The Beauty Economy

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BEAUTY ECONOMY | 07 RACONTEUR | 27 / 09 / 2015 raconteur.net BEAUTY EQUITY BEATRICE AIDIN In the grips of beauty M&A The value of the beauty business is growing, evidenced by the flurry of mergers and acquisitions so far this year and smaller brands financing expansion W hen executives from Wal- greens Boots Alliance rang the Nasdaq stock market opening bell in January, the occasion marked the newly merged con - glomerate's first week trading. But it also set the tone for 2015, with mergers and acquisi- tions (M&A) gripping the $473-billion global beauty industry. Market watchers waited with bated breath – what and who would be next? It wasn't a long wait. From March to July, Unilever, known for mass beauty brands such as Simple and Dove, made almost monthly acquisitions, including REN and Dermalogica. On July 9 Walgreens Boots Alliance announced the ac - quisition of Liz Earle from Avon in a reported £140-million cash deal. But the blockbuster? The very same day P&G accepted a $12.5-billion offer to merge 43 beauty brands, notably Max Factor, Dolce & Gabbana Beauty and Nice & Easy, with Coty in an eventual deal to be completed during late-2016. Why? "A lot of the approach P&G had for mass-market brands they used in luxury and invested by throwing money at it," says Imogen Matthews, industry guru and author of the Premium Market Report. This did not work. "But they did groundbreaking things with Gucci and D&G, but when it came down to fine fragrance, it didn't fit into P&G's core category which is FMCG [fast-moving con - sumer goods, such as Pampers and Daz]." Why has 2015 been such a big year? "Mul- tinationals have got money again and they want to spend it," Ms Matthews explains. "The competitiveness of the landscape is fuelling M&A," says Venette Ho, managing director at Financo, an investment adviso - ry company. "In the West, many of the large conglomerates have been built on M&A and many large beauty players are looking [at] really small [brands]." For the small brands to grow, finance is the challenge. "Some beauty brands start with their own savings, with a bank loan or a gov - ernment regeneration fund for small busi- nesses," says Tracey Woodward, an adviser to B&B Investment Partners, which acquired Aromatherapy Associates last year. "Next it could be a friends-and-family round, who may loan money and/or take equity, then 'angel' investors of up to £500,000, taking an above-interest-rate return and/or equity, and who will advise too. PE [private equity] will look for companies to expand and they might buy outright or become a majority stakeholder and advise." But what do inves - tors look for, besides a profitable company with potential? "Distributors, PR, and in- creasingly social media presence and strat- egy," she adds. In May, This Works, founded by Kathy Phil- lips, the former health and beauty director of Vogue, reached a deal to sell a majority shareholding to Tengram Capital Partners. "Our business trebled from 2011 to 2014," says This Works chief executive Anna Per - saud. "Tengram are strategic partners work- ing with us and guiding our expansion into the US." Not all see PE as the ideal. "The big down- fall is that yes you get the money, but in- variably the growth of the business and the exit strategy aren't always compatible," says George Hammer, chairman of Hammer Holdings, investors in Joan Collins Timeless Beauty and Leighton Denny. "But this busi- ness isn't a formula; you have to use your in- stinct. For example, I had heard that Leight- on Denny was a very good nail technician. I met him and suggested he create a line. Now it's a big business and turns over a few mil- lion quid." Two companies looking for money didn't have the benefit of available financing during the recession. "We launched in 2007 and in 2009 we went to HSBC to borrow quite a bit of money," says Ed Saper, direc - tor of Pai Skincare. "They laughed at us, but they did actually lend us £25,000 under the government's Enterprise Finance Guaran- tee scheme that guaranteed 75 per cent of the risk." Alexia Inge, founder of Cult Beauty, an online niche beauty boutique, found tax breaks gave potential investors confidence during the credit crunch. "When we passed accreditation for the Enterprise Investment Scheme it attracted investors because for the life of the investment you don't pay cap - ital gains tax and say you invest £100,000 you instantly get £30,000 as a tax break. Did that attract investors? Yes, one did it purely for that reason – we've made him a lot of money." Some brands have no interest in outside fi - nancing though, such as South African skin- care brand Environ. "It is co-owned by my sister and me; we have no investors and are quite passionate about this," says co-founder Dr Des Fernandes. "We've had people knock - ing on the door and met them, and realised they have no idea about our business from the stupid things they say or the ridiculous offers for it." Indeed to successfully work with investors it is about personality and gut feeling. "I was online dating at the time and the two felt rather similar – lots of sharks out there," says Ms Inge, who did find her investment prince. "The relationship is as important as the deal or it's doomed to fail," says Mr Hammer. "It's like a marriage." Yet to quote Shakespeare, "the course of true love never did run smooth". After sell - ing a 70 per cent stake of NUDE to LVMH in 2011, the formulations and packaging changed, and formerly loyal customers were ill-pleased. "One year in, we realised that this was not what we had signed up for," says co-founder Bryan Meehan. Fascinatingly, LVHM