Beauty is now in ‘the eye of the acquirers’
The M&A market for beauty products has reached a tipping point – ‘acquire, or be acquired’. Consolidation is being driven by large strategic players, who are systematically acquiring smaller players as they emerge. Private equity is also ramping up investments and boosting valuations. The ‘Global 30’ enjoy a massive buying advantage over the rest of the market, which is made up of mainly small businesses with specialized offerings. These giant groups have a genuine need to add growth assets to their portfolios, and are eager buyers of innovation, creativity, potential for geographic expansion, and digital and social connections. (They struggle to foster innovation themselves, and rarely create brands from the ground up any more.) Meanwhile midcaps are acquiring for scale and new capabilities in related categories that can be added to product portfolios.
- Growing market: The global beauty market grew by 5% in 2016 and is growing at a 10-year CAGR of 4%, thanks to growth in emerging markets and demand for ‘premium’. The hottest segment is currently make-up, which grew by 8.4% in 2016. Other trends to watch out for include ‘natural & organic’, ‘active beauty’, and ‘sustainable choice + ultra performance’.
- Market power is lopsided: the ‘Global 30’ beauty companies represent some 63% of the global market, while the rest is made up of mainly small actors (ie. brands). This has created a ripe environment for deal-making and market consolidation, as small players often require growth capital, while the largest players tend to lack the necessary innovation, creativity and digital-media savvy of the younger upstarts.
- The M&A market is booming , supported by large strategic groups, but also by midcaps and increasingly private equity. Europe is seeing the most deals, with 36% of all worldwide transactions in the last five years.
- Deal drivers : Deals are being designed to broaden product portfolios in specific segments, and to access new customers and geographies. The dynamic make-up segment is highly sought after, and brands with large followings on social media (You Tube, Instagram). The rise of the ‘influencer’ is a game-changer, as these online stars with millions of followers now have the power to make or break brands.
- Valuations for dedicated beauty players are generally high – the listed players are averaging 13.3x EBITDA, while the Capitalmind Investec Transaction Database shows that double-digit multiples are common in the midcap space, with mid-teens and higher possible for best-in-class brands.
- Private equity has become an active market participant, on the lookout for attractive growth categories (eg. natural & organic), and also consolidation plays within mature market segments – eg. in France, the fragrances segment is widely fragmented, and the industry is increasingly seeking partners with growth capital.
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“The beauty market has reached a tipping point, where small and mid-sized businesses need to steer their strategies towards accelerating international growth and/or being acquired. Market power is becoming more lopsided, as the largest beauty players continue to grow their market share and also outperform.”