European Luxury Groups Are Moving In on Beauty
The European beauty scene continues to morph, with Kering taking beauty in-house and Richemont building a Laboratoire de Haute Parfumerie.
It’s a sign of the times, as luxury makers’ once red-hot trades in China and in fashion cool, and beauty proves its staying power despite the ongoing tough geopolitical and macroeconomic climate.
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Still, success in the industry isn’t easy, and there is no cookie-cutter approach to building the business.
Beauty is a lure today for four main reasons — growth, resilience, desirability and margins — according to Laurent Droin, head of Europe, Middle East and Africa at Eurazeo Brands.
Fragrance and cosmetics is a big, fast-developing business, with the category generating sales last year of approximately $430 billion, according to a McKinsey study that projects those are expected to reach about $580 billion by 2027. That represents projected annual growth of 6 percent.
“Luxury is the fastest-growing sub-segment in beauty globally over the past decade — outstripping mass,” said Céline Pannuti, managing director, head consumer staples research Europe at J.P. Morgan, pointing to high single-digit annual growth. “It has had a huge draw from China, so we’ll have to see how the market develops going forward.”
Droin highlighted beauty’s resilience. Whereas the fashion business, with its discretionary categories, has become more difficult, “beauty is part of a daily routine, and people will keep buying beauty,” he said.
Pierre Tegner, head of food, spirits, home and personal care at Oddo, said humankind has always needed beauty. “Short term, on top of this, there is a new generation giving traction to the beauty business,” he said.
Beauty also has a high frequency of use “and eventually, the perceived value is quite high,” said Droin. “The pleasure for the value is really high, so people are still buying it, even in times that are a bit more difficult.”
As with handbags, beauty’s margins are among the highest in luxury.
Success in beauty can bring enormous rewards, and potentially change the dynamics of the industry, with the big luxury groups grabbing ground from industry stalwarts such as L’Oréal, Coty Inc. and Interparfums.
Luxury groups are already making big moves, and shaking up markets in the process.
“Luxury is about control,” said Erwan Rambourg, global head of consumer and retail research at HSBC. “It gets pricing power and builds brand equity.”
Kering’s decision to take beauty in-house in early February 2022 and Richemont’s to build a Laboratoire de Haute Parfumerie et Beauté, announced in September, are just two examples.
Shares in Interparfums, Richemont’s longtime licensee for fragrance brands including Montblanc and Van Cleef & Arpels, sank 9.4 percent on Sept. 6, the day of the announcement, which also revealed Richemont had named Boet Brinkgreve the division’s chief executive officer.
Clearly, the threat of a beauty-savvy Richemont is a very real one.
Kering Beauté’s purchase of Creed — which closed in October — made investors sit up and take notice, too.
“Kering’s acquisition of Creed at a 14-times sales multiple was an outstanding outcome that has reverberated through the category,” said Peter Wells, an associate at Lempriere Wells, a global M&A firm specializing in beauty and personal care.
Wells added the firm has been seeing “increased M&A activity in the sector,” and that the Creed deal will most certainly make buyers and sellers alike curious about what other deals can be done, and multiples achieved.
More market shifts are contributing to the increased focus on beauty.
“Mega brands want to appeal to a broad audience, without making brands ubiquitous in their core categories. Therefore, they are increasing the average entry price of handbags, while introducing new product categories at the entry point — costume jewelry, for example, or small leather goods,” said Luca Solca, managing director, luxury goods at Bernstein. “Among these categories, beauty is the perfect category to attract the largest possible consumer audience, as it has the lowest possible absolute price point.”
An investor who asked not to be named believes Richemont is looking to do just that with its new fragrance platform.
“They seem to be tearing a page out of the LVMH playbook by creating multiple avenues into the brands, and potentially spreading their marketing budgets across all the fragrance brands,” the person said.
Wells believes it makes sense for these groups to focus on fragrance first.
“Consumers are increasingly thinking about wellness, and in broader terms, and valuing the power of scent to transform space and mood,” he said. “It is also highly personal to the wearer, and anchors customers to a brand. Combined with attractive margins at scale, it’s a natural category for luxury groups to pursue.”
