After a fallow period, beauty M&A has been on a tear since late last year. K18, Barbara Sturm, Dr. Dennis Gross Skincare, The Honey Pot Company and more have been involved in deals, and there are plenty of other brands rumored to be trading soon. In a roundup of sought-after beauty M&A targets, the publication Business of Fashion identified Kosas, Rare Beauty, Merit, Glow Recipe, Makeup by Mario, Huda Beauty, Vegamour, Biologique Recherche and Summer Fridays as leading contenders for upcoming deals.
To make sense of the deal rush, for the latest edition of our ongoing series posing questions relevant to indie beauty, we asked 13 investors and investment bankers the following questions: What do the recent deals portend for beauty M&A this year? Are there lessons that emerging brands should learn from the paths the brands at the center of them took? Do you believe what’s happening with strategic acquisitions now will have trickle-down effects on funding for emerging beauty brands?
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Deborah Benton Founder and Managing Partner, Willow Growth With the market stabilizing somewhat and returning to a healthier state, I believe 2024 and 2025 are going to be extraordinary years for beauty M&A. New exciting cohorts of innovative beauty brands are growing up and reaching interesting threshold revenue stages yet still offer considerable expansion and development opportunities to the acquirer.
I think there are a few lessons that younger brands can learn from the success of both the recent and potential 2024 transactions. First, there is no cookie-cutter or silver-bullet approach to scaling and exiting.
Some brands like K18 have quick and meteoric growth and exit quickly. Other brands take more time to build their community, distribution and growth story. Looking to other brands' success stories for inspiration is fine, but don't expect any two brands' trajectories and journeys to look exactly the same. Build a bespoke and tailored journey that provides the best and most authentic path for your own brand's value proposition, positioning, and most importantly, consumer experience.
Second, the most powerful brands I see on the market that go on to successfully exit have a true and distinct personality. No one is grappling to understand what the brand stands for. Founders should lean into building and developing a rich and interesting brand personality with clear values.
Third, of course, I would be remiss in not stating the obvious key required attributes: strong margin profiles, healthy profitable growth, robust repeat purchasing and a highly engaged community that shares and aligns with the brand values. At the end of the day, trying to “manufacture” a growth path and exit feels a little stale and inauthentic, which I think will be negatively reflected in the brand itself. Build a brand that provides genuinely real value to its consumers, is differentiated in its positioning, has unfair advantages, and develops sustainable and enduring consumer brand love.
Do I think an uptick in beauty M&A will positively affect early-stage funding in the sector? Yes, absolutely. Once Drunk Elephant exited Shiseido in 2019, we saw a lot more early-stage funding activity. While an increase in available capital can be good news for early-stage founders, a word of caution: Never lose sight of your brand and business fundamentals, and choose your financial partners wisely.
Funds that focus on the beauty sector in both good and challenging times are sector experts and can provide a wealth of experience and wisdom. They may not offer the highest valuation (absolutely the wrong metric to focus on), but they are truly there to help you build, scale and exit a healthy and lasting brand.
- Tina Bou-Saba Investor
I am optimistic with respect to beauty M&A this year. There are a number of outstanding brands across categories that have achieved significant scale, reflecting strong omnichannel distribution, highly engaged customer communities and solid product innovation. Consumer interest in beauty and wellness overall continues to be robust, thus both strategic and financial buyers' interest in the category remains high.
In some instances, we see large corporates actively rebalancing their portfolios via sales of legacy slow/no growth brands and acquisitions of modern high-growth ones. To the extent that interest rates decline this year, that may have a positive impact on M&A, especially for financial buyers.
As for lessons for emerging brands, there is no substitute for true brand DNA. What is your reason for being? But that is certainly not enough! These three recent acquisitions all had strong innovation, efficacy and science behind their products, great brands and great products that really work. This drives true customer love and word-of-mouth recommendations.
I'd also note that there is no one playbook for distribution. While all three brands were omnichannel, they achieved success with different go-to-market strategies, including luxury retail and professional distribution.
As an investor, I encourage brands to approach distribution with a creative, open mind. Of course, eventually a brand will need large retail distribution to get major scale, but at the emerging brand stage, it is important to be strategic in this area and build consumer demand authentically rather than try to follow a playbook for distribution.
