From challenger brands to M&A activity, the cosmetics industry is booming



Beauty is everywhere. This week we got the long-awaited news that British makeup artist Pat McGrath will launch a permanent collection of her coveted Pat McGrath Labs brand from next month. Pat, who has been putting out limited edition product runs for the last two years, will sell the highly-anticipated new collection primarily on her own website and on Sephora.com, the brand’s exclusive retail partner.

This disruptive, online-first approach is also epitomised by Glossier, the cult US cosmetics brand that recently opened its first London office and will soon begin shipping to the UK. The brand, which launched on social media back in 2014, keeps close control of its distribution channels and only sells its products online and via pop-ups. Interestingly the brand has its origins in online influencer culture, having started life as an offshoot of the popular Into the Gloss beauty blog founded by Emily Weiss in 2010.

Having raised $24m in new investment last November, Emily is now leading an international expansion charge for Glossier. Indeed its powerful online following ensures Glossier will have a ready-made and highly motivated customer base when it lands on these shores in October.

Emily and Pat are part of a long list of prominent names in the beauty world who have chosen not to go into partnership with the big corporates, preferring instead to create their own brands and retain ownership of their routes to market, often with disruptive results.

Take the phenomenal success of Kylie Cosmetics, the makeup brand launched in 2015 by reality TV star Kylie Jenner, which exercises complete distribution control. In its first 18 months of operations, the brand has amassed an astonishing $420m of sales and is forecasting growth of 25% year-on-year for 2017. With over 14 million Instagram followers, Kylie Cosmetics uses social media to spark excitement at will and drive online sales for its next big product launch.

Alongside this stunning success story, add the likes of Charlotte Tilbury, the brand founded in 2013 by the British makeup artist of the same name, which has seen incredible growth and famously became Selfridges’ biggest-ever beauty launch by turnover. In April Sequoia Capital made an undisclosed investment in the brand, which is now stocked in a wide range of retailers and has its own flagship shop in London’s Covent Garden.

Charlotte Tilbury

Another brand that catches the eye is Anastasia Beverly Hills, which launched its UK website earlier this year. The company was founded in Los Angeles by beauty entrepreneur Anastasia Soare and has grown rapidly by pioneering new products for eyebrow threading and shaping.

As I wrote recently, the demand for specialist beauty services like eyebrow grooming and blowdrys has led to a booming industry of dedicated salons in the US and UK. The same is true of cosmetics brands offering specialist, high quality products.

The big corporates are waking up to this march of the challenger brands, and are taking steps to claim their piece of the action. Last year, for example, the Kendo division of LVMH agreed a deal with popstar Rihanna to license her name for a new makeup brand called Fenty Beauty by Rihanna, which is due to launch in the UK at Harvey Nichols on 8th September. Standby for another overnight hit.

These new brands have emerged in response to the demands of discerning female consumers who are presented with ever-growing choices online, and who are searching for new brands that speak to their own, individual identity. Such brands are building loyal followings on social media by investing heavily in content that young women want to spend time with, such as video makeup tutorials presented by influencers.

There has been a spate of M&A activity in the cosmetics sector as bigger corporates strive to gain access to these highly engaged communities. This week, for example, online health and beauty retailer The Hut Group acquired Glossybox, the Germany-based provider of beauty box subscription services.

FMCG giant Unilever has also made a number of acquisitions in the cosmetics market via its Prestige arm. In June the company announced the acquisition of Hourglass, the luxury colour cosmetics brand known for its luxe packaging and innovative, breakthrough formulations. Commenting on the deal, Unilever pointed to Hourglass’s “loyal following amongst consumers who look for high performance beauty products”.

Private equity firms increasingly view cosmetics as a sector ripe for investment, too. Besides Sequoia’s investment in Charlotte Tilbury, L Catterton invested $29m in New York-based professional makeup brand Il Makiage in June. Since December 2014, L Catterton has also been an investor in Intercos, a beauty manufacturer and supplier which this summer agreed a mega-merger with Cosmint, creating one of the largest B2B beauty groups worldwide.

All of this deal activity poses the question of how larger corporates should handle their acquisitions. A recent report by MarketWatch notes that rather than buying a cosmetics brand and trying to integrate it as quickly as possible, big beauty companies are letting their acquisitions “do what they do best without too much interference”. The trade-off is that these small companies provide the larger business with a new audience or customer group.

Beauty giant L’Oreal has its own track record of buying up smaller cosmetics brands, although this year the bigger story was its decision to sell The Body Shop. The auction of the retailer was a great demonstration of the strength of the current beauty market, with plenty of private equity firms making bids before it was ultimately won by Brazilian cosmetics group Natura in an astonishing $1.1bn deal.

With its 3,000 stores across 66 countries, The Body Shop is a global high street mainstay – but it is undeniably tired and in need of new ideas. Given all the exciting challenger brands now disrupting the market, and all of the deal activity this has sparked, Natura shouldn’t have to look too far for inspiration.

Maria@thembsgroup.co.uk | @TheMBSGroup | The MBS Group