Small cosmetic brands can have sources and target customers that larger companies want
Many people have organic and natural foods in their cupboard. Now, they’re also stocking their medicine cabinets with organic beauty products and cosmetics.
The demand for natural beauty products, creams with special ingredients, serums that tackle a specific beauty issue, and cosmetics that can multitask has prompted heightened interest in small and midsize players in the sector.
“Five or 10 years ago, cosmetic consumers were buying image,” said Mark Dixon, chief thinking officer at ThinkingLinking, a global mergers-and-acquisitions firm that specializes in emerging growth markets and investors. “Now they’re buying science, or believe they’re buying science.”
Consumers care about what they’re wearing on their bodies in much the same way they care about what they’re putting in their bodies, Dixon said. Moreover, there is a new trend toward “quality and traceability.” With increased regulation, cosmetics are being treated more like pharmaceutical products, and it becomes critical that companies know what exactly is going into their jars.
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“Companies are expanding their geographical sourcing and geographical customer channels but at the same time are expanding the range of products they control,” he said in a statement.
A more established company can provide accountability, but smaller companies can have access to coveted ingredients and technologies, or may have the patents for them.
According to ThinkingLinking’s report “Alchemists go shopping,” there were 50 acquisitions in the five-year span of 2012 to 2016, with 45 different buyers involved. The biggest cosmetic ingredient deal, Symrise AG’s SY1, +0.78% acquisition of Pinova Holdings Inc., was worth $417.0 million. Some of Pinova’s products are used for depilatory waxes, including those deemed “spa formula.”
International Flavors & Fragrances Inc. IFF, +0.69% , one of the largest companies in the sector, ringing up $3.12 billion in sales in 2016, acquired Lucas Meyer Cosmetics for $311 million. International Flavors was also the acquirer for the fifth largest deal, which dropped precipitously in value to $88 million. It bought Aromor Flavors and Fragrances, whose products include natural and “nature identical” materials.
Most of the top 50 deals, 46 total, were under $100 million, according to Dixon.
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“What you’re seeing now is a consolidation of some slices of the sector that weren’t previously consolidated,” said Dixon. “The middle market is consolidating the middle market and then the big players can snap them up.”
As a result, the landscape of the beauty industry is changing. Smaller, independent, and very flexible companies are coming to market and developing loyal customers.
“These brands have a story, focus on a particular kind of skin, ethnicity or hair type,” said Sarah Jindal, senior innovation and insight analyst for beauty and personal care at Mintel, a market research company. “One-size-fits-all doesn’t resonate with consumers in this day and age. A brand with a personal story is another important aspect of what draws us into a brand.”
There’s been a “shift in the way big guys handle their acquisitions,” Jindal said. Rather than buying a company and trying to integrate them as quickly as possible, big companies are letting their small acquisitions do what they do best without too much interference. In return these small companies fill in gaps like a new audience or customer group.
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As a result, these large companies have purchased an established product rather than creating a new one, and probably saved money on expensive launch costs like advertising and public relations along the way.
“The amount of indie brands that are coming out and resonating with a younger consumer base is ensuring their future growth,” said Karen Grant, global beauty industry analyst at NPD Group. The only thing these customers care about is whether the product works for them.
“These are companies that larger and smaller companies want to have in their portfolio so they can have sustainable growth over time,” Grant said.
Some of the brands that have thrived with the backing of a larger company are Urban Decay and IT Cosmetics, both under the L’Oréal SA OR, +0.28% umbrella.
“A company who’s small today can be huge tomorrow,” said Grant. “Don’t underestimate any brand today.”