There are other reasons for bulking up on beauty.
“Bring beauty back in-house and you control the narrative,” said Cindy Palusamy, an entrepreneur and the founder of CP Strategy, a boutique consulting firm focused on concept development for consumer-facing businesses, especially in the hospitality, beauty and wellness sector. “If you have a license there will always be a disconnect, and you don’t always have control over execution.”
Having full control of a brand’s fashion and beauty business can pack a powerful punch, giving synergies and power alongside consistency. Puig has been pioneering in that.
“Beauty, possibly taken in-house and controlled directly, could be scaled up and help enhance the positioning and the image of the brand, especially with this more aspirational consumer,” said Chiara Battistini, executive director, head of European luxury and sporting goods equity research at J.P. Morgan.
More beauty makers are muscling up to a point they can outbid fashion makers in their own field. In late November 2022, the Estée Lauder Cos. acquired Tom Ford for $2.3 billion, marking the beauty giant’s first venture into fashion. The deal included the luxury brand’s beauty activity, which Lauder had been running under license, and eyewear.
“The big players are even bigger than before,” said Tegner.
Advertising and promotional spend at L’Oréal — the world’s number-one beauty maker — represented 31.5 percent of its 2022 sales, which were 38.26 billion euros, for instance.
“They have this big weapon they can manage in a very agile way,” said Tegner.
Numerous strategics have the financial wherewithall to launch into beauty.
“It’s going to be quite interesting in terms of the investment phase,” said Pannuti.
Patience is necessary. For luxury groups, it can take five to 10 years before their beauty business will yield results — so it’s not necessarily going to help offset the slowdown being experienced in luxury fashion and jewelry.
Challenges
Building blocks need to be put in place.
“The most obvious thing these companies miss in beauty — by definition, as they start now — is scale. Beauty distribution is fragmented; serving a fragmented distribution with no local scale is very challenging from a cost standpoint,” said Solca. “You need scale to deliver frequently and with decent drop sizes, or your logistics cost will prove to be a burden.”
Why else would Kering establish a whole new division with Creed at the core?
At the time of the acquisition, Kering said Creed was not only a “perfect fit” with its portfolio of renowned luxury brands, “it immediately provides Kering Beauté with the required scale, an outstanding financial profile, plus a platform, supporting the future development of other Kering Beauté fragrance franchises, by leveraging in particular Creed’s global distribution network.”
“It’s a different go-to market,” said Pannuti. “It’s something you need to learn as well as make sure that you have the right capabilities. It’s a bigger distribution suite that you have to be comfortable with.”
Further, Palusamy said that if the luxury groups can figure out how to marry fashion and beauty marketing, they will strike gold.
She speculated that had Louis Vuitton launched makeup this summer during Pharrell Williams’ debut show, the result would have been spectacular.
“What if the models wore LV lipstick, and the company integrated the ad campaigns? What if the LV marketing budget … was monetized across fashion, accessories and beauty? If these brands could figure out how to integrate the fashion and beauty storytelling,” it would be an existential crisis for the wider industry, and to big groups like L’Oréal, she said.
But that’s one big “if.” Palusamy said that, in reality, fashion and beauty teams don’t tend to speak to one another. They often come from different professional backgrounds, and are used to speaking to vastly different audiences.
Another challenge is beauty’s already crowded space. Consumers also need to believe in a brand.
“The most important challenge is one of credibility,” said Solca. “Couture and designer brands expand easily into beauty, and success cases abound: Chanel, Dior and Saint Laurent. But accessories brands have a harder job in making beauty relevant to their DNA.”
Palusamy said there are so many more hurdles, explaining: “The beauty business is fundamentally different from the fashion business.”
That’s true, for many reasons.
“Are the luxury brands underestimating the complexity of product development, formulations, distribution and compliance?” asked Palusamy.
Burberry, which briefly took its beauty business in-house, remains a cautionary tale.
Former CEO Angela Ahrendts terminated Burberry’s license with Interparfums SA and took the beauty business back in-house in 2013. The stand-alone activity had been a key pillar of Ahrendts’ strategy: She’d imagined that it could someday grow as big as that of Chanel or Dior. At one point, there were even plans for a skin care line.
