What Beauty Industry Trends Did Capital Focus on in the First Half of this Year?

Geopolitical instability, the pandemic, inflation, and supply chain issues have contributed to a slowdown in global capital markets. The beauty industry is no exception. What new opportunities can we see in beauty industry investments in the first half of 2023?

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Due to increased market uncertainty in recent years, the beauty industry has also been greatly impacted. As of the first half of 2023, China, as the world's second-largest consumer market for cosmetics, has ended its COVID-19 control measures, which has to some extent driven the recovery of the global beauty industry. Capital has also started to increase investment in the beauty industry.

Three highly-watched transactions

In terms of financing, notable investments include Talm, a DTC maternity skincare brand founded by former Byredo and Guerlain executives, which received investment from Mathilde and Bertrand Thomast, founders of Orlane, and Mathilde and Bertrand Thomast acquired a minority stake in Talm.

Fable Investments, a venture capital fund under Natura & Co., increased its stake in Perfumer H, a fragrance brand founded by perfumer Lyn Harris.

French niche fragrance brand Juliette Has A Gun received a new round of funding from Cathay Capital, with participation from new investor Weinberg Capital Partners and existing shareholder USHOPAL, a Chinese high-end beauty brand group.

Dibs Beauty, a makeup brand, received investment from L Catterton, a private equity fund under LVMH.

Clean beauty brand Live Tinted completed a $10 million Series A funding round led by Monogram Capital Partners. Other investors include Unilever Ventures, Devonshire Partners, and Silas Capital. The brand has raised a total of $15 million to date.

Australian scalp care brand Straand received $2 million in seed funding from Unilever Ventures.

In terms of M&A, there were three highly publicized and large-scale transactions in the first half of 2023.

The first one was in April, L’Oréal announced its acquisition of Aesop from Brazilian beauty giant Natura & Co. The proposed transaction values Aesop at an enterprise value of USD 2.525 billion. If completed, this will be the largest acquisition for L’Oréal.

Founded in 1987, Aesop is known for its skincare, haircare, and body care products. According to Natura & Co's financial report, Aesop's total sales increased from $28 million in 2012-2016 to $537 million in 2022. The acquisition is expected to be completed in the third quarter of 2023, and L’Oréal plans to expand the brand's presence in China and invest in its travel retail business.

Natura & Co initially considered an IPO for Aesop but opted to sell the equity due to market fluctuations. The sale aims to improve the Brazilian beauty giant's balance sheet and allow for further investment in Latin American markets.

In addition, on June 26, luxury conglomerate Kering Group announced that its beauty division, Kering Beauté, acquired the high-end traditional fragrance brand Creed. The financial terms of the transaction were not disclosed, but industry insiders estimate the deal to be around $1.5 billion.

Founded by James Henry Creed in 1760, Creed has a unique and exquisite collection of timeless fragrances, including the iconic Aventus. Kering stated that the acquisition of Creed is an important step for Kering Beauté, as it perfectly complements its portfolio of renowned luxury brands and immediately provides the scale, strong financial position, and platform needed for Kering Beauté, particularly in utilizing Creed's global distribution to support the future development network of other Kering Beauté fragrance franchises.

On June 22, U.S. private equity firm Advent International announced its acquisition of a majority stake in two French niche fragrance brands, Parfums de Marly and Initio Parfums Privés. The specific financial details of the transaction were not disclosed, but Industry insiders estimate that the value of this transaction exceeds $700 million.

In addition, other significant M&A include Estée Lauder's early-stage strategic investment and incubation unit, New Incubation Ventures, acquiring a minority stake in British fragrance brand Vyrao. Famille C Participations has acquired a majority stake in Pai Skincare to help accelerate the brand's development and position it as a clean skincare leader in selective distribution. Pierre Fabre, the parent company of Avène, announced the acquisition of Même, a skincare and makeup range formulated for women with sensitive skin due to cancer treatment. Additionally, P&G Beauty acquired the haircare brand Mielle Organics, and the deal value was not disclosed.

Establishing venture capital funds to invest in promising beauty companies

One of the significant changes in the beauty industry's investment landscape is those beauty giants are more interested in start-ups and are investing in potentially promising beauty enterprises through the establishment of venture capital funds. They are becoming more cautious in spending large amounts of money to acquire indie brands.

