Booming beauty

The top-performing stock for the first half of 2019 wasn’t from a well-known tech heavyweight or an up-and-coming startup, but from the 115-year-old beauty company Coty Inc [COTY], which, after spending a number of years in free-fall, surged 104%.

It’s emblematic of a sector that has, after a mostly choppy two years, offered some of this year’s hottest stocks at a time when the wider retail market has been pretty lacklustre.

Meanwhile, within the same period, US budget makeup brand ELF Cosmetics [ELF] and Ulta Beauty [ULTA], a chain of US cosmetics stores, gained 63% and 42% respectively. International names Estée Lauder [EL] gained 41% and L’Oréal [OR] 24.5%, while consumer goods company Unilever [ULVR], for which beauty and personal care accounts for 40% of its revenue, gained 18.5%.

Coty has since pulled back after announcing a restructuring plan, but Ulta Beauty, Estée Lauder, L’Oréal and Unilever all went on to reach new all-time highs in July. ELF meanwhile broke new 12-month highs, bringing its total climb in 2019
to 96% as at 10 July.

Although the industry has faced widescale disruption in recent years, incumbents have managed to maintain market dominance and sustain significant sales growth. Traditional heavyweights have looked to embrace, rather than fight, challengers – connecting with a new generation through personalised products and services while promoting and selling these across online platforms.

M&A, partnerships and those companies adopting new ways of doing things have enabled beauty specialist retailers such as Ulta and LVMH-owned Sephora [MC] to gain significant market share between 2010 and 2017, moving from a combined 11.8% to 15.4%. To put this into perspective, the global grocery incumbents – another heavily disrupted retail segment – dipped from 23.9% to 20.4% through the same period, according to data from Euromonitor.

What’s more, growth in beauty is not about to stop. The global cosmetics and personal care market is forecasted to expand by 7.14% between 2018-2023 according to Orbis Research, with its value set to balloon from $532bn in 2017 to an estimated $863bn in 2024, according to Zion Market Research.

 

The Kylie effect

For large cosmetics companies, tying up with independents which have a large millennial and Gen Z following online has been key to their success. Ulta’s rocketing share price can be predominantly attributed to a sales boost from the distribution deal it struck in August 2018 with Kylie Cosmetics, the cosmetics line from Keeping Up With the Kardashians star Kylie Jenner. Coty is now suspected to be eyeing a deal with Jenner that would see it take a 51% stake of the company.

Ulta’s partnership with (and Coty’s possible takeover of) Kylie Cosmetics is emblematic of the strategy these incumbents have taken to stay on top: acquiring new, independent, digitally native companies to inherit their mass followings, marketing innovations and know-how.

 

The beauty land grab

The rise of the independents has led to a surge in M&A activity over the past five years. From 2010 to 2015, mega corporations were somewhat squeezed by new competitors, which has ultimately pushed them into action. Deloitte data shows within that period the 10 largest prestige brands dropped in market share from 46% to 40%, while niche brands grew from 20% to 25%.

Since 2015, Unilever has bought 13 companies in the beauty and personal care space and, most recently, is thought to be considering a $1bn bid for ‘clean beauty’ startup Drunk Elephant. News of the potential deal in May was enough to send Unilever stock up 3.1% across the week ending 17 May.

Within the same time period L’Oréal acquired It Cosmetics, Korean brand Stylenanda and professional hair colour brand Pulp Riot. The corporation is also upping its stakes in augmented reality and artificial intelligence businesses by purchasing Canadian brand ModiFace.

Meanwhile, for Estée Lauder – which has positively revised its revenue forecasts twice this year – acquired millennial-favourite brand Too Faced Cosmetics and the social media-led Becca Cosmetics, both of which have provided consistent returns for the company. Each business has performed well in their makeup segments.

A total of 116 similar transactions were made in 2018, according to research firm Capstone Headwaters, and analysts expect there will be even more by the end of 2019. So far, we have seen L’Occitane acquire British beauty brand Elemis, Unilever buy Tatcha and Garancia, Colgate-Palmolive announce its acquisition of Laboratoires Filorga Cosmétiques and SC Johnson reveals plans to purchase Sun Bum.

Emerging beauty opportunities

While the increased focus on aesthetics is a global phenomenon, gains in fast-growing emerging markets are a particular highlight.

According to a report from Inkwood Research, Asia Pacific dominated the beauty growth market in 2017 with a value of $143.64bn, aided by an expanding middle class. Singapore, Thailand, Australia and New Zealand are set to continue strong growth from 2018 to 2026. Meanwhile, Latin America is anticipated to be the fastest-growing regional market within the forecast period.

As a result, the brands making the most of these opportunities are prospering. L’Oréal smashed analyst expectations for its Q1 results this April with sales up 7.7% – largely driven by Asia Pacific and e-commerce sales – which grew by 23% and
43% respectively.

“At a regional level, the highlight is Asia Pacific,” Jean-Paul Agon, L’Oréal’s chief executive, said in a statement. “Not only in China but also in India, Indonesia and Malaysia, which have all posted double-digit growth. In contrast, the first quarter saw modest growth in North America and Western Europe.”

L’Oréal’s China growth is particularly encouraging as a host of other industries have seen a slowdown in the territory. In 2018, L’Oréal’s China sales rose by 33%, helping the company deliver its fastest organic sales growth in a decade.

“We’ve doubled the size of our business in China over the past four years, and the beauty market is still very dynamic [there], especially the luxury segment,” Agon recently commented.

“We’ve doubled the size of our business in China over the past four years, and the beauty market is still very dynamic [there], especially the luxury segment” - Jean-Paul Agon, L’Oréal’s chief executive

 

“I know there are other industries and other categories of products where there has been a slowdown, but honestly in our market, we are not seeing anything like that.”

Elsewhere, the Estée Lauder-owned brand Origins was singled out during the corporation’s third-quarter 2019 earnings for its positive performance in the Asian market. Origins is also targeting Latin American millennials with a new range that it plans to sell through Hola.com – a Latino magazine website which boasts 1.8 million monthly unique visitors.

 

A glossy newcomer

Up until now, major beauty corporations have managed to temper the negative impact of a more fragmented and complex market created by new entrants. The majority of top challenger unicorn brands such as Anastasia Beverly Hills, Pat McGrath Labs and Charlotte Tilbury have looked to sell parts of their businesses to larger incumbents for expansion and reach. But there
is one that could yet become a serious competitor to these businesses in coming years: Glossier.

The brand began its journey as a blog in 2010 and has now brought in nearly $200m in venture capitalist investment, making it one of the most well-funded privately held beauty businesses.

In its latest funding round, it was valued at $1.2bn, cementing it as one of the biggest unicorns in the industry. It looks to be on a clear path to IPO in the coming years, something founder and CEO Emily Weiss has alluded to.

  

Glossier’s growth strategy may well lead it to become a multi-brand beauty empire, much like its corporate cousins Estée Lauder and L’Oréal. Starting with a small line of basic products, the company has established two brick-and-mortar shops in the US and has since incorporated flashier extras with its products, which frequently appear among influencers’ channels across social media, including YouTube and Instagram. The launch of its recent spin-off brand Glossier Play in March highlights the company’s ability to create diverse and impactful product portfolios.

And if the response to Amazon’s [AMZN] recent foray into the beauty business is anything to go by, there remains a threat that competitors could steal some of the market share from beauty giants and halt momentum. The sector momentarily slumped in June after Amazon launched its Professional Beauty Store aimed at beauty professionals, as well as announcing it would be the retail partner for Lady Gaga’s new cosmetics label,Haus Laboratories.