Trends in International Investment by Chinese Cosmetic Companies

Ohana & Co.: The beauty M&A market has become more favorable to acquirers.

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According to the data of HKTDC, the size of China's cosmetics market in 2021 will account for about 17.3% of the global market, making it the world's second largest cosmetics market after the United States. Euromonitor forecasts that the CAGR of China's cosmetics market is expected to be 7.54% from 2022 to 2026, and will grow to 817.7 billion yuan in 2026.

Leading international beauty enterprises began to have more capital operations, and more and more beauty enterprises invested in China. For example, L'Oreal invested in China's local high-end perfume fragrance brand Documents, and Shiseido invested in Jiangsu Trautec Medical Technology, which focuses on recombinant collagen 2-based biomaterials.

However, the impact of the epidemic on consumption has not yet receded, and the recovery of the beauty industry is still on the way. According to the latest retail sales data of consumer goods released by the National Bureau of Statistics on November 15, from January to October this year, the total retail sales of domestic consumer goods amounted to 360,575 billion yuan, up 0.6% year-on-year, with a slower growth rate. Among them, the retail sales of cosmetics reached 308.4 billion yuan, down 2.8%.

The increased competition in the Chinese market has also prompted more and more Chinese companies to look overseas. For instance, YatsenGlobal was listed on the New York Stock Exchange, and China's high-end new luxury beauty brand group USHOPAL announced the acquisition of the UK high-end skincare brand Argentum.

The market changes rapidly, and what trend will the beauty market show? CHAILEEDO interviewed Ariel Ohana, the founder of Ohana & Co., and discussed the development direction of the cosmetics industry and the overseas investment trend of Chinese cosmetics enterprises.

Make friends prior to do business

Founded in 1994, Ohana & Co. is a global independent investment bank focused on the consumer and digital sectors, have offices in New York and Los Angeles, and a China desk in Paris to support M&A transactions with Chinese clients or counterparties.

“In concrete terms, we represent business owners in selling their company or raising capital and represent large cap conglomerates in buying or investing in brands.” Ariel said. In his nearly 3 Decades experience, Ohana & Co. have successfully closed transactions with the top luxury groups, such as LVMH, Kering and Richemont, and many beauty conglomerates. For instance, they represented luxury performance cosmetics Hourglass on its sale to Unilever, represented Kosé Corp on its acquisition of Tarte Cosmetics, and represented Procter & Gamble on the sale of Rochas to Inter Parfums.

Ariel Ohana, the founder of Ohana & Co.

When talking about the beauty investment case, CHAILEEDO specifically asked Ariel which aspect he valued most in the beauty investment process. Ariel smiled and shared the Hourglass case with us. He said that he first contacted with Carisa Janes, the founder of hourglass, when her company was small. At that time, they did not talk about transactions, but rather exchanged ideas and experience in the beauty industry. In the process of continuous communication between the two sides, they understand each other and build trust. ”We tend to grow and to nurture relationships with people before we represent them.” Ariel said this when recalling this story.

Not only big deals，While most of Ohana & Co.’s activity is on established brands, Ohana & Co. also participate in the growth of startup brands. Ariel said that since three years ago, Ohana & Co. have started an incubation activity whereby invest in early-stage brands, and they usually do this by bringing along as co-investors from their personal network. For example, Ohana & Co. co-invested with Manzanita Capital in What Matters (refillable personal care products) and invested in FRE (personal and skincare for active women), in which Chalhoub group recently invested. Outside of beauty, Ohana & Co. also invested in RTFKT with Adrien Cheng – just a few months later, RTFKT was sold to Nike.

“For mid and large size companies we advise on M&A, and for small size companies we invest.” Ariel sums up Ohana & Co. In this way.

The overseas investment strategy of Chinese beauty enterprises has two characteristics

Ohana & Co. started working with Asian groups more than a decade ago. Their earliest partner was AmorePacific, a well-known cosmetics company in South Korea, and they ended up representing AmorePacific on two M&A transactions, one in France and one in the US. Since then, Ohana & Co. have represented a number of Asian clients, including Adrian Cheng’s C-Ventures in Hong Kong, S’Young group in Changsha, and Kose Corp from Japan.

Investment strategies are usually to acquire successful brands, to fill a gap for the buyer in terms of product category or geography. These strategies also apply to Chinese buyers, however, Ariel believes that Chinese enterprises’ investment strategies differ from those of other international enterprises mainly in two aspects. First, “There is a strong focus on brands that are showing great promise in China”. Chinese enterprises like to acquire overseas enterprises, and then feed the domestic market competitiveness through the advantages of foreign enterprises.

Second, “Ability to use management of the target as a platform for the entire group”. After acquiring foreign enterprises, Chinese companies will prefer to retain the acquired enterprise structure as overseas headquarters, which will be conducive to the expansion of Chinese enterprises overseas.

Ariel identified four pain points for Chinese enterprises during their acquisition process. Identifying the right brand to acquire、Approaching the brand owners、Management Retention and Deal Negotiation. These are typical pain points in any deal, but they are heightened for Chinese acquirers due to the long distance of geography and the difference of cultural background. This is where Ohana & Co.’s industry knowledge in beauty and experience in cross border deals and negotiations can really help.

What trends have beauty investment activities shown in recent years?

Like any other market, Beauty M&A is a market that has trends. From the category analysis, Ariel believes that Clean Beauty and Hair Care are gradually attracting investors' attention. In addition, the focus of the fragrance category M&A has shifted from celebrity brands to authentic niche brands, such as the Spanish beauty giant Puig Group's acquisition of Sweden's Byredo.

In addition, Ariel also stressed that from the current market situation, in the US, the mass channel (Walmart, Target, Kohl’s, etc) is likely to become the next "next frontier" of the beauty market. As he said, Estee Lauder Group, which has always been taking the high-end route, has acquired a majority stake in Deciem, the parent company of the ingredient skincare and beauty brand The Ordinary, at a valuation of 2.2 billion dollars in 2021. Furthermore, both Sephora and Ulta have announced initiatives to sell in the mass channel.

Ariel told CHAILEEDO that compared with last year, the overall beauty investment environment has not changed much this year. As beauty consumption has shown greater resilience than other industries this year, the beauty M&A situation is still strong. “I would say the main difference is that last year the market was clearly a ‘pro-seller’ market and this year it is much more balanced between buyers and sellers, but still active.” Ariel summarized.