High-end Beauty: the New Battlefield for Luxury Giants

Coty has raised its fiscal year 2023 performance guidance, expecting a year-on-year revenue growth of 10% to 11%. Its Prestige segment now accounts for over 60% of its revenue.

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Coty has revised its Q4 and full fiscal year 2023 guidance, anticipating a year-on-year revenue growth of 10% to 11% for fiscal year 2023. The company's high-end beauty business now represents more than 60% of its overall revenue.

Coty achieved profitability firstly in 6 fiscal years

Coty, founded by François Coty in Paris, France in 1904, is now headquartered in New York. Like other international beauty giants, Coty has grown through a series of acquisitions. Since 2010, Coty has been aggressively acquiring companies to expand its brand portfolio.

In November 2010, Coty acquired beauty company Philosophy and nail care products manufacturer OPI Products from the Keiretsu Group. In January 2011, Coty purchased the Chinese domestic brand TJOY for 2.4 billion yuan ($333.19 million). In 2014, Coty acquired the Chanel-owned cosmetics brand Bourjois.

In 2015, Coty made a huge investment of $12.5 billion to acquire 43 brands across three divisions of Procter & Gamble: fragrance, hair care, and cosmetics. It gave Coty the fragrance licensing rights for luxury brands such as Gucci, Hugo Boss, and Dolce & Gabbana. On the cosmetics side, Coty added brands like Cover Girl and Max Factor to its portfolio. Between 2016 and 2017, Coty also acquired the beauty and personal care business of Hypermarcas (now Hypera Pharma). In 2019, Coty purchased a majority stake in Kylie Cosmetics, owned by Kylie Jenner, for $600 million.

Among a series of investment actions, the deal with Procter & Gamble (P&G) has attracted particular attention. In October 2016, Coty completed its merger with P&G's professional beauty business. At the time, Bart Becht, then chairman of Coty, stated that with this massive acquisition, we hope to double Coty's performance, achieve a revenue target of $10 billion, and become one of the world's largest beauty conglomerates.

But for Coty, the acquisition of Procter & Gamble had both positive and negative aspects. After the acquired Procter & Gamble brands were consolidated into Coty's financial report in 2017, Coty's revenue reached $7.65 billion, a 75.9% increase from the previous year's $4.35 billion and a record high since the company went public. However, in 2017, Coty suffered a net loss of nearly $400 million, compared to a net income of $179 million in 2016.

CHAILEEDO found that Since 2017, the net debt brought about by acquisitions and supply chain disruptions caused by a large brand portfolio has been the reasons behind Coty's declining revenue for several years in a row. From 2017 to 2021, Coty's revenue declined for four consecutive years, and the company suffered a massive loss of $3.77 billion in 2019.

In 2020, the appointment of Sue Y. Nabi as CEO brought about a turning point for Coty. Nabi began her career at L'Oreal in 1993, where she became the youngest CEO in the history of L’Oréal Paris. In 2009, she joined Lancôme, leading the brand to achieve double-digit growth within three years and record-breaking sales of 320 million euros.

After Sue Y. Nabi took over as CEO, she adjusted Coty's business and streamlined some of its brands, consolidating the luxury, consumer, and professional beauty divisions into two segments: the consumer beauty segment and the Prestige segment. In Coty’s fiscal year 2020 annual report, Coty stated that it owns over 75 brands, with 53 primary brands listed in the report. By the fiscal year 2022 annual report, the primary brands had been reduced to 37. Coty's CFO, Laurent Mercier, stated that the company plans to sell its stake in Wella by 2025 to further streamline its brand portfolio.

After one year under Sue Y. Nabi's leadership, Coty's revenue decline slowed in the fiscal year 2021. Coty's revenue was $4.63 billion in FY21, a decrease of only 1.86% compared to 2020, the lowest decline in five years. The company's net losses also narrowed from $1 billion in 2020 to $205 million in 2021. In FY2022, Coty achieved revenue growth for the first time in five years, with revenue reaching $5.304 billion, a 14.57% increase from 2021. Moreover, Coty achieved profitability for the first time in six years, with a net income of $268 million in FY2022.

Prestige segment revenue accounts for over 60%

Since Sue Y. Nabi became CEO of Coty in 2020, the revenue of its Prestige segment has been growing year by year, and its proportion of Coty's overall revenue has also been increasing.

In FY2020, Coty's Prestige segment achieved revenue of $2.61 billion, accounting for 55.25% of the total revenue. In FY2021, Coty's Prestige segment achieved revenue of $2.72 billion, a 4.2% increase from the 2020 financial year, accounting for 58.77% of the total revenue. In FY2022, Coty's Prestige segment achieved revenue of $3.27 billion, a 20.22% increase from FY2021, and accounting for over 60% of the total revenue, reaching 61.61%. In the first half of FY2023, Coty's Prestige segment achieved revenue of $1.82 billion, accounting for 62.5% of the total revenue.

In the third quarter of the 2023 financial year, Coty achieved revenue of $1.289 billion, with the Prestige segment delivering revenue of $799.7 million, accounting for 62.05% of the total revenue.

Recently, Coty raised its Q4 and FY2023 guidance. Coty has revised its expectations for like-for-like sales growth upwards, with anticipated growth of between 12% and 15% for the three months ending on June 30, and 10% to 11% for the entire fiscal year. Coty attributed the raised guidance to strong demand for high-end beauty products from consumers.