It is prohibitively expensive to attempt to "buy" success at specialty retail. Emerging brands need to focus on establishing the consumer "pull" before investing in scaled retail distribution.
I think that pre-seed and seed-stage funding continues to be challenging for beauty and wellness brands. This is not unique to the sector. Startup fundraising in general has gotten much more difficult over the past two years, with the exception of AI companies.
However, the funding environment for emerging brands with real traction, strong gross margins, and high consumer engagement and retention has improved compared to a year ago. I might call this series A or emerging growth, although sometimes this stage is still referred to as seed depending on the investor and the size of the business.
The nomenclature is not the point. What matters is that brands with real breakout potential are consistently in high demand among investors. Demand always exceeds supply for the most promising brands. The recent M&A activity is sure to drive additional excitement amongst investors, but much more selectively than we might have seen a few years ago and still with a lot more time and data required to get to yes.
- Odile Roujol Founder, Fab Co-Creation Studio Ventures
K18 is powered by experts who embody the brand, including hairstylists, and I’m a proud early investor in it. Other brands turn to dermatologists and aestheticians as experts to embody their brands and help them scale.
The deal that just took place is exciting news for founders of brands based on science, and close to the biotechnology and health tech spaces that have a deep knowledge of skin and hair and links with researchers and scientists.
I'm a believer in data and understanding customers to serve them better. I'm bullish on the longevity space, which will matter for all corporations.
Beauty M&A will continue with corporations looking for unique brands with engaged communities making excellent products to be part of the beauty routines of happy, loyal customers and educating people with insightful and entertaining content. (TikTok for K18!)
Funding for emerging beauty brands will still be complicated in 2024. My advice to founders is to focus on business angels to achieve milestones, have a path toward profitability and insights about your customers if talking to VCs, and a clear ambition and storytelling if you aim at a later-stage exit with corporations.
Why would they purchase your company? Don't be just reactive to retailers’ short-term requests. Keep your North Star, be obsessed with your EBITDA, that’s the best way to have a healthy multiple.
- Ron Mackey Managing Partner, Clinton View Capital
I think M&A volume in the beauty and personal care space in 2024 will exceed levels achieved in 2023. Investment/acquisition volume was muted in 2023 due to a rising interest rate environment that contributed to a disconnect between buyer valuations and seller price expectations.
I believe that this interest rate dynamic helped enhance the positioning of strategic buyers in sell-side processes relative to financial buyers that experienced leverage constraints.
In 2024, I think a more robust transaction pace compared to 2023 will be driven by:
- A flat to declining interest rate environment
- Significant levels of private equity dry powder
- More moderate valuation expectations from early-stage brands that faced challenges finding funding in 2023
- Strategics continuing to look for differentiated brands (like K18, Barbara Sturm and Dr. Dennis Gross) to enhance their portfolios
- Sustained beauty and personal care sector growth
- Andrew Ross Senior Advisor and Venture Partner, XRC Ventures
This is the confluence of a few factors. 2023 was a reset year for beauty M&A, and many strategic buyers were more conservative based on higher interest rates, anticipation of a recession that never came or waiting to see if lower liquidity brought multiples down. PE firms as buyers for bigger deals also dried up as reality set in for some of their bets.
As a result, there is a queue of quality assets that are market ready, especially since indie brands continue to win and take market share. It is now clear that quality asset multiples are not coming down and strategics, including new strategics like Puig, have to continue to optimize their portfolios or reset them in the case of Shiseido to reflect changes in the Chinese market versus their earlier pivot.
The takeaways for brands are perennial: Build an authentic, beautiful brand that consumers love, make effective products that consumers want to buy again and again, construct your business model so that it demonstrates a path to value creation for acquirers, and build positive relationships with consumers, retailers and stakeholders to strengthen brand longevity.
However, 2023 also created a longer term pipeline issue for acquirers. There may be a queue of market-ready brands right now, but the precipitous decline in consumer brand venture funding plus the sector exit of some PE firms means there’s going to be a gap soon if that pipeline does not resume or if strategic acquirers don’t start to innovate themselves in how they approach early-stage investments. That is why the XRC Ventures Brand Capital Fund exists to innovate this space.
