Mergers and Acquisitions in the Cosmetics Industry (Excerpt)

Amandine B. Michaud
April 24, 2016
By
Mergers & Acquisitions
in the Cosmetics
Industry
RECOMMENDED BEST PRACTICES
- EXCERPT -

This report was delivered for an independent study project
that was conducted from April 4 to April 24, 2016 as part of
the MBA program at HEC Montréal.
Special thanks to Prof. Gwyneth Edwards
who gladly supervised this project,
and to all those who contributed to this research.
This is an excerpt provided as a courtesy.
Copyright © Amandine Michaud | All rights reserved.
No part of this document may be copied, photocopied, reproduced,
translated in whole or in part, without specific permission.
Distribution for commercial purposes is prohibited.
---
To obtain the full report, please contact:
Amandine Michaud
amandine.michaud@hec.ca
+1 514.576.1299

Table of Contents
Executive Summary...................................................................................................................................... 4
Introduction...................................................................................................................................................5
Part One: The Industry ................................................................................................................................ 6
History........................................................................................................................................................7
Ancient Times to Edwardian Era ..........................................................................................................7
History of Modern Cosmetics .............................................................................................................. 8
Contemporary Landscape.......................................................................................................................10
The Industry: Size, Growth and Key Markets ....................................................................................10
Industry Dynamics and Key Players....................................................................................................11
Product Types....................................................................................................................................... 13
Trends ................................................................................................................................................... 14
Hurdles .................................................................................................................................................16
Industry Analysis..................................................................................................................................... 17
Profit Margins and Financial Observations ....................................................................................... 17
Porter Five Forces................................................................................................................................. 18
The Consolidation Curve: Industry Maturity Stage ..........................................................................19
M&As in the Cosmetics Industry.......................................................................................................... 20
Typical Storyline and Accelerating Rate of Acquisitions ..................................................................20
Part Two: Case Analysis.............................................................................................................................. 21
1995: Estée Lauder Buys Bobbi Brown...................................................................................................23
Context and Expected Synergies .........................................................................................................23
Deal Structure and Aftermath ............................................................................................................24
Analysis.................................................................................................................................................25
2006: l’Oréal Buys The Body Shop.........................................................................................................27
Context and Expected Synergies .........................................................................................................27
Deal Structure and Aftermath ............................................................................................................28
Analysis.................................................................................................................................................29
Part Three: Recommendations for Best Practices....................................................................................32
Conclusion ...................................................................................................................................................34
Bibliography.................................................................................................................................................35
Appendices...................................................................................................................................................38
*Highlighted in yellow are the parts provided in this excerpt.

Executive Summary
The cosmetics industry is a hyper-competitive environment with an interesting idiosyncrasy: even
though leaders enjoy important market shares, startups continue emerging at a surprising rate.
These new entrants challenge established corporations by targeting and catering to a specific niche
segment or capitalizing on a new trend. In order to keep their market shares and fuel their growth,
legacy companies swiftly acquire smaller ones one after the other.
Some past acquisitions did not maximize value for neither the acquiring nor the acquired
companies. As the future of these multinational companies depend on the performance of their
next acquisitions, this study aims to clarify the best practices surrounding those transactions.
This report identifies the influencing factors behind those industry dynamics. Industry
publications, research papers, case analysis and personal observations support the findings.
An in-depth study reveals that recommendations for higher-performing M&A’s revolve around the
following points:
 People must be put at the forefront of strategic efforts.
 “Preservation” or “best-of-both” integration approaches works best to retain the acquired
company’s brand equity and unique expertise.
 Stakeholder analysis must be integrated in the strategic plan and an appropriate
communications plan must be deployed accordingly.
 Strategic motives should come before financial ones.

