Kearney analyzes M&A trends in beauty and personal care

15-Nov-2023 - Last updated on 15-Nov-2023 at 16:29 GMT

"While it's good to look back, I think what stood out most were the implications that came out of the survey work we did looking at how deals will take shape over the next couple of years," said Pauline Mexmain, Senior Manager at Kearney. © simarik Getty Images

The study, released last week, anticipates increased volume in beauty and personal care company mergers and acquisitions despite rising costs to industry supply chains and potential outsourcing of ingredient and product manufacturing efforts.

Last week, US global management consulting firm Kearney released an internal study forecasting the climate for mergers and acquisitions (M&A) in the beauty and personal care spaces for the next two years. The study, which analyzes the past five years of small, midsize, and large industry M&A activity to inform predictions of expected trends moving forward, takes a closer look at the impact of marketing preferences, changes in digital innovation, and consumer demographic breakdowns in the beauty and personal care space.

Considering that "89% of recently surveyed industry senior executives believe that Beauty & Personal Care M&A deal volume will increase over the next two years, accelerated by Gen Z consumers driving around 30% of industry growth," as detailed in the study, it's clear that understanding the current temperature of the M&A climate is beneficial not only to beauty brands but also to manufacturers and suppliers to the cosmetics and personal care product industries who seek to expand their operations in the coming months. To better understand the study, its key takeaways, and the potential impact of the study's findings on both small- and large-scale industry operators, CosmeticsDesign spoke to Pauline Mexmain, Senior Manager at Kearney, for her insights.

Compiling the report and initial impressions

The analysis was performed in two parts, explained Mexmain to prepare the study. "For our retrospective analysis," she shared, "we reviewed Beauty M&A activity in the Americas, Europe, and Asia," which included a five-year overview of large, midsize, and small transactions from 2018 to mid-year 2023 and deal rationale tracking from 2018 to present.

Then, "to forecast the M&A environment over the next two years, we spoke with 150 executives, strategic acquirers and financial sponsors responsible for setting and executing M&A strategies," she said, which included ranking the deal rationales by industry leaders, and examining relevant capabilities for future acquisitions like technology and data analytics.

Regarding initial impressions of the study overall, Mexmain shared that "while it's good to look back, I think what stood out most were the implications that came out of the survey work we did looking at how deals will take shape over the next couple of years." Those implications can vary, she explained, "depending on what sort of player you are, whether you're an independent brand willing to get acquired, whether it is a conglomerate willing to acquire or whether it's a brand that's already Private Equity (PE) owned."

To best understand the study's analysis and gain the most insight from its predictions, she added, it's essential to keep in mind that "there's a different set of implications for each, and each requires a different strategy and approach for the merger to have long-lasting success and to add value."

Explaining key takeaways

One of the most critical takeaways from the Kearney study is that the current M&A landscape in the beauty and personal care industries is very dynamic and is now reaching a new stage, said Mexmain, which indicates that now is a favorable time for companies to act. "One of the things that stood out," she shared, "is that multiples at which companies are acquired in the beauty and personal care space are lower than where they were three years ago, and this has two different types of implications." She then explained that "on the one hand, it has positive implications for any strategic or financial investor willing to scoop a bargain and take advantage of the lower multiple at which to invest," which can benefit industry companies with lower valuations.

On the other hand, she added, "the more negative implication is for the PE owned or venture capital (VC) backed beauty and personal care companies which have now to live up to their previous valuations," which can create added pressures to perform financially. To illustrate her point, she provided the example of a company in the beauty or personal care product industry with a reported revenue stream of $250 million.

"Two years ago," she explained, "especially if there was a Direct to Consumer (DTC) component, the company would have been valued 8 to 10 times your revenue, so close to a $2 billion valuation. Now multiples are more around 3x so to keep the same level of valuation to your $2 billion would require going from a $250 million to at least a $500 million revenue quite quickly."

The key takeaway here is that these implications significantly impact the industry landscape overall, she concluded. "For those smaller sized PE owned or VC backed companies, it means they have to rethink their growth path and their growth avenues and the surrounding landscape… there's a whole rethink about 'what's my new path to growth.'"

Another crucial takeaway from the Kearney study considers an additional set of implications for still-independent brands willing to be acquired or seeking an acquisition partnership, Mexmain shared. "What the research tells us is that investors are looking for uniqueness and very strong differentiation, and they are also looking for assets that already have a track record of profitability, which was not necessarily the case in previous years," she explained.

For beauty and personal care companies, this means that even if a company is not profitable, "buyers could consider you interesting if they believed that they could get you to a place where they could potentially resell the asset a few years later," she said. However, this can be challenging for still-independent beauty brands, as buyers are looking for profitable assets, "which is difficult because costs have increased so much for the last three years" across the industry supply chain, Mexmain stated.

A final takeaway from the Kearney study is the implications that involve investors, "particularly the conglomerates, many of whom have been suffering lately," she revealed. For these companies, an acquisition could be made to return to growth. Therefore, "the question for the conglomerate then becomes, how do I identify the right target – companies that are profitable and differentiated are not that easy to find, particularly with so many acquisition options today," she explained.

In addition, "the second question for the conglomerate then becomes, how can they make sure the acquisition is going to be successful, especially when many of them have a track record for being unsuccessful," Mexmain said, and therefore, "how can they integrate acquisitions in a successful way?" The key takeaway for investors in the beauty and personal care product space is that these companies must go all in and "invest in M&A capabilities from strategy to execution" to remain profitable.

Impact on manufacturers and suppliers moving forward

Moving forward, Mexmain maintained that for manufacturers and suppliers to the cosmetics and personal care product industries, the study's data supports that currently, the "capability play" is in "acquiring capacity." Therefore, she shared that in the coming months, it is anticipated that there will be significant activity "by conglomerates through VC funds, wherein they won't necessarily make a budget acquisition, but they will start investing through the VC funds." For companies interested in being acquired, this could significantly impact strategic decision-making, expansion plans, and overall budget opportunities.

Finally, Mexmain also called attention to data points that demonstrate that in the coming months and years, "industry executives expect acquisition in China to increase, which goes hand in hand with the fact that they also need all those conglomerates to derisk China potentially by directly acquiring Chinese brands, or at least manufacturing capabilities there," she said.

With the looming pressure of manufacturing efforts being outsourced outside of the United States, it is therefore prudent for US-based beauty and personal care product manufacturers and ingredient suppliers to pay closer attention to industry M&A trends and consider the potential impact that M&A activity can play regarding the profitability of their operations in the near future.