- Ashleigh Barker Director and Head of Beauty and Personal Care, Lincoln International
Reflecting on the past year, the 2023 deal flow slowdown was driven by a number of variables due in large part to macro-economic challenges that had a direct correlation to decreased spend on discretionary consumer goods, higher interest rates impacting the funding market and further exacerbated by an increase in thresholds to get a deal done.
Additionally, buyers came to the tables with a lower risk tolerance, i.e., they needed real conviction in proof of sustainable profitability and growth coupled with longer diligence periods. These factors led many founders to postpone plans to take their companies to market instead deciding to focus inward on growing their companies. Concurrently, this led many investors to opt into sitting on sidelines absent finding a deal that checked all of their boxes.
Looking forward, the recent deal announcements support the viewpoint that there is an appetite for M&A in beauty and personal care and specifically that quality assets will always stand to garner strong buyer interest and quality valuations. Dr. Dennis Gross and K18 became household names for their founder-led backing that brought added credibility to the brand story, product development innovation and exceptional growth momentum driven by hero SKUs, product efficacy, success in retail, etc.
We’re also seeing a growing number of corporate carveouts and platform plays among quality assets that have been neglected or no longer considered core to the current owner’s strategy, but are poised to flourish under new partnership and bodes well for heightened M&A activity. Further, while it may not be the opening of the floodgates we all tried to predict last year, pitch activity is up, and the second half of this year is sure to be an active one for M&A in beauty and personal care.
There are a number of important lessons for emerging brands to consider:
- The majority of these brands were not overnight success stories. While they are household names today, they took time to build their platforms and establish why there was a need for their product offering in the eyes of consumers.
- Each of these brands had strong founder backing and a story that brought a unique authenticity and credibility that supported why the brand deserved to hold a place in consumers’ vanities. This continues to hold true and is even more imperative for emerging brands to have a very clear point of view as to the “why” for their brand.
- Focus, focus, focus. It’s easy to be lured by interest from retailers or accelerate the pace of new product launches. However, one of the bigger mistakes we often see is when a brand grows too fast too soon without the ability to support its expansion. Instead, emerging brands should focus on key retailers that truly act as anchor partners and approach new product launches with intention. It’s better to make a big impact with one versus a small impact with many.
Regardless of their holding period, investors ultimately need to believe that there will be an eventual exit for their portfolio companies. Whether the exit is to a strategic or to another private equity investor, this will be key to making money on their investments and returning capital to their own shareholders.
The recent string of acquisitions sends a positive signal to the market that there’s capital to be deployed and that strategics remain keen to grow through acquisitions in the near and long term. Moreover, consumers continue to invest a significant share of their wallets into the beauty and personal care categories, which further underscores the attractive value proposition the sector brings to investors looking to put their capital to work.
- Cristina Núñez Co-Founder and Managing Partner, True Beauty Ventures
2023 was a quieter year for M&A deal activity overall, demonstrating that strategics can be very patient and discerning when it comes to brand acquisitions. While careful and selective, the recent string of deals in the last two months is also reinforcing the need that these strategics continue to have for acquiring the right brands at the right time.
It is not surprising to us that the brands that were recently acquired are focused on results-driven, highly innovative and efficacious products. Since COVID, we have seen the consumer shift towards a science-backed and health -focused approach to skincare and haircare, and the latest acquisitions support the continued focus of these larger conglomerates on acquiring fast growing indie brands that meet the needs of today’s consumer.
This year, there are already some great brands in the market, and we expect that strong brands with impressive growth trajectories and cultural relevance will continue to garner the most interest from strategics. We expect the pick-up in deal activity we just witnessed to be indicative of the type of year that 2024 will be.
We have been asked by many brands on key lessons to learn from K18’s success specifically, considering how quickly it scaled from inception. Dr. Dennis Gross and Dr. Barbara Sturm, both of which launched 10-plus years ago, reinforce the unique characteristics of K18 and their ability to scale in just three years.
