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The global beauty industry has proved to be resilient amid a turbulent macroeconomic environment, with all categories on an upward trajectory and potential for the overall market to hit $596 billion by 2025, up from $546 billion in 2022, according to data from Euromonitor International. That reliability has made it an appealing sector for many, from prominent investors to A-list celebrities.
But, as scaling and turning a profit becomes tougher, experts agree that dealmaking will not be the same as the last three years when the economy was healthier, and a wave of fast-growing brands were snapped up for large price tags.
A flurry of M&A deals kickstarted the year, with L’Oréal’s acquisition of Australian premium beauty brand Aesop among the most notable as the French beauty giant’s biggest deal to date. Interest in categories such as fragrance and hair care remains strong, as seen with The Estée Lauder Companies’s (ELC) investment in Vyrao, a new-generation wellness fragrance brand; Procter Gamble’s acquisition of Black-founded textured hair brand Mielle; and private investment firm Sandbridge Capital’s backing of fragrance brand Henry Rose, clean hair care brand Ceremonia and singer Ariana Grande’s beauty label REM.
However, beauty M&A activity is slowing. Pauline Mexmain, a senior manager in the consumer practice of global strategy and management consulting firm Kearney, estimates that there were about 200 deals in 2022, compared with 240 in 2021, when valuations hit a record high. “In a lot of cases, some of that was overly frothy,” observes Lauren Leibrandt, head of beauty and wellness at investment banking firm Baird. “Some businesses got valuations that are typically ascribed to great companies.” During 2021, Estée Lauder took a majority stake in Deciem at a $2.2 billion valuation, while Unilever acquired Paula’s Choice for $2 billion.
In January, the beauty industry received a warning about the short-lived nature of social trends. Forma Brands, the parent company of cosmetics brand Morphe — known for its big bets on influencers — filed for bankruptcy just three years after receiving a $2.2 billion valuation.
Looking ahead, buyers will be more cautious and mega deals will be fewer in number, Leibrandt believes. Founders may have benefited in the past decade from lower barriers to entry, but investors are shifting their attention from trendy labels in their growth phase to already-profitable businesses, says Susan Anderson, managing director of financial services firm Canaccord Genuity. “Companies used to buy small up-and-coming brands that have influence on social media, but now, you need a bit more to it.”
Appealing targets
Industry executives and financial advisors say they’re now looking for brands that have built strong loyalty through non-discretionary products, which can keep consumers spending even in a recession. They should also have demonstrated an ability to grow sustainably.
There’s no shortage of potential beauty targets: Kearney’s Mexmain estimates that about 700 companies could be up for acquisition in the next few years. Augustinus Bader, Glow Recipe, K18, Supergoop, Malin Goetz, Sisley, Summer Fridays, Chapstick and Madison Reed are among the names that have been touted by industry insiders as attractive for investment.
A common strength of these brands is their easily identifiable hero products, which are essential at a time when consumers are pulling back on the notion of overabundance — reflected in recent movements such as “de-influencing” and “corecore” — and instead preferring fewer but “really good products”, says Baird’s Leibrandt.
Brands specialising in biotech and green ingredients are also attractive as younger consumers begin to demand proof of efficacy beyond surface-level claims made in marketing campaigns, says Canaccord Genuity’s Anderson. “They want something that is going to work.”
Beyond product efficacy, young consumers also want to feel seen and look for brands that are inclusive in their retail and marketing strategies. Brands like Prose, Function of Beauty and Curology could be appealing to investors as they offer personalised formulas at scale, tapping into the desire of Gen Z customers to be their authentic selves.
Personalisation can help a brand stand out and build loyalty as the market grows increasingly crowded and customer acquisition costs soar. “It’s never been easier to launch a brand, and there’s still a lot of opportunity, but there’s not room for everyone to be successful,” says Leibrandt. “It’s difficult — and expensive — to scale.”
New buyers
After years of financial buyers, whose goal is to buy businesses for as little as possible with the hope of selling them at a profit five or 10 years down the road, “strategics” — companies looking to acquire assets that add synergistic value to their existing portfolio — will play a bigger role this year, predicts Gavin Meschnig, a partner in Kearney’s consumer practice. “Now is a good time for strategic investors because you can make acquisitions at a lower price than one or two years ago when the market was at its peak.”
Big luxury groups, such as Kering and LVMH, are likely to compete more aggressively in the beauty market going forwards. “Luxury groups’ balance sheets have never been stronger in over 30 years. Most of them have zero debt or are close to zero. Some of them have a net cash position, so they have a lot of firepower to make acquisitions,” says Edouard Aubin, head of luxury goods at Morgan Stanley. “When you look at the market capitalisation or cash flow generated by these companies, they can go really big.”
Aubin also advises keeping an eye on family holdings, such as Groupe Arnault, Groupe Artémis and Mousse Partners, which can make smaller acquisitions. However, luxury buyers face tough competition from pure players like L’Oréal and ELC, which have image, scale and can generate synergies with beauty brands. Puig, owner of Paco Rabanne and Charlotte Tilbury, announced plans in May 2022 to buy a majority stake in Byredo. A few months later, ELC announced its $2.8 billion acquisition of Tom Ford.
A more practical mindset is emerging, with buyers thinking beyond the purely short-term financial rationale, Mexmain observes. That could mean “upstream acquisitions” in areas like manufacturing or sourcing, which can help companies tackle supply chain disruptions or improve their ESG performance.
Celebrities are also endorsing brands through financing. This year, television host, producer and author Oprah Winfrey invested an undisclosed amount in Dr Barbara Sturm’s skincare brand, while singer Miley Cyrus invested in self-tanning brand, Dolce Glow. Brands benefit from a famous backer, while celebrities can grow their asset base in a more meaningful and authentic way (one of the biggest criticisms of celebrity-founded brands is their true knowledge and interest in the space). “It’s a win-win for both parties,” says Meschnig.
Overall, M&A is expected to continue with fewer but higher-quality deals. “We’re going to have a better second half than the first half,” predicts Leibrandt. “There are a lot of great buyers and sellers out there. It’s just a matter of timing at this point.”
Brands with unique products and a strong balance sheet that can weather turbulent macro-environmental conditions will prevail. There are more questions now around how “recession-resistant” a business is, says Leibrandt. “Buyers are pressure-testing businesses more to understand how they might fare when market conditions are a little bit less than ideal.”
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