Queried by Beauty Independent, beauty industry experts give Coty Inc.’s $600 million purchase of a 51% stake in Kylie Cosmetics a mixed grade. The deal values Kylie Cosmetics, which will be renamed Kylie Beauty to accommodate category expansion, at $1.2 billion. Some experts point to heavy debt Coty is still digging out of after buying 41 brands from Procter & Gamble as an obstacle to innovating at Kylie, currently on track to produce $200 million in sales this year with $25 million of the total from the recently launched Kylie Skin.
In addition, there’s concern about how much leverage Kylie Jenner will have to keep the brand relevant in a beauty environment where trends emerge at lightning speed. There’s already fatigue creeping into her domain as evidenced by Rakuten Intelligence’s estimate of a 14% drop in Kylie’s sales for the first five months of the year. Will Coty retain Seed Beauty, the operation with Colourpop and KKW Beauty in its portfolio that’s helped cultivate Kylie’s cool vibe, as the producer or move production in-house for economies of scale? Coty doesn’t have a promising track record of integration. On top of its acquisition blunders with the P&G brands, Coty faltered with its investment in Younique, a direct-sales brand sold back to its founders.
A big elephant in the room is whether Jenner will be transparent about her brand being under corporate control on social media and clue her fans into what might happen to their favorite makeup with the new ownership. Although they mostly may be oblivious to the changes or not care as they drool over holiday goodies or beg for international distribution, something Coty can deliver, a handful have expressed anxiety about the future of Kylie Cosmetics. In a social media comment, one follower wondered, “Why did you sell your brand?”
Quelling the chatter, Coty CFO Pierre-André Terisse succinctly sums up why Coty wanted Kylie or, more specifically, Jenner. “With a single post, she’s able to reach more than double the number of people who watch the Super Bowl every year,” he said in an analyst call. Coty’s hope is that Jenner will lure young consumers who’ve turned away from Coty’s tired stable of CoverGirl, Rimmel and OPI. Coty executives also see dollar signs in international distribution and broadening Kylie across the merchandise spectrum. Are they right? To get at that question, let’s turn back to the dozen beauty industry experts we prodded to provide verdicts on Coty’s latest pickup. We asked them: What do you think of Coty’s acquisition of Kylie Cosmetics, and what are the implications for the broader makeup market?
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Stephanie Wissink Managing Director, Jefferies Coty has been clear about its desire to condense its focus on cosmetics, skin, fragrance and nail care as evidenced in sales plans for the hair color, Brazil HPC [health and personal care] and professional businesses. Coty's exit of non-core offerings stands to de-risk the balance sheet and affords the company capital to participate in growth-oriented mergers and acquisitions. While the timing of the Kylie deal preceded the balance sheet cleanup, the deal qualifies for growth and premiumization of the portfolio. There are benefits and risks of investing in a celebrity brand, and that was a focal point on the analyst conference call.
Kylie brings significant reach, recognition and influence that thus far have been effective in driving sales growth. The Kardashian clan has perfected optimizing/leveraging the consumer's insatiable appetite for details on their everyday lives to benefit their brands and drive awareness across multiple platforms. Despite the benefits, there are numerous risks with celebrity brands such as faddish affinity value, unpredictable behavioral risks and lifecycle changes…Protecting authenticity and driving repeat purchase can prove a challenge.
- Sabrina Yavil Marketing Consultant, Sabrina Yavil LLC
Coty’s acquisition of Kylie Cosmetics should be a huge win-win for both parties. It’s tremendous what Kylie Jenner has accomplished with this business in just a few years and really speaks to the power of social media as a marketing channel. At the same time, there’s still a lot of untapped potential that a strong partner like Coty can help mine. For example, the majority of Kylie’s sales are from within the U.S. while the majority of Kylie’s social media followers are outside the U.S. As Kylie Cosmetics begins focusing on growing sales internationally, Coty’s global capabilities in manufacturing and distribution will make entering new markets faster and more profitable from the start. Coty will also be a great resource from an R&D and manufacturing perspective as it begins expanding into new product categories such as fragrance, nails and maybe even haircare.
