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Interest for mergers and acquisitions among large beauty companies steadily grew throughout 2017 and is set to continue thriving in 2018. According to beauty M&A advisors, Intrepid Investment Bankers, the M&A market continued its active pace with over 100 transactions in 2016 and 2017. Not only have we seen an increase in the number of beauty deals, but the size of beauty M&A transactions reached 17.7 billion dollars in the United States in 2017, showing a 6 percent increase from 2016.
With this ongoing rise in beauty transactions, we have seen the pendulum shift as name brands have become more active in the mergers and acquisitions space. For years, high profile companies such as Unilever and Estée Lauder chose to develop new products within their own walls from the ground up. This is now changing as these companies look to smaller businesses as a strategy for growth.
In 2016 alone, Unilever acquired Dollar Shave Club for 1 billion dollars and Seventh Generation for a reported amount between 600 million and 700 million dollars, as a way to inject itself more actively into “Generation Z—a generation of consumers that follows the millennial generation.” And in 2017, Unilever acquired Carver Korea and Hourglass Cosmetics. This is a similar move to that of Estée Lauder who acquired Smashbox in 2010, and Too Faced Cosmetics in 2016, helping it reach the ever-elusive millennial audience. It’s clear that this is no longer an age where only a handful of household names hold all the power. The rate at which small businesses are popping up is impossible to ignore. The question is: does it make sense for a large corporation to pour time, resources, people—and most importantly, money—into a brand-new product on its own? Or is it best to look outside for innovative opportunities?
The market’s answer is a resounding yes. Large beauty companies are getting creative, and adding social media-endorsed independent cosmetic brands to their portfolios through M&A transactions. This allows companies to reach and interact with a younger customer base of millennials and Generation Z, an audience that bases its purchasing decisions on likes, follows and reviews rather than being tethered to a sole brand. These smaller companies are more nimble and more willing to adapt to the millennials’ and Generation Z’s ever-changing desires. Larger brands are looking for ways to create excitement and engagement with consumers on social media, which can be achieved through acquiring younger brands with a growing digital footprint. It’s no wonder that companies are having make-up artists with a strong social media presence step into the shoes of celebrities as a way to reach a new and broader audience.
Hand in hand with the beauty industry, this trend has rolled over into the fashion space. With brick and mortar retail stores struggling and a drastic expansion in e-commerce, brands and retailers are having difficulty surviving on their own. Companies are finding that they are better off capitalizing on key synergies and consolidating with other companies. According to a IBISWorld Inc. report, Coach Inc., the industry’s second largest company, acquired Kate Spade New York for 2.4 billion dollars in an attempt to improve performance and transition into a “lifestyle brand.” Struggling retail companies should consider joining forces to build multi-brand portfolios rather than staying as a single brand company, which can help resolve financial instability or stagnant growth.
Is this uptick in M&A activity a trend that will continue to rise? It appears so, as the ability to gain differentiating products through acquisitions is far less time consuming than starting from scratch. L’Oréal reported that when it purchased IT Cosmetics, one of the fastest growing prestige beauty brands, in August 2016, it added more than 300 products to L’Oréal’s existing make-up portfolio. Who’s going to be the next one to make a splash in all of this? Only time will tell. But if the last 12 months are any indication, we won’t have to wait long to find out.
Written by Bianca Prikazsky, associate at Crowell & Moring LLP, an international law firm with a fashion law practice representing clients across the United States as well as in Europe. Crowell & Moring assists clients in the fashion industry with a variety of legal issues, including corporate law, mergers & acquisitions, and licensing transactions. Learn more at crowell.com.
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