The U.S. beauty and personal care market has been barely inching upward, with only 3% growth over the past five years. As the next five years don’t hold out great hope of any faster gains, industry leaders have been seeking bigger returns through inorganic growth — which has often meant acquiring both smaller, more innovative companies and larger ones that are ripe for the plucking.
A.T. Kearney’s Merger End Game Methodology, which posits that an industry is ripe for consolidation when the top three players account for 45% of the market or more, indicates that the beauty and personal care space has reached the tipping point where survival depends on acquiring or being acquired. This is true for the overall market as well as at the subcategory level.
Four motivators driving deals
What does this mean for the industry? We embarked on a study analyzing more than 200 M&A transactions that took place across all geographies in the beauty and personal care space from 2010 to 2016.
The resultant report, “Shop or Drop: The Inevitable Path for Growth in Beauty,” identifies four motivators that have driven most of the recent deals: greater access to consumers, innovation, emerging distribution channels and access to new markets.
We found that greater access to consumers was the most widespread strategic M&A driver, accounting for about 60% of the deals we studied. The most attractive acquisition targets for top beauty and personal care companies looking to expand into new consumer segments are smaller companies that have harnessed the ability to read the attitudes and preferences of evolving or emerging demographic beauty segments.
Some of these include Asian, African-American and Hispanic consumers. One deal exemplifying this trend is L’Oréal’s 2014 purchase of Carol’s Daughter, an ethnic hair care and skin care brand.
Acquisition is the quickest way to add cutting-edge innovation to a larger, less nimble company. We found that access to innovation accounted for 20% of the transactions in our sample of deals. Industry and consumer interest in biotech and science-based formulas and devices has made this a go-to space for deal seekers.
Two examples for this type of transaction are Valeant’s acquisition of Solta Medical, a manufacturer of energy-based medical device systems for aesthetic applications, and SkinMedica’s acquisition of science-based mineral makeup company Colorescience.
Twelve percent of the M&A transactions we studied were motivated by access to distribution channels, as acquirers felt the need to strengthen their distribution or to avoid building one from the ground up. Access to e-commerce distribution has also fueled a significant portion of this type of transaction, with Target’s acquisition of online beauty e-retailer DermStore serving as one example.
Expansion into new geographies, giving access to new markets, has been a core driver in 8% of the M&A moves we reviewed. However, there are nuances — most of the M&A deals of this kind took place between an acquirer and a target that were both in mature markets.
Generally these transactions were between North American, European and Japanese companies; deals involving companies rooted in emerging geographies trying to access established markets have been far less common.
Another way large beauty companies have taken a shortcut in building distribution from the ground up is by acquiring or merging with local companies — thereby creating rapid access to local distribution channels. Two examples of these are Japanese beauty brand Kosé’s move on U.S. prestige cosmetics company Tarte, and Hain Celestial’s expansion into Canada with its purchase of Belvedere.
Serial acquisition proves critical for value creation
Acquirers that are active in the beauty and personal care M&A space, completing two transactions or more per year, are shown in our study to experience faster increases in value than infrequent ones.
Compared with companies that didn’t engage in transactions as often during the same period of time, frequent buyers’ value growth rate was 26% higher.
Our comparative analysis of enterprise value/EBITDA multiples across these M&A acquisitions showed that serial acquirers, both large and small, maintained 1.4 times the EV/EBITDA of companies that were not serial acquirers — a confirmation that Wall Street rewards frequent buyers with significantly higher market valuations.
In summary: Whether they are looking to expand for greater access to consumers, innovation, emerging distribution channels or access to new markets, beauty and personal care corporations have to sharpen their M&A skills. Making an art of the acquisition game will separate the best from the rest in 2017.
Hana Ben-Shabat is a partner in the Consumer and Retail Practice of A.T. Kearney, a global strategy and management consulting firm. She can be reached at firstname.lastname@example.org.