It’s not one-sided, though. Coty is absolutely benefiting from this partnership, too. It’s much easier to acquire a brand than to create one from the ground up, so larger companies like Coty and Estée Lauder are actively looking for attractive brands they can support and grow. For example, of Estée Lauder’s 29 brands today, only six of them were developed in-house. The others were strategic acquisitions such as M.A.C and La Mer that have helped grow the company into the powerhouse it is today. The key for Estée Lauder is to keep the brand’s identity intact and to create value by providing management experience, R&D capabilities and operational synergies on the backend. If Coty can achieve this—keeping the Kylie brand cool and profitable—then it was a good deal for all.
As for the beauty industry overall, it suggests that a serious focus on social media and influencer marketing is still what it takes for smaller brands to gain traction among consumers and consideration from larger companies like Coty and Estée Lauder, Ulta and Sephora, or even venture capital.
- Allan Mottus Consultant, Mottus & Associates
Coty is acquiring 51% of the makeup company, making Kylie and her staff more focused on creating future growth. Moreover, Coty has a separate agreement to distribute Kylie skincare and fragrances. The question is how much room Coty does have left to grow Kylie's sales in the U.S. because, overall, the makeup category is declining in the double-digit range.
I do not know how celebrity is accepted abroad in makeup. In fragrances, celebrity did not sell very well in Europe in the early 2000s. I would imagine Coty has used market research to see if there are growth opportunities in Europe and Asia for Kylie makeup. Kylie depends on gen Z and millennials for makeup sales in the U.S. Both demographic segments are now changing how they purchase products online and in retail stores. Recently, Kylie makeup was being discounted by 30% at Ulta.
The overriding issue I see is how Coty management will deal with its restructuring and still integrate Kylie. It has aspects of a soap opera and will demand ongoing press coverage.
- Arne Zimmerman President, Catchers Mitt LLC
From my perspective, I am trying to figure out the strategy. Kylie is another Hollywood personality that really brings no new technology to the market, but rah rah! We all have been through personalities in our business careers, and I must say that this one shocked me. It would make sense to chase a Revlon or Almay to reinvent the magic. This looks like a buy for numbers and that catches up very quickly. How many brands can be thrown in a wok and mixed up? There has to be serious strategic brand marketing initiated or they will cannibalize the businesses and must continue to acquire.
- Barry Shields Managing Partner, Beauty Partners LLC
Coty will do a wonderful job globalizing Kylie Cosmetics. Their reach and experience will maximize this primarily U.S. beauty property around the world.
- Jayme Cyk Founder, Cannonball Theory
Coty has the majority of the celebrity fragrance market, which at times feels averse to risk. Hoping to capture the broader makeup market with Kylie Cosmetics is an interesting acquisition for Coty since fragrance is more of their niche. Kylie Cosmetics, love it or hate it, knows how to market itself. The power of social media is where the brand thrives and, hopefully, Kylie can teach Coty a thing or two.
Basically, this partnership could go two ways. Coty could make Kylie Cosmetics another one of their many celebrity brands, create hype in the beginning and, then, begin to fizzle, or Kylie Cosmetics will teach the conglomerate a few things about how to build a strong following and a loyal customer.
- Alex Fogelson Co-Founder and CEO, Taste Beauty
I think the acquisition is very interesting. What Kylie and team have built in terms of direct-to-consumer scale and cultural relevance in only five years is an incredible achievement. The acquisition allows Coty to leverage Kylie as a platform for expansion in both distribution and product categories, and it will allow Coty to expand its direct-to-consumer capabilities with a relevant, premium brand targeted toward younger consumers. I think it is meaningful that Kylie will retain significant equity in the business to help drive it forward into the future. It also validates the relevance of social media-driven beauty brands, and the value they can have for acquirers.
- Karen Young Founder and CEO, The Young Group
My candid opinion, for what it's worth, is that Coty is out of their league on this. Their color business is struggling and, now, they're going to be distracted with a high visibility brand to manage. Color, as we all know, is in the down cycle, and it's always challenging to guess when that cycle will shift.
- Ameann DeJohn Founder and CEO, Ameann Beauty
Acquisitions are exciting as they bring structure to smaller organizations, but, oftentimes, innovation and creativity do not prevail. Thinking outside of the box is what made Kylie successful. The brand founder was different and controversial and, in the beginning, thought of products and distribution in a different way. As Kylie grew, they adapted a more traditional brick-and-mortar approach, which made it appealing for a successful acquisition.