Introduction
Insignificant. Futile. Irrational. This is how the average
citizen might describe the cosmetics industry. Indeed,
for most people – including business professionals – this
sector is not worth delving into for it has no economic or
social impact whatsoever. “It is just about all things
beautiful,” one could say – only to be ever so wrong.
In fact, the cosmetics industry spans internationally and
collected up to US$425 billion in sales revenues in 2015
(Euromonitor International, 2016). With double-digit
growth in the next five years, it is one of the most
promising and dynamic sectors of the consumer-
packaged goods industry.
SURVIVAL OF THE FITTEST
The last two decades have seen rising activity in the form of mergers and acquisitions. In 2016,
Procter & Gamble and Coty finalized their transaction in which the former sold 43 beauty brands to
the latter for an astounding amount of US$12.5 billion. This “mega-deal” – as dubbed by industry
publications – indicates that the stakes are high and only the fittest companies will survive in this
hyper-competitive environment.
OBJECTIVE
This report aims to provide companies with recommendations as to how to position themselves
best for the upcoming industry consolidation. More specifically, the findings of this study will help
industry leaders avoid pitfalls that could lead to financial and strategic dead-ends.
METHODOLOGY
In addition to global industry statistics and analysts report, selected examples of past M&A’s will be
analyzed in order to provide an in-depth overview of the subject. Industry experts will also be
consulted to confirm the trends identified in the data analysis. And personal observations will
complement the findings.
US$425
billion
SIZE OF THE
GLOBAL COSMETICS INDUSTRY

Part One: The Industry
Once reserved to certain socio-demographic groups, the use of beauty and personal care products
have now permeated through all social circles, from women to men, from movie stars to
housewives, from tweens to “young at heart’s” in developed and emerging countries. This trans-
generational trans-gender industry now generates a significant sum of revenues globally.
The first part of this report aims to sensitize the reader to the financial importance of this industry
and to its intricacies through fun facts and relevant quantitative data. This report will analyze
products from all segments, including hair and skin care, makeup (or “color cosmetics” according
to the industry jargon), baby products, every day body care (shower gels, deodorants) as well as
premium products such as fragrances and higher-end lines.
Explore the fascinating dynamics of this industry through a quick overview of its history, an
analysis of its current challenges and a trend forecast.
Kosmētikós
(greek)
“The Art of Beautyfying”

HISTORY
Cosmetics are part of most ancient traditions. Their usage and level of sophistication has evolved
throughout the historical eras and reflect a range of contextual factors – societal, religious,
geographical or financial.
Ancient Times to Edwardian Era
In Ancient Egypt, men and women alike were avid users of bath
oils and other scented products to mask body odor in the humid
weather. Black kohl was applied around the eyes to protect from
the sun glare and improve eye sight. Later, the word cosmetae
was first coined to refer to Roman slaves in charge of giving
"perfume baths.” (Chaudhri & Jain, 2009)
In the Middle Ages, the Church dubbed makeup "immoral" and
"sinful. But Queen Elizabeth I of England used white lead to
paint her face. Fairer skin was a sign of nobility and similar
routines were noticed throughout the world, notably in China
and Japan. During the Edwardian era, makeup - if wearing any at
all - had to be undetectable.
At the turn of the 20th Century, performing arts (Les Ballets
russes, Hollywood movie stars, etc.) inspire a makeup revival.
Perfume makers and pharmacists are the first to jump in the
market, followed by pioneers Helena Rubinstein and Elizabeth
Arden. The latter two broke all the rules to form a new industry
at the time when only men were part of the business world.
Soon, color cosmetics and skincare are sold and used widely.
Even the Soviet Union included cosmetic manufacturing into its
second five-year plan.