What we continue to believe is true is that it is incredibly difficult to sell to a strategic buyer. Not only must a brand have incredible products, but it also must have a strong team that can execute flawlessly and a nurtured community that is built around loyalty and repurchase.
Many brands will try to jump onto trends to fuel growth, whether that is clean/natural, sustainable or now clinically focused. However, a lot of these trends are truly product attributes and a brand must differentiate with more than that in order to scale, something all three of these acquired brands were able to do. Emerging brands should not look for the quick win or pursue an unnatural, unsustainable path to growth. Strategics are looking for brands that can build legacies and stand the test of time.
A pick-up of the M&A market could help heat up the investment landscape as it provides some liquidity to institutional investors and draws attention to exit opportunities in general, but beauty continues to be a category that outshines other consumer categories, from its continued year-over-year growth to its deal activity and premium multiples.
While investments in most categories took a hit in 2023, we didn’t see the same level of slowdown in beauty. It was certainly tougher than it has been in the past for emerging beauty brands to raise money for institutional investors, but there is and will continue to be a strong appetite for this sector and we should expect to see an acceleration of investment in the top performing emerging beauty brands this year.
- Amanda Eilian Co-Founder and Partner, Able
Economic uncertainty drove a lackluster year for beauty M&A in 2023. With interest rates coming down and consumer confidence remaining resilient, 2024 could see a modest rebound in dealmaking.
One of the likely factors weighing on transactions last year was buyer-seller valuation disconnects. With a number of beauty brands reportedly waiting to launch processes this year, it will be interesting to see if sellers have adjusted to a more sober deal environment or if buyers are willing to step up for strong brands.
The buyer universe will continue to expand beyond traditional strategic conglomerates, many of whom are facing financial market pressure to divest non-core assets. As financial buyers and sponsor-backed platforms play an increasingly active role in dealmaking, valuations are likely to remain constrained relative to strategic acquisitions.
One clear takeaway for emerging brands is that innovation matters. K18 positions itself as a biotechnology company with a patented peptide, Barbara Sturm promises to deliver "science-based skincare," and Dr. Dennis Gross is known for its clinical-grade skincare technology such as its chemical peel innovations.
Tangible, unique and defensible IP matters in an increasingly crowded beauty landscape. As a result, emerging beauty companies need to think about core competencies beyond marketing when building their businesses.
While we saw fewer deals in the last 12 months, the deals that did get done were generally larger brands with stronger financials and attractive growth characteristics. In this environment, profitability or a path to profitability matters, but acquirers still want to see strong growth.
Not every brand is able to thread that needle. Emerging companies should be focused on unit economics and sustainable customer acquisition strategies, which ultimately should give them more degrees of freedom both in financing and eventual exits.
The same things likely to drive more M&A in 2024 will also drive a more optimistic private investment environment: lower interest rates, rising consumer confidence and the inherently attractive characteristics of beauty businesses (high margins, recession resistant).
But beyond those common causes, investors ultimately make their money in two main ways—a successful sale or IPO. These M&A deals signal to earlier stage investors that one of these paths to exit remains viable, which certainly supports more investment.
However, beauty M&A multiples remain lower than in previous years, which will play into the valuations that investors feel comfortable paying. Ultimately, strong financials, a well-executed growth strategy and defensible differentiation will give earlier stage brands the best chance at a successful fundraise in 2024.
- Kevin Murphy Managing Director, Sonoma Brands
Each of the three recently acquired businesses (K18, Barbara Sturm and Dr. Dennis Gross Skincare) has a strong brand, effective products, scale and healthy operating metrics. That’s a pretty good recipe for success regardless of the macro views one may have on the M&A landscape at any point in time.
Two of the three have been around for quite a while, one came on the scene relatively recently. My takeaway from these transactions is simply a reaffirmation that very high-quality independent brands continue to be coveted by strategics. So long as brands bring product innovation and marketing magic that excite consumers while the channels through which those brands are sold continue to thrive, the business rationale for the strategics to thoughtfully build their portfolios should remain intact.
That’s all positive and, I’ll admit, not particularly insightful. If there is any caution for me to glean, I guess I’d say that these three brands serve as a reminder that it is not easy (at all) to build strong brands and to develop innovative products that allow for the financial performance and buzz that these three have generated. And, as hard as that is to do, the timeline to make that all happen can get pretty long.