There is now an opportunity for a new brand to innovate and drive something different. As a product developer, we are constantly striving to create a new story and a new way to deliver innovation. It is time to think of the next best makeup product, but, more importantly, how to drive demand for the new brand. Never stop thinking of truly new ways to target customers, and never take no as for an answer.
- Laura Chisholm Founder, LTC Beauty Consulting
I look at this partnership as a win for both Kylie Cosmetics and Coty. Kylie is not only financially rewarded for success to date, but also gains resources to fund global distribution and product development. For Coty, the opportunity to access an engaged audience in a key demographic space is unparalleled.
While this situation is an anomaly due to Kylie’s massive audience (270 million followers across brand and social media channels), a few key insights for all brands include the following. Product authenticity: The assortment genuinely reflects the ethos of the Kylie brand. When working on influencer and partnership initiatives, make sure there is a genuine, established connection between talent and product.
Proof of concept. The initial launch of lip kits on the brand website quickly and definitively proved audience interest, and provided a strong foundation for growth. Take small steps to establish client interest via limited editions, local focus groups or social polling, and build from positive proof points versus gambling resources on the unknown. Merger of digital and physical worlds: After success online, the rollout to Ulta stores kept the business momentum rolling. Going forward, digital excellence coupled with strategic physical retail partnerships will prove to be the recipe for success. In our world today, this partnership is a continued demonstration that social and digital marketing matters a lot.
- Ben Bennett CEO, The Center
This was a smart investment for Coty. Acquiring a majority position in Kylie Cosmetics immediately catapults Coty into a modern space with a massive millennial and gen Z audience, something they desperately needed. Kylie Cosmetics should be much easier to grow than some of Coty's recent acquisitions—P&G brands and Younique—as international distribution for Kylie Cosmetics is largely untapped.I think they biggest challenge for Coty is the long-term one. They will have to figure out how to turn Kylie Cosmetics into an evergreen brand. It will be interesting to see if they can get it to transcend beyond Kylie the person, and have it stand on its own one day.
- Jeffrey Ten CEO, Global Brand Development
It is, of course, a great move as Kylie has a strong appeal to gen Z. For the moment, influencers are one of the most efficient drivers of color cosmetics purchases. The Jenner/Kardashian family has incredible pull in the consumer and entertainment markets. The big question is how will Coty get back it's $600 million-dollar investment plus a nice return? The numbers are daunting, and remember Coty only owns 51%.
So, in order for them to raise $600 million of operating cash to pay for the investment, they would need to sell $12 billion of Kylie’s product to just break even. That will take several years, and that assumes that no competitors enter and other brands give up some share. Kylie has done, in e-commerce, $200 million at retail, which is around $100 million at wholesale if it was going through a retailer channel. She is selling in Ulta as the only retail channel, and I doubt Sephora will take it, so they have to do some real upside growth online, which is not one of Coty's core competencies or in department stores, which are very costly. Lastly, there’s international, but it might be questionable how strong her following is outside the U.S.
The implications for the broader market are simple. The market now is not growing and is at around $8.5 billion at retail, so Kylie would be hard pressed to achieve more than a 5% share max at around $500 million retail/$250 million at wholesale. That means other brands give up around 5% share. A 10% ROI is $25 million. This does not include the interest or cost of money over 25 years. It will take 25 years for Coty to recover the $600 million investment, plus keep in mind Kylie would be getting 49% of the $25 million.
Using her for nails is a great idea, but nails is around 7% of the color category, and almost 100% is in the mass market with leaders like Coty's Sally Hansen. She would have to go mass with it as the prestige market for nail care is almost nothing, and professional like OPI is already quite full with Essie, OPI and others.
As a contrast, L’Oréal paid $500 million for NYX, a mass brand that was doing around $100 million wholesale when it was sold, which is equal to what Kylie has done, although most of NYX sales were produced in retail doors. But NYX was already in the mass market when L’Oréal took it over, and the company has most likely substantially grown it in the last five years. After all, L’Oréal is a true expert in mass color, and they have probably taken the brand up in the last five years to $600 to $700 million wholesale, and they still have lots of white space as there are more options at the mass level. They will definitely get their money back in less than 10 years, and it will help their other makeup brands that have been losing steam. Coty has very few makeup brands at the prestige level, so they have much more of an uphill battle than L’Oréal had with NYX.
If you have a question you’d like Beauty Independent to ask beauty industry experts, please send it to editor@beautyindependent.com.
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