It was clearly tough going it alone. Just three years later, Marco Gobbetti, Burberry’s incoming CEO, wound it all back and return to a licensed model, and a sure and steady flow of royalty payments, under Coty.
At the time, Solca said: “We never liked the idea of Burberry managing its beauty business directly, as beauty is [a fast-moving consumer-goods] business, where you win on the back of global reach. Burberry was a dwarf in the land of giants in this industry, and never had sufficient scale to run this business effectively and efficiently.”
Strategies Differ
All eyes are on Kering, which rebuilds its in-house beauty activity at a time when the group is undergoing heavy investments, not least for the repositioning of Gucci.
With beauty, Kering was encouraged by eyewear, which it took back in-house in 2017.
“Eyewear was a very big bet when they announced it,” said Battistini. “Kering orchestrated a fantastic success story. They’ve really strengthened their operation and enhanced their presence in that segment.”
Kering appointed Raffaella Cornaggia CEO of Kering Beauté — a new position in a new division. She is charged with developing a team with expertise in the beauty category for Bottega Veneta, Balenciaga, Alexander McQueen, Pomellato and Queelin. It is believed fragrances for the three first brands could launch in the second half of next year.
Kering Beauté wasted no time, and in late June of this year acquired Creed, the oldest existing high-end niche fragrance house, in a deal reportedly worth 3.5 billion euros.
Before that, alongside Ford, it was reported Kering had been in the chase to purchase Byredo, which was snapped up by Puig for an estimated 1 billion euros.
In a call on Oct. 24 with financial analysts and journalists, Jean-Marc Duplaix, Kering’s deputy CEO in charge of operations and finance, argued Creed will help to supercharge Kering Beauté. He described the new division as a beauty “start-up” with a small top line — and a lot of costs.
“Creed will help it to accelerate, and will absorb some of those costs. It is a 300-million-euro business and highly profitable,” he said, urging analysts to exercise patience. “This division will be loss-making until we reach a critical scale.”
Creed, which has a strong positioning in its niche, seems to be a learning platform for Kering, regarding distribution, marketing, ideation and fragrance-making, according to Battistini.
Duplaix also suggested Kering would take a break from buying, and focus instead on “portfolio, strategy and integrating the new brands,” he said.
Some analysts question the Creed-related strategy.
“My fear is that Creed — with 250 million euros of sales — is too small a business to serve as a viable platform for Kering’s beauty ambitions,” said Solca. “I understand, though, that they see significant potential for the brand and a solid skill base within the company.”
Others are less hesitant.
With Creed, Kering bought a great and sizable brand and category — niche fragrances — as well as knowledge about working with key distributors, said Droin, who believes the size of the acquisition, the brand and its quality make sense for the group. He explained: “They are bringing the full business model Kering needs to have.
“Getting the sizable platform with a sales force is very smart,” continued Droin. “The question you have then is: Can you use it for a different brand? Can you synergize those sales forces?”
“[Creed] accelerates the process of building a platform,” said Rambourg, adding: “We always though that the end game for Kering was to recoup Gucci from Coty.”
It is believed that license is set to expire in 2028. And Kering executives have been vocal that Gucci beauty could be much bigger than it is today.
Pannuti said that L’Oréal, which in 2007 acquired YSL Beauté — and with it the beauty license for YSL, a brand owned by Kering — has done a fantastic job with the brand, especially in fragrance and makeup.
“If you look at that as a template for Gucci, there is a lot of headroom to develop a strong brand,” she said. Pannuti underlined, too, the strength of couture fragrance brands today.
Rambourg said that Dior’s fashion business generates about 10 billion euros, versus approximately 3 billion euros for its fragrance and cosmetics activity. That compares to Gucci’s fashion business, which is about on a par with Dior’s, but its beauty business generates just about 600 million euros.
“If Kering runs [beauty] appropriately, it can be sizable, like it is sizable for Chanel and Dior,” said Rambourg. “It’s bound to move the needle at Kering. I don’t think it will be the case at Richemont.”
