companies, savvy investors, and acquirers.
While this crisis is different in its uncertainty, we can look back to the financial crisis of 2008 for an indication of investment and M&A activity. The confluence of health, cultural and financial crises are likely to impact and reshape short- and long-term activity, as investors and organizations explore the implications, revise strategies, and/or shore up capital. Lessons from the 2008 global financial crisis taught us that businesses that adapted to the current context emerged stronger in the next normal.
Looking long term, the global beauty industry is attractive. It has grown steadily with the exception of the 2008 financial crisis when spending fell slightly but fully bounced back by 2010. The industry may be resilient and in a relatively stronger position than other consumer categories, but the dynamics of 2020 will leave a profound imprint on the category and looks to be one of the worst years the category has endured. One pool of investors is looking for distressed investments and discounted brands in need of a turnaround, another group of investors is eyeing sound businesses that might have been too expensive in the past but might be open to a tie-up for takeover, and still others are making early bets on the crop of businesses emerging in the white space being created by the crisis.
For a complete overview of all of the beauty and wellness deal activity in Q3 2020, along with unique insights and analysis, be sure to check out our exclusive report.
Beauty Deals: Capital Raises, and M&A Transactions Q3 2020:
