Majority-stake acquisitions are the latest strategy for beauty conglomerates

This week, I take a look at a new acquisition strategy emerging in the strategic buyer space, as well as Ulta Beauty’s new DE&I commitments.

A new exit strategy is emerging between independent brands and strategic buyers.

Since 2019, companies Estée Lauder, Puig, Coty Inc. and L’Occitane have all made majority stake acquisitions. In Nov. 2019, Coty Inc. took a 51% stake in Kylie Cosmetics for $600 million. Then, in Feb. 2021, The Estée Lauder Companies announced it would increase its investment in Deciem from approximately 29% to approximately 76%. The company also agreed to purchase the remaining interests after a three-year period. Later, in June 2021, Puig bought a controlling stake of Charlotte Tilbury for an undisclosed amount. And most recently, L’Occitane announced an 83% majority stake acquisition of Sol de Janeiro, founded by CEO Heela Yang. The transaction valued the 6-year-old brand at $450 million.

Much like SPACs, IPOs and private equity buyouts, majority-stake acquisitions serve as one of many exit approaches for founders and owners. Majority-owned stakes specifically serve to mitigate risks while also affording conglomerates the chance to get a foot in the door earlier in a brand’s lifecycle. With new brands and business models launching every day, combined with continued strong growth across multiple beauty sectors, it’s a great time to be an acquirer. But with an abundance of choice, as well as rapidly changing consumer habits and economic circumstances, it is not necessarily an easier market than in the days of yore.

“There’s this fragmentation of brands in the market, and it becomes challenging for investors to identify and be able to pick out the true winners,” said Maria Steingoltz, managing director and partner in L.E.K. Consulting. “[Partial ownership structures] are not novel, but it is going to [remain] a tool.”

Yang said her goal is to build Sol de Janeiro into a billion-dollar lifestyle brand, and that L’Occitane’s focus and expertise on quality ingredients, sustainability, and other research and development will push the brand to reach it. Ultimately, L’Occitane was the right size for a smaller brand like Sol de Janeiro, as it would reduce the likelihood of getting lost inside a larger portfolio, said Yang. Sol de Janeiro earned about $60 million in net sales in 2020 and was on track to reach $100 million in sales in 2021. Sol de Janeiro had one outside partner, Prelude Growth Partners, which invested in the brand in 2019. L’Occitane declined to comment.

“L’Occitane has to have enough skin in the game for them to bring the [necessary] level of attention and resources to Sol de Janeiro. That was the thinking behind it. It was a great opportunity for Prelude to get out, as well,” said Yang. “L’Occitane and Sol de Janeiro have a lot of similar goals. I felt very confident and comfortable and excited about this partnership.”

Lauren Leibrandt, director at Baird’s Consumer Investment Banking group overseeing beauty and wellness, said there have been more flexible deal structures and responses to the changing deal environment. Strategic buyers, such as P&G and L’Oreal, are moving downstream and becoming more comfortable with buying smaller brands. That has caused private equity to become more voracious and get their foot in earlier than usual by investing in or buying small brands before they are sold to strategic buyers. The result of this dynamic is that smaller brands have not been on the market long enough to withstand various pressure tests and prove their mettle, which opens up strategic buyers to more risk. In essence, majority stake acquisitions are often a strategy to hedge a conglomerate’s bets.

“It’s much easier for strategics to go out and acquire new brands and new products, rather than for them to develop and incubate new brands in-house,” said Leibrandt. “Because they’re prioritizing newness, they take on a bit of the risk that the brand hasn’t quite reached their inflection point of being well established. But strategics are comfortable going downstream because a brand could go from $50 to $100 million pretty quickly, and they want to make sure they get it at a smaller scale before it gets too big and acquisition becomes difficult.”

The beauty industry has seen its fair share of failures and flops over the last two years, especially under the economic and market pressures from Covid-19. In July 2020, L’Oréal-owned Clarisonic was the first major brand to fold in Covid times. Then came Rodin Olio Lusso in April 2021, followed by Becca Cosmetics in Sept. 2021, both owned by The Estée Lauder Companies. But even before 2020, there were instances where large 100% stake acquisitions became an albatross. Coty Inc. notably had numerous difficulties absorbing its P&G Beauty portfolio acquisition in 2016. And smaller brands run the particular risk of getting lost within a big business, akin to a younger sibling overshadowed by more impressive big brothers and sisters.

“It is very difficult to take a brand and plug it into your portfolio of brands doing [sales] of more than $100 million each. It’s very different managing a $100 million brand than it is managing a $25 million brand,” said Leibrandt.

Yang herself said she views her role not just as a founder and a CEO, but also as a gatekeeper for the brand. Maintaining a minority stake allows her to be a steward and ensure that the brand flourishes, she said.

“As much as [an acquirer] loves the brand, they don’t know the brand as well as [a founder] does,” she said.

In the case of high-profile founder-led brands like Kylie Cosmetics and Charlotte Tilbury, keeping them tied to the brand via equity is also a better long-term scenario than the cushy salaried creative director role that’s often typical for founders. When high-profile founders leave a brand, there is the risk of stripping value from either a customer relationship standpoint or an earned media value position.

The sky-high valuations of some of these brands — Kylie Cosmetics was valued at $1.2 billion — means that acquiring 100% of the business could be a bitter price to digest and justify. But by buying a smaller, yet significant stake, a strategic buyer can be more measured and disciplined in its approach to acquisitions and take chunks over time. Steingoltz said that cash-flow position and availability of funds are just a couple of the factors that strategic buyers consider, along with potential growth and retaining talent and management teams.

“This way, [founders] aren’t cashing out in a single moment, but continue to benefit from future growth,” said Steingoltz. “From the buyer’s perspective, it makes sense. because they can retain talent. It [also] de-risks the acquisition by allowing the business to maintain its own face and own identity, versus being subsumed by the parent company.”

Ulta Beauty revises diversity, equity and inclusion strategy
On Thursday, Ulta Beauty shared its new commitments and investments for its 2022 DE&I plans, which will focus on four key areas and amount to a $50 million investment. The four areas include amplifying underrepresented voices, diversifying its assortment, employee training, and elevating BIPOC store associates and employees. In 2021, Ulta Beauty launched its initial four-pronged approach to combatting racial injustice and earmarked $25 million for the initiative.

Among its many goals over the past year, Ulta Beauty joined the 15 Percent Pledge, doubled the number of Black-owned brands in its assortment and launched the Muse 100, a group of 100 honorees driving positive change across DE&I initiatives in their personal work. Across its 40,000-people workforce, Ulta Beauty increased the diversity within its workforce by 3%. Forty-nine percent of employees are now non-white and 7% are Black — an increase of 1%.

“This year, we’re focused on many of the same topics that we were last year, because we know they are the ones where we feel we have the greatest impact,” said Dave Kimbell, CEO of Ulta Beauty, who stepped into the CEO role in June 2021.

The biggest changes to the DE&I program include allocating approximately $25 million to media investments, with a focus on multicultural platforms, an increase of $5 million from the year before. In addition, it’s investing $8.5 million to brand marketing support for Black-owned, Black-founded and Black-led brands, more than doubling last year’s investment. There is also the launch of a Brand Partner Accelerator Program focused on early-stage BIPOC beauty brands and the new investment of $5 million into venture capital firm New Voices, which focuses on entrepreneurs of color. And quarterly, the in-store training program Inclusion in Action, launched in 2021 to reinforce inclusivity and address unconscious bias, will be mandatory for distribution centers and corporate associates. It will be part of the curriculum for salon and store associates for a second year.

“We know how important beauty is to our guests and how important self-expression is,” said Kimbell. “Yet the beauty category hasn’t always created an environment or supported or encouraged that self-expression in a way that allows people to see themselves [represented]. It’s really important as the largest beauty retailer that, [in both] scale and cultural influence, we live up to our mission and values.”

Inside our coverage

Other beauty news

Beiersdorf marked its investment in North America with two openings: a new Innovation Center in Florham Park, NJ and a new North American HQ in Stamford, CT.
Clarins UK launched a new online editorial platform called Beauty Daily, hosted on beautydaily.clarins.co.uk.
MUTHA launched a hashtag campaign called #NEVERSELFISH to destigmatize self-care.
Goop has teamed up with Uber Eats to offer on-demand delivery in New York and Los Angeles.
Atelier Cologne is pulling out of the U.S. and Canada, both online and in-store, by mid-March. Atelier Cologne was acquired by L’Oréal in 2016.
Dolce & Gabbana established an in-house beauty brand, transitioning from licensing to direct operation.

Executives moves

Amber Garrison was promoted to global brand president of hair-care brand Bumble & Bumble, effective Jan. 1.
Daniel Mahler was promoted to executive vp of strategy and transformation at The Estée Lauder Companies, effective Feb. 1.
Sanford Browne was appointed president of research and innovation for North America at L’Oréal.
Tatcha got a whole new C-Suite. Mary Yee has been appointed CEO, Kylene Campos as CMO, Nicole Malozi as CFO and Vijay Khare as COO.
Amy Sloan was promoted head of SkinCeuticals U.S.
Drybar co-founder Alli Webb was brought on as president of Canopy, just before Canopy’s Sephora.com launch on February 15.

M&A and investment

In addition to her appointment, Webb has made an undisclosed investment in Canopy.

Beauty & Wellness Briefing: Majority-stake acquisitions are the latest strategy for beauty conglomerates