For the current 2023 fiscal year, 56% of Coty's overall sales come from prestige fragrances, while consumer beauty cosmetics and body care account for 24% and 7%, respectively. Coty aims to achieve low 50% growth for prestige fragrances.

Considering the excellent performance of its high-end beauty division, Coty plans to adjust its products to adapt to changes in market structure, particularly in the fragrance sector.

Sue Y. Nabi, Coty’s CEO said, "Against this backdrop, we continue to grow the fragrance category and premiumize our business through our portfolio of icons and leading launches, such as Burberry Hero and Her, Gucci Flora Gorgeous Jasmine and Gorgeous Gardenia, Boss Bottled Parfum and Chloe Atelier des Fleurs."

Coty revealed in May its plans to launch a new collection of high-end fragrances called Infiniment Coty Paris in 2024. The collection is expected to be to fragrances what Coty's ultra-premium brand Orveda is to skincare. The project has been described as Coty's “most ambitious and premium fragrance project to date”.

Coty CEO Sue Y. Nabi also addressed the issue of the Gucci fragrance and beauty product license. The long-term license for Gucci is set to expire in 2028, and there are rumors that Kering may want to regain control of the license. Nabi stated that any license that Coty holds will not expire within the next five years. She also emphasized the importance of balancing growth between licensed brands and owned brands.

Coty has identified a significant opportunity for growth in China, which accounts for approximately 13% of global beauty sales and 4% of the company's overall sales. The Chinese market is rapidly developing into a major market for fragrances. Sales of high-end fragrances in China have increased by 66% over the past three years and are growing 1.5 times faster than China's high-end beauty segment.

Regarding Coty's plan to seek a dual listing in Paris, Sue Y. Nabi stated that European investors are also interested in high-end cosmetics and fragrances, and seeking a dual listing in Paris can diversify the company's investor base and benefit its long-term development.

Luxury giants compete in the beauty market

In a recent report, McKinsey predicts a surge in the luxury market within the beauty industry, with the premium and ultra-premium segments expected to double by 2027, from approximately $20 billion to approximately $40 billion.

For luxury giants, the beauty business has always been one of the most stable sources of growth. Especially against the backdrop of increasing global economic uncertainty, luxury beauty brands can provide sustained revenue growth for companies.

In 2020, even the top luxury brand, Hermes, entered the lipstick market and launched its lipstick in the Chinese market in 2021, focusing on online sales. The official Hermes website shows that a single Hermes lipstick costs about 600 yuan ($83.30), and the two-year-old Hermes beauty business has shown strong growth. According to the 2022 financial report, the revenue of Hermes' fragrance and beauty business was 448 million euros ($493.38 million), a year-on-year increase of 15% at fixed exchange rates.

Meanwhile, LVMH, the French luxury giant, has also maintained a good growth momentum in its beauty business. In 2022, LVMH's revenue from perfumes and cosmetics reached 7.722 billion euros ($8.50 billion), a year-on-year increase of 17% (organic growth of 10%).

Another luxury giant, Kering, is also intensifying its entry into the beauty industry. In February of this year, Kering created its beauty division Kering Beauté, led by CEO Raffaella Cornaggia, to develop beauty businesses for brands such as Bottega Veneta, Balenciaga, Alexander McQueen, Pomellato, and Qeelin.

Then on June 27th, Kering announced that its beauty division, Kering Beauté, had reached an agreement to acquire all shares of the high-end perfume brand Creed. The specific transaction amount was not disclosed, but according to the Financial Times, four insiders said the transaction was valued at 3.5 billion euros. Kering stated that Creed has built a network of 36 brand stores worldwide and has about 1,400 stores. Kering hopes to leverage its global distribution network to help tap the potential of its brands in the beauty industry.

The acquisition of Creed demonstrates Kering's determination to enter the beauty industry. Prior to this, Kering had licensed the perfume and beauty businesses of Gucci and YSL to Coty and L’Oréal, respectively. Therefore, Kering, which is making a large-scale layout in the beauty industry, may consider regaining the operating rights of Gucci and YSL in the future.

In April of this year, Estée Lauder completed its acquisition of Tom Ford by paying $2.25 billion. After the acquisition, Tom Ford's high-end beauty and perfume business will be operated by Estée Lauder itself, to revive its recent slump.

Major beauty companies are also joining the competition for exclusive global licenses for high-end perfumes.

On July 11th, perfume manufacturer Inter Parfums secured the global exclusive license for Roberto Cavalli perfumes, which was previously held by Coty.

Although Coty's CEO Sue Y. Nabi has stated that none of Coty's licenses will expire within the next five years, according to its FY2022, 16 out of its 20 Prestige beauty brands are not owned by the company. Against the backdrop of increasingly fierce competition in the high-end beauty industry in recent years, the owners of these brands may consider reclaiming their operating rights. Coty's Prestige segment revenue accounts for over 60% of the company's total revenue, and the reclamation of these brand operating rights will inevitably have an impact on Coty's performance, although the company will not face such a problem in the next five years.

From the perspective of these companies' recent moves, amid global economic uncertainty, high-end beauty businesses remain a market that major beauty conglomerates and luxury goods conglomerates are vying for.