A lot can happen in 12 months. Heading into 2020, M&A activity in the beauty sector had been on fire for several years, and while there was constant chatter of a beauty bubble, 2019 proved to be another strong year. Everything seemed to get bigger—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 had all been active, with many newcomers entering into the space. Beauty unicorns emerged, there were a number of billion-dollar deals, some brands were trading for more than eight times revenue or 10 to 15 times earnings, and bets were made on the next crop of indies with smaller capital raises in the $5–$10 million range.
The consensus was the market would continue to be healthy, with many investment bankers reporting robust pipelines of beauty deals for 2020. Others didn’t expect 2020 to be as robust as 2019 because the pool of mature independent brands of scale was quite small while valuation expectations remained high, predicting it could take two to three years for the next crop of indies to surface as the next beauty leaders driving the continuation of smaller capital raises. The decade also began with a new environment—magical unicorn thinking was replaced 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.”
But no one could have predicted the turmoil COVID-19 would unleash, creating a global crisis sparing few industries. While this year will be one of the worst, with the biggest sales declines in history, the beauty industry has shown resilience with decreases far less dramatic than that of many other sectors. Even with all the uncertainty and disruption of 2020, our 2019 predictions for the year held true. Below were the predictions in our Beauty Deals: M&A Transactions Year End 2019:
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.
The Activity: While the general color category continues to struggle, as predicted a bright spot could be found in the category with sustainably minded brands with clean formulations.
Note: It’s also worth noting La Bouche Rouge and Kjaer Weiss are not only luxury product propositions, but they are also based on refill concepts which have finally begun to gain traction.
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 Activity: Personal care fared well during the shutdown given the category proliferation in essential retail. This, coupled with a tremendous bout of innovation and reinvention of the category, has created excitement in what has been a staid category.
Note: It remains to be seen if the P&G acquisition of Billie will go through. The Federal Trade Commission plans to file suit to block the deal. The complaint alleges that the proposed acquisition would allow P&G, the market-leading supplier of both women’s and men’s wet shave razors, to buy Billie, a newer but expanding maker of women’s razors, and thereby eliminate growing competition that benefits consumers. Earlier this year the FTC filed a similar claim over competition concerns that prevented Schick-owner Edgewell from buying Harry’s in February.
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.
The Activity: While most brands speak to purpose, for others their purpose is the reason for being—it is a non-negotiable. Consumers have made it clear they expect brands to make a positive contribution to society. The rise of B Corps will add a level of validation to these claims, rewarding those that can substantiate values, claims, and commitments. The shift from profit to purpose is just getting started.
Note: This year we not only saw more funds launch with the focus of investing in purpose-led consumer brands, but they are also becoming B Corp certified. They are walking the walk.
Increase in Asian Activity: In 2020 strategics in the region got 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.
The Activity: In addition to strategic activity in the region, the rising trend of homegrown brands is driving venture capital’s interest in funding C-beauty start-ups.
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.
Activity: Below are brands grounded in technology facilitating personalization and customization. The pandemic has been an accelerant, rapidly increasing the pace of innovation and adoption of technology to bridge the gap between physical retail and digital.
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.
Notes: Supply-side consolidation in contract manufacturing, ingredients, and packaging continued at a rapid pace. The pandemic saw consolidation begin across the e-commerce supply chain, from technology to warehousing.
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