Trends
The cosmetics industry is rapidly changing thanks to urbanization, globalization and rise of
technology. Evolving consumers’ habits and expectations are forcing the industry to adapt.
Diversity: Men's Grooming and Multiculturalism
Established brands have launched men’s product lines and a flurry of
startups cater exclusively to them. Men outearn women across emerging
and developed countries and thanks to changing cultural attitudes,
men’s growth rate of consumption of beauty products outpaces women’s
especially in Asia-Pacific and Latin America. (Euromonitor International,
2016). This fragmentation of the market is also observed culturally.
Ethnic segments demand products tailored to their specific needs. And
Japanese and South Korean cosmetics have acquired mainstream
popularity in the West. (Tyrimou, 2015)
Luxury, Beauty Tech and Blurring Frontiers
The premium segment's growth of 6% outpaced the mass segment for
the first time in 2015 thanks to colour cosmetics, fragrances and skin care
(Micallef, 2016). Beauty gadgets to use at home and in stores are popular.
In 2011, L'Oréal acquired Clarisonic known for its facial cleaning brush.
And hybrid makeup-skincare products are changing the game. In the last
years, Asian-born Beauty Balms (BB creams) have flooded the market
and have forced the likes of Bobbi Brown and Maybelline to launch their
own blemish-treating-and covering cream.
Ethical Consumerism
The Body Shop - created in the 1980's - paved the way to a new kind of
entreprises like Lush and more recently The Honest company founded
by actress Jessica Alba. They strike a chord with consumers who are
eager to find companies aligned with their values. Recycling material,
banning preservatives and animal testing and supporting
underpriviledged communities are at the core of these new-age
corporations.

Trends (continued)
Shifting Industry Dynamics
Retailers, manufacturers and salons are interchanging roles. For example,
Drybar which started as a successful chain of blow-dry-only hair salons
launched its full line of hair products and electronics at Ulta Beauty a
mere 6 years after the first salon opening. Cosmetics specialist boutique
Sephora launched an Accelerator Program in 2016 to finance a new
generation of cosmetics entrepreneurs.
Younger Consumers
Millennials have a great consumption influence on other age groups,
including for men’s grooming. As they advance in their careers, their
disposable income grows, along with their personal care spending. This
trend of “young influencers” is likely to continue: Generation Z and
Generation Alpha (born after 2010) cultivate their own style, are more
consumption-focused and are active users of beauty and fashion products
from an early age. (Euromonitor International, 2016)
E-commerce and Big Data
Since the era of the dot-com bubble, beauty giants like Estée Lauder have
launched e-commerce websites for brands like Clinique and Bobbi Brown.
However, expansion in countries like China have accelerated this trend as
e-commerce is fairly well-developed in Asia-Pacific. In addition,
companies are looking into big data analytics to gain an edge over their
competitors. For example, L'Oréal uses software to gather customers'
"sentiment" through their social media activity.

Hurdles
Activists groups have brought consumers’ attention towards the following causes. With the
popularity of social media – through which messages can be more easily communicated – and the
advent of a more socially-conscious consumer, cosmetics companies will need to adapt to these
new demands at least in the long run.
Animal Testing
Cosmetic companies are finding it hard to ban
this practice completely as countries like China
require animal testing for all the products sold on
their territory. In response, new entrants like
Paula's Choice are using their no-animal-testing
policy as a differentiator to win market shares.
Product Safety
“Story of Cosmetics” is a documentary released in
2010 by activist and Greenpeace US Executive
Director Annie Leonard. According to her, most
widely available cosmetic products contain
carcinogenic ingredients because of laxist
regulations and lobbying.
"Pink-washing"
In 2011, the National Film Board of Canada
released a documentary entitled Pink Ribbons, Inc
based on the book of the same name by Samantha
King. It denounces that companies use this cause
to improve their sales without contributing
enough to breast cancer research.
Women Empowerment(?)
Critics argue that cosmetics companies exploit
women's insecurities and make them even more
financially dependent on men. In response,
companies like Bobbi Brown and Benefit to invest
in social programs targeting women in need.

