Kearney Predicts Beauty M&A Will Increase Over The Next Two Years
Unilever, Procter & Gamble, L’Oréal, Givaudan, Beiersdorf, KKR, L Catterton, Advent, Carlyle and Sandbridge are a few of the most active M&A players.
Gen Z isn’t into old brands—and beauty conglomerates into gen Z are responding.
According to a new survey by management consultancy Kearney of 130 senior executives orchestrating mergers and acquisitions in the global beauty industry, 89% predict beauty deals will increase over the next two years, driven by the quest for gen Z dollars, which account for 30% of the beauty industry’s growth, resilient businesses in the face of economic turmoil, portfolio scaling, geographic and category diversification, and sales acceleration as legacy brands flag.
In a report summarizing the survey entitled, “Beauty and Personal Care: Resetting the Stage for M&A,” Kearney writes M&A activity is expected to escalate despite the beauty industry having a poor track record of success from it, “with many deals delivering no value creation for shareholders. This track record, in combination with high interest rates and volatile corporate valuations, creates an environment in which a clear M&A strategy is paramount. The ability to quickly identify and integrate attractive businesses or smoothly spin off businesses that are no longer worth pursuing will be a decisive factor to outperform competition.”
The M&A strategies beauty conglomerates and private equity firms are pursuing today, including jumping on brands relatively early in their life cycles or waiting until they’re established winners, is causing a bifurcation of transaction sizes, leading to a forecast of more deals involving large companies surpassing $1 billion in sales and small companies under $100 million in sales while deals involving medium-sized companies are anticipated to decline. Small companies have been dominating beauty M&A. They were responsible for 86% of transactions in the first half of this year.
In the last five years, beauty M&A activity peaked in 2021, when there were 238 deals. Last year, there were 203, and there were 59 in the first half of this year. Average transaction size peaked at $435 million pre-pandemic, compared to $326 million for the first half of this year. Private equity firms and strategic buyers each initiate around half the deals. Unilever, Procter & Gamble, L’Oréal, Givaudan, Beiersdorf, KKR, L Catterton, Advent, Carlyle and Sandbridge are a few of the most active M&A players.
Pauline Mexmain, senior manager in the consumer practice at Kearney, estimates there are currently 800 possible company targets for M&A in the beauty industry generally with at least $50 million in revenues. At 54%, the firm’s survey respondents peg skincare as the top beauty and personal care category target for M&A activity followed by body care (41%), beauty technology (41%), supplements (39%), haircare (34%), fragrances (32%), makeup (23%), oral care (20%) and sun care (16%).
“The ability to quickly identify and integrate attractive businesses or smoothly spin off businesses that are no longer worth pursuing will be a decisive factor to outperform competition.”
In recent history, there’s been stronger interest in makeup deals and weaker interest in skincare deals than the survey respondents project going forward. In the first half of this year, 30% of the deals were in makeup, 26% skincare, 19% personal care, 11% fragrance, 9% beauty tech and 6% haircare. In 2018, 53% were in makeup, 12% personal care, 10% haircare, 10% skincare, 6% beauty tech, 5% fragrance and 3% supplements.
Mexmain points to category diversification as a key rationale for M&A in the wellness arena as beauty company portfolios tend to be underpenetrated in the area. Additionally, she mentions that wellness provides companies in beauty, an industry valued at around $600 billion, entrée into a wellness industry valued at roughly $1.5 trillion worldwide. “What’s tricky is that consumers, especially gen Z, are not expecting a brand to do everything,” she says. “So, wellness is a space where acquisition could make sense.”
A surprise to Mexmain in the survey findings is that M&A professionals aren’t particularly preoccupied with capability acquisitions encompassing manufacturers, ingredient suppliers and other supply chain actors. However, she says attention on supply chain targets is “quite strong in VC investment and especially the VC funds owned by conglomerates, so this is where they actually invest in capability, not necessarily doing mergers and acquisitions.”
For geographic diversification, Mexmain highlights mounting interest in emerging markets. She singles out the regions and countries India, South Africa, Southeast Asia and the Middle East as probable hotbeds for future M&A. In China, she explains companies are attempting to de-risk their approach by acquiring local brands that can withstand foreign disentanglement from the country or picking up Chinese manufacturing and sourcing capabilities.
Although economic pressures might seem to make mass-market brands attractive as M&A targets, Kearney’s report says, “Executives expect good momentum across price tiers, with some priority given to the luxury and prestige segment, especially among European respondents. This is in line with our expectation that acquisitions of strong brands with pricing power and a loyal consumer base will remain highly attractive.”
As executives guiding M&A evaluate independent beauty brands, Mexmain highlights that they’re zeroing in on market differentiation and profitability. Influencer brands and pure-play direct-to-consumer brands aren’t appealing targets. “In the past, low profitability was not an issue because they would bet on the possibility and opportunity to grow that profitability,” says Mexmain. “Now the profitability play is even more important, and both strategic and financial investors are looking for assets that are already profitable.”