It is not believed Richemont is attempting to take all of its beauty businesses in-house at present, but rather plans to offer strategic guidance to the licensed brands about how to build their activities and become more sustainable.
“They are studying the options that they have for Cartier only, not for the other brands,” said Battistini.
Cartier is a mega-luxury brand.
“Therefore, if you just go by scale, reach and perception, the brand should have similar power as Gucci, which is also a 10-billion-euro brand, [in fragrance and beauty],” she said.
Might Richemont ink joint ventures to develop its beauty business, as it did for eyewear?
“It will be interesting to see if that’s another option that they could consider,” said Battistini.
Droin has two questions regarding Richemont.
“Does it have brands that are relevant to play in beauty? Does the consumer want those brands to be in beauty?” he asked.
LVMH Moët Hennessy Louis Vuitton, already a powerhouse in beauty, in early March named Stéphane Rinderknech chairman and CEO of the group’s Perfumes and Cosmetics division. In the role, he oversees the group’s 15 beauty brands, organized under Parfums Christian Dior, Guerlain, LVMH Fragrance Brands and Kendo, while continuing to lead LVMH Hospitality Excellence. No one had held that beauty post since 2004.
“You don’t recruit someone of that caliber to run a small portfolio of beauty,” said Rambourg, of the former chief of L’Oréal USA.
LVMH has a unique positioning in beauty, due to its existing brand portfolio plus the ownership of Sephora, the world’s largest omnichannel prestige beauty player.
“How can they expand in this market?” asked Droin. “Should they go higher luxury? What are the biggest addressable markets, where they have good assets to play? In general, LVMH is very good at doing beauty in-house or if they buy assets, buy very early and develop them through their own channel.”
He believes for LVMH growth is going to be less about acquisitions — but that if it does snap up other brands, they would be tactical acquisitions for segments the group is not already in. Droin sees a lot of potential for LVMH in beauty, including Sephora.
“I would say they’re at the level of Estée Lauder, Shiseido or L’Oréal,” he said.
Rambourg believes the Estée Lauder Cos., as well as indies, could be potential targets for LVMH.
For Tegner, the biggest challenge for LVMH and Kering is not to focus on beauty brands already working well for them.
“You have to build a portfolio to be ready to respond to the next trend,” he said, adding diversification is key in the beauty category, which is growing while becoming more volatile. “That’s clearly the big competitive advantage of L’Oréal. They are everywhere.”
It’s expensive to build resilience and consumer loyalty like L’Oréal has done for decades.
“That’s the biggest challenge,” said Tegner. “My big question is: Are these players fully aware about the big battle they are entering into?”
Puig is already firmly in the fray. The Spanish family-owned beauty and fashion company is studying options for its next moves.
“Puig is currently assessing all strategic alternatives for the future of the company, including the option of opening our capital to third parties via an IPO,” Marc Puig, company chairman and CEO, told WWD in October. “This is only one of several options, and no decision has been taken.
“We could also maintain the status quo. Whatever we decide, the family will remain for the long term,” he continued. “For the last few years, we have already been running the company according to the best-in-class principles that characterize a European publicly listed entity, as we deeply value the rigor that these principles bring and believe this construct to be fair for all Puig stakeholders, as well as for the generations to come.”
“Puig has been doing an excellent job in the past few years,” said Solca. “An IPO could possibly be a way for them to graduate and crystalize some of the progress made — and then move forward.”
“Maybe an IPO could offer them more visibility to make a bolt-on acquisition,” said Tegner, explaining the move could put more operational discipline within a family-owned group, too.
Industry experts widely lauded Puig.
“Puig is one of the most impressive companies I’ve seen. They’ve been building a great portfolio,” said Droin. “The Byredo acquisition was so smart. It’s so good, with such a potential.
“What they need to do is to continue acquiring some great brands, like Byredo,” he said, adding of Puig: “They are excellent at distribution. They have a great platform. It’s a very compelling story for the markets.”
Having so many strategics honing their focus in on beauty is a positive bellwether.
“It means that the market is going to remain very active with a lot of good players for the next 10 years,” said Droin.
“I would expect the unexpected — and a lot to happen,” said Rambourg.
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