---
Amandine Michaud
amandine.michaud@hec.ca
+1 514.576.1299

M&AS IN THE COSMETICS INDUSTRY
The history of mergers and acquisitions in the cosmetics industry has evolved over time: acquiring
companies have different motives and transactions are more frequent and.
Typical Storyline and Accelerating Rate of Acquisitions
Since the 1950’s a new industry trend has emerged. New cosmetics entrepreneurs find a niche
segment whose needs are unmet. Oftentimes, they are industry professionals who are in close
contact with the end-consumers. Their startup gains rapid success thanks to their innovative
products and personalized customer service. Soon after, they are acquired by legacy companies –
e.g. L’Oréal, Estée Lauder, LVMH, Coty, Procter & Gamble and Unilever – which enable their brand
to capture international markets. This trend has been intensifying in the last two decades as
L’Oréal’s history of acquisitions shows below:
L’Oréal’s history of acquisitions. Shown in pink: the years during which the company made
acquisitions.
Niche M&A Expansion

Part Two: Case Analysis
Looking at the popularity of mergers and acquisitions in the cosmetics industry and their
intensifying rate, one question begs to be answered: why are there so many M&A’s?
The analysis of the two following cases will enable a better understanding of the rationale between
those transactions. Delving into why Estée Lauder bought Bobbi Brown and L’Oréal bought The
Body Shop in 1995 and 2006 respectively will enable the reader to understand the motivations
behind more recent acquisitions.
These two cases will provide great insight, in part because they involve two of the greatest players
in the cosmetics industry. Also, both deals were approached and executed in very different ways.
The results yielded by one contrasts starkly with the other’s – at least in the immediate term. And
enough time has passed to have a truly meaningful retrospective on what could have been done
differently to improve the value of the deal. Finally, both of these cases represent key strategic
moves for the acquiring companies which were looking to enter a new product or market segment.
For each case I will aim to answer the following questions:
1) What was the rationale behind the merger or acquisition?
2) What were the competitive pressures and other influencing factors?
3) How were both companies doing at the time?
4) What were the terms of the agreement?
5) How was the announcement received?
6) What were the results in the short term? In the long run?
7) What conclusions can we draw from these examples to render M&A’s more effective?

A success story
Interviewer: What made you decide to sell the company?
Bobbi Brown (BB): We sold the company in 1995. And it wasn’t for sale.
Estée Lauder was the third company that come to us to buy us.
[Retelling the story:]
Leonard Lauder (LL): We can’t beat you anymore,
we’d like to own you.
BB: But we’re not for sale.
LL: What if you could do what you do but have
behind you an organization to grow the business [in a
way] that you would never dream of to do by yourself.
[…] With our help, you can have the life you want.
BB: And he was 100% right.
Interviewer: What is your role in the company now?
BB: […] I think I [still] own the company. I don’t act any differently.
[…] It is my fourth child. I love it so much.
Excerpt from “Makeup Guru Bobbi Brown” an interview by Christina Ha for Reserve Channel
as part of their “Behind the Label” series. > Click here to view full interview

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Appendices
USA
19%
China
12%
Japan
8%
Brazil
7%
United Kingdom
4%
Germany
4%
France
3%
India
3%
South Korea
3%
Italy
2%
Mexico
2%
Russia
2%
Spain
2%
Canada
2%
Argentina
1%
Saudi Arabia
1%
Australia
1%
Thailand
1%
Indonesia
1%
Poland
1% Others
20%
Top Global Spenders in Beauty and Personal Care
According to Retail Value
RSP in 2015
Source: Euromonitor
International, 2016
31.00
21.20
18.80
18.50
18.50
18.20
17.70
17.20
14.80
13.80
13.30
13.10
12.60
10.00
9.90
Baby and Child-specific Products
Premium Beauty and Personal Care
Fragrances
Deodorants
Skin Care
Colour Cosmetics
Men's Grooming
Sets/Kits
Sun Care
Depilatories
Mass Beauty and Personal Care
Oral Care Excl Power Toothbrushes
Oral Care
Bath and Shower
Hair Care
2015-2020 Period Growth by Product (%)


---
Amandine Michaud
Amandine.michaud@hec.ca
+1 514.576.1299

Mergers and Acquisitions in the Cosmetics Industry (Excerpt)

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