concurred. "They said we were right and allowed us the space to do what we did in the first place," says Mr Meehan. "Sales have been significantly better." Multinationals have got money again and they want to spend it – the competitiveness of the landscape is fuelling M&A Source: SyncForce 2015 TOP 20 BIGGEST COSMETICS BRANDS IN THE WORLD BRAND VALUE ($BN) CASE STUDY: UNILEVER AND COTY Unilever's spending spree this year may have seemed dramatic to some, but an- alysts have been following the company closely and saw the signs. "We have noted Unilever's determina- tion to become a selective skincare heavyweight since its investment in IOMA and Syneron back in 2013," says Vivienne Rudd, Mintel's director of global insight and innovation, beauty and personal care. "It has an interesting strategy of mixing outright acquisitions of niche brands with complemen- tary positionings, such as REN (natural and quirky), Kate Somerville (facialist), Murad (doctor's brand) and Dermalogica (professional/ problem-solving), with investment in bolt-on tech- nology via a joint venture with Syneron to create the iluminage device and products, but teaming them up with its heritage brand Pond's." Unilever has certainly covered all bases, but a large part of this has been to put the consumer first, really think about their buy- ing choices and consider who else is vying for their money. "I always talk about tribes and it's as if Unilever thought 'who is the cus- tomer for each brand' – so REN for the yummy mum- mies, for example," says Tracey Woodward, adviser to the beauty industry. "But also people from these tribes buy from across the board spending say £5 on a cleanser, but a £100 face cream, and Unilever has found the best of the best for people to cross-pur- chase across brands." As for Coty why did they buy 43 brands from P&G? "While Coty has more than doubled its size in global beauty, both the prestige fragrances and colour cosmetics make a good fit with its existing portfolio, and the acquisition granted the company entry to haircare," says Ildiko Szalai, senior beauty and personal care analyst at Euromonitor International. "It's fantastic for Coty," says beauty industry guru Imogen Matthews. "It might make them the number-one company in the sector." BIG M&A DEALS OF 2014 AND 2015 Newly-merged Walgreens Boots Alliance marking its first week as a new public company by ringing the Nasdaq opening bell in January 2015 Coty buys Lena White, the distributor of nail care brand OPI, for an undisclosed amount Estée Lauder buys skincare brands Rodin Olio Lusso and Glamglow, and fragrance groups Le Labo and Editions de Parfums Frédéric Malle, all in quick succession Walgreens takes full control of Alliance Boots, buying remaining 55% stake for $5.3 billion Unilever buys UK premium skincare brand REN for an undisclosed amount Procter & Gamble buys the Rochas fragrance brand from Inter Parfums for $108 million Unilever buys skincare brand Dermalogica for an undisclosed amount Walgreens Boots Alliance buys Liz Earle from Avon for a reported £140 million Procter & Gamble agrees to merge 43 beauty brands with Coty in $12.5-billion deal, to be completed late-2016 JAN 14 OCT 14-JAN 15 DEC 14 FEB 15 MAR 15 JUN 15 JUL 15 JUL 15 $11.218 $3.897 $8.988 $3.591 $5.821 $3.550 $5.364 $3.220 $5.322 $3.051 $4.921 $2.814 $4.792 $2.577 $4.630 $2.353 $3.986 $2.122 $3.984 $1.997 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 COMMERCIAL FEATURE under 2 % un un unde de der % red 4 8 hrs Look for swollen painful hot itching red Lo Lo Look ok ok for or or swollen painful hot hrs itching under 2 % un un unde de der % red 4 8 hrs Look for swollen painful hot itching red Lo Lo Look ok ok for or or swollen painful hot hrs itching under 2 % un un unde de der % red 4 8 hrs Look for swollen painful hot itching red Lo Lo Look ok ok for or or swollen painful hot hrs itching under 2 % un un unde de der % red 4 8 hrs Look for swollen painful hot itching red Lo Lo Look ok ok for or or swollen painful hot hrs itching under 2 % un un unde de der % red 4 8 hrs Look for swollen painful hot itching red Lo Lo Look ok ok for or or swollen painful hot hrs itching BE SAFE AND ALWAYS DO THE ALLERGY ALERT TEST Beware permanent hair colourants and so-called "black henna" temporary tattoos contain a substance called PPD which can cause an allergic reaction in a small number of people Last year an estimated 50 million packs of home hair dye were sold in the UK alone. Did you buy one? If so – be honest – when you read the instructions that said, "It is essential that you perform an allergy alert test 48 hours before each use of this product", did you follow the advice to the letter? Or just go right on and use the product, reassuring yourself that you've been using the same colour for years and never had a problem? Like many of us, you probably skipped the test and got colouring. But these alert tests aren't optional, they're essential. To understand why, you have to understand a little bit about the chemistry of colouring hair and the nature of allergy. "To colour hair permanently, molecules of colour need to be captured within the hair shaft," explains Dr Emma Meredith, director of science at the Cosmetic, Toiletry & Perfumery Association (CTPA). "The problem is that the molecules of colour are too large to penetrate the shaft, so you have to make them inside the hair shaft." This is done by applying two components, one that contains substances called colour precursors a n d a n o t h e r, k n ow n as an oxidising agent, which is usually hydrogen peroxide. These are both small enough to get into the hair. Once inside, they react with each other to create the colour molecules which