It takes real brand differentiation and strong operating performance with a healthy dose of the kind of good luck that tends to show up when those things are happening can position a brand for this type of outcome. The fun for all of us is betting on which of today’s upstarts can follow this path. As is true for the brands involved in these recent deals, the most compelling clue is the strength of the founder(s). That’s what it’s all about.
- Madeline Kaplan Principal, Selva Ventures
All three brands (K18, Barbara Sturm and Dr. Dennis Gross Skincare) have a strong emphasis on clinical efficacy and put science at the forefront of their marketing efforts. Even the name of each brand has either “doctor” or “science” in it. It’s clear that there is strong buyer demand for clinically backed brands that have earned consumer trust and can sell at a premium price point.
Each of these brands also leaned into a hero product strategy (for K18 the hair mask, for Sturm the hyaluronic acid, and for DDG the daily peel pads).
Each of these hero products is best in class and truly solves a problem for the consumer. They’re the kind of products people become obsessed with and tell all their friends about. They ultimately drive strong repeat purchase behavior, a more efficient marketing engine, and are key to a great relationship with retailers like Sephora.
One difference in the path to exit amongst these three is the timeline (and amount of capital they previously raised). For Dr. Dennis Gross it took over two decades, for Dr. Barbara Sturm over one decade, and for K18 five years. Each journey is different. All require stellar products, a credible and tenacious team, patience and good timing.
- Jackie Dunklau Founder and Partner, Aria
I think we will continue to see M&A in the beauty space this year. It feels like there was a backlog of deals waiting to be done in 2023 as people wanted to wait and see how things would play out in the macroenvironment.
However, the fundamental trend of strategics looking for high-quality, growing beauty brands is still there. I think we will see more deals in 2024, and naturally this will have a trickle-down effect on funding for emerging brands as beauty continues to be a super active segment of consumer.
- Luc-Henry Rousselle U.S. Consumer, Leisure and Retail Managing Director, DC Advisory
In 2023, M&A activity in the beauty and personal care sector was negatively affected by economic uncertainty, high interest rates and continuing inflation. Recently announced acquisitions are a positive sign that M&A conversations are being more constructive.
We are encouraged to see participation from Western buyers (E.l.f.’s acquisition of Naturium, Unilever’s acquisition of K18), Asian buyers (Shiseido’s acquisition of Dr. Dennis Gross, Kao’s acquisition of Bondi Sands) and private equity (Compass Diversified’s acquisition of Honey Pot, Yellow Wood’s acquisition of Elida).
The beauty and personal care industry remains a bright spot in the broader consumer sector, and we are optimistic that transaction volumes will pick up this year. In our conversations with all buyers and investors, confidence remains in the long-term outlook for the industry, and these transactions should keep inspiring earlier stage investors of the merits of supporting growing beauty and personal care brands in their journey to scale.
- Maggie Abeles VP, NewBound Venture Capital
We believe deal activity has the potential to accelerate in 2024 due to significant cash positions for most strategics, recessionary fears abating and very strong fundamentals beauty and personal care. What remains to be seen is whether valuation expectations for both sellers and buyers will intersect, but we believe that balance seems to be returning to the market.
We have always believed that underlying science and technology plays a material role in how attractive a company is to strategic buyers. We continue to believe that the fundamental characteristics of strong beauty and personal care brands remains the same: undeniable product-market fit, strong underlying technology and a unique brand story.
Of course, much more than this goes into strategic buying decisions and what it takes to build a brand, but those three pillars are paramount to, as we say, build in the “right direction.”
While strategic activity does tend to bring additional investor attention to the category, we are committed to a more long-term view of the category given our early-stage focus and are always looking for the best emerging brands who are building the right way.
Ultimately, M&A can be cyclical, and although beauty and personal care as a category tends to be less so, we believe that good fundamentals, strong management teams and unique technology are always in vogue. Because of this, in 2024 we will continue to search out the best possible partner brands regardless of year-to-year acquisition activity.
If you have a question you’d like Beauty Independent to ask investors and investment bankers, please send it to editor@beautyindependent.com.
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