At the end of 2018, L’Oréal established its venture capital fund, BOLD (Business Opportunities for L’Oréal Development), which targets innovative start-ups and brands with high growth potential and invests in minority equity stakes to combine innovation with sustainable development, investing in new marketing models, research and development, digital technology, distribution, communication, logistics, packaging, and many other areas.

Since its inception, BOLD has invested in several start-ups worldwide, including Sillages Paris, a French start-up that uses AI and machine learning technology to provide personalized online perfume customization services, and Functionalab Group, a Canadian beauty industry company, in the form of minority equity stakes.

In the first half of 2023, BOLD and the British Fashion Council participated in the $4 million financing of French virtual universe developer Digital Village and acquired a minority equity stake in US biotech company Debut.

Estée Lauder also established its venture capital unit, New Incubation Ventures, in 2021. Since its establishment, it has led a $3 million financing for men's beauty brand Faculty and invested in UK sustainable skincare and fragrance brand Haeckels. In March of this year, New Incubation Ventures acquired a minority equity stake in Vyrao, a new-generation health perfume brand launched by fashion and beauty retail creative force Yasmin Sewell.

In addition, Unilever Ventures, Unilever's venture capital unit, has increased its investment in start-up niche brands since its establishment, including US emerging cosmetics brand Beauty Bakerie, US clean beauty start-up Saie, and natural skincare brand True Botanicals. In 2023, Unilever Ventures invested $2 million in seed funding for pure beauty brand Live Tinted and Australian scalp care brand Straand.

Acquiring minority equity stakes in start-ups means less risk. Spending a huge amount of money to acquire a mature brand requires a longer period to achieve investment returns, and if the acquired company's performance declines, it will hurt the entire group's performance. Investing in start-ups can provide investment returns in the short term.

According to Statista data, the average deal value per M&A in the beauty industry dropped sharply from $247 million in 2019 to $107 million in 2022. Although the number of M&A deals in 2022 increased by only one case compared to 2019, from 174 to 175, this also indicates that beauty giants are becoming more cautious about their acquisition investments.

The fragrance remains the most attractive category to investors

Despite the current challenging economic environment, M&A will continue to play a driving role in the beauty industry due to its resilience and growth potential. Large beauty conglomerates will seek smaller but higher-quality brands and companies to fill gaps in their product portfolios and remain competitive.

Even with continued market uncertainty in the first few months of 2023, the attractiveness of the beauty industry to investors remains stable. According to BOF, the beauty industry's EBITDA profit margin averages between 15% and 25%, and McKinsey predicts that the skincare, haircare, cosmetics, and fragrance industries will achieve a compound annual growth rate of 6% globally by 2027.

In these examples of M&A and investments, fragrance remains one of the most attractive categories to investors.

In recent years, several major M&A deals in the beauty industry have occurred in the fragrance category. In 2022, Spanish beauty giant Puig acquired a majority stake in Swedish fragrance brand Byredo, with an estimated valuation of up to €1 billion. In addition to Puig, Estée Lauder, and L'Oreal also showed strong interest in Byredo.

On April 28th of this year, Estée Lauder acquired high-end brand Tom Ford for $2.25 billion, beating out other bidders including Gucci's parent company Kering Group, and it will become Estée Lauder's largest acquisition to date. The acquisition was largely due to Tom Ford's fragrance and beauty business.

On June 26th, Kering Group announced that its beauty division, Kering Beauté, had reached an agreement to acquire all the shares of the high-end fragrance brand Creed. The all-cash transaction is expected to be completed in the second half of 2023, with Creed's revenue exceeding €250 million. The transaction amount is estimated to be around $1.5 billion.

Advent International, a private equity firm based in the United States, revealed on June 22 that they had acquired a controlling interest in two French niche fragrance brands, Parfums de Marly and Initio Parfums Privés. While the exact financial terms of the deal were not disclosed, insiders in the industry estimate that its value exceeds $700 million.

In recent years, the rise of independent brands has been a key trend disrupting the competitive landscape of the beauty industry. These fast-growing, agile, and innovative new brands have made the market more fiercely competitive, and beauty giants have joined in investing in independent brands to grasp the latest trends and increase their influence.

Overall, fragrance and independent brands will be important trends in M&A in the beauty industry.

In the short term, M&A is expected to continue, but the number of transactions will decrease. In this uncertain economic environment, acquirers in the beauty industry will become very cautious, requiring them to focus on identifying target beauty brands with rapid growth and profitability. M&A in the beauty industry will focus more on quality rather than quantity.