are then trapped in there, resulting in the hair being permanently coloured. O n e o f t h e s e s m a l l e r c o l o u r precursor molecules is a substance called PPD (paraphenylenediamine or p-phenylenediamine) and, while for most people PPD won't cause any problems, there are a small number of people who may have an allergic reaction to it, in the same way that some people may be allergic to peanuts or shellfish. "An allergic reaction happens when the body's immune system reacts to a substance that is normally harmless," explains Dr Chris Flower, director-general of the CTPA, and a chartered biologist and toxicologist. "Your potential to be allergic to something is determined by your genes and you won't get an allergic reaction the first time you encounter something as your immune system has to have met the allergen in the past, and decided it is harmful to you, before it can react." Instead allergies build up over time and after a number of exposures to an allergen, a threshold will be reached which will result in an allergic reaction. It's like a glass of water; once full, adding more will make the glass overflow. "Less than 1.5 per cent of the population have the potential to react to PPD and around 0.1 per cent of the population will develop an allergy after hair colourant use," says Dr Meredith. "When you compare that with food allergies, which can affect up to 5 per cent of the population, that's actually quite low. Although for those who do become allergic, it is a serious matter." And, she stresses, reactions on the head and face can be avoided by carrying out an allergy alert test 48 hours before using a hair colourant and every time you dye your hair. Below is a detailed guide to doing the test. But it's not just about going through the motions. "You have to pay attention to how you've reacted to dyes or tests in the past. If there was even the slightest bit of redness or itchiness, this is a sign you shouldn't be using that product – and probably any permanent hair colourant. It's also important, if you do react to the allergy alert test, that you speak to your doctor and also contact the manufacturer – careline or helpline numbers are provided on the pack." So if you are one of the very small number of people who can't use products containing PPD or you're desperate to colour your hair before you go out tonight, what's the solution? "Look for a product that doesn't require an allergy alert test," recommends Dr Meredith. "Temporary hair colours, such as mousses, mascaras and chalks are less likely to contain PPD or a PPD-like dye and can usually be used straight away." But when it comes to allergic reactions to PPD, the biggest danger is not hair colourants which, when used according to the instructions are perfectly safe, but temporary, so-called "black henna" tattoos, often offered at funfairs, festivals and in holiday resorts. According to the British Skin Foundation, the majority of the colourant in black henna is PPD – legally allowed to be present in limited concentrations in hair dyes, but illegal for use on skin in these types of tattoos within the European Union. "Having a 'black henna' temporary tattoo presents a significant risk of a very nasty adverse reaction to the tattoo itself," says Dr Flower. Indeed, in a survey, 40 per cent of dermatologists asked said they had treated patients for reactions to these tattoos. But crucially, if you do have the potential to be allergic to PPD, it can give you a high exposure to the allergen, topping up your "water glass" with huge implications for the future. "If you have one of these tattoos, even in childhood, it increases the risk of you either not being able to use most hair dyes in the future or having a bad reaction to them if the warnings are ignored," Dr Flower says. The message is clear – never have a "black henna" temporary tattoo and always do the allergy alert test. www.thefactsabout.co.uk Reactions can be avoided by carrying out an allergy alert test 48 hours before using a hair colourant and every time you dye your hair Dr Anjali Mahto, consultant dermatologist and British Skin Foundation spokeswoman, says: "Black henna is well known to cause skin reactions and should be treated with caution, particularly in children. Individuals presenting to dermatology outpatients with a history suggestive of contact allergy to hair dye should also be questioned closely regarding previous reactions to black henna. In most cases, patients with a reaction to PPD, who present to outpatients, are usually rash free and the reaction has occurred at some point in the past. In these cases, patient photographs can be extremely helpful. When patients acutely present, usually as an emergency appointment, a range of skin changes can be visible. These include redness, itching, blistering and swelling. Long term, there may be residual pigmentation changes in the skin at the site of PPD application." ADVICE TO CLINICIANS Wait 48 hours as reactions to hair dyes are delayed contact allergies so can take this long to show up - if you react to the allergy alert test DO NOT go on to colour you hair Apply a small amount of the mixture behind your ear or in the inner-elbow as instructed You DO NOT need to buy a second pack to do the alergy alert test, just re-close the packs after taking out a small amount, mixed or not, as instructed Always read and follow the manufacturer's instructions found in the pack Under 2% of the population has the potential to become allergic to ingredients in hair colourants, but as allergies may develop over time, an allergy alert test should be carried out each time you colour your hair

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