What Constitutes A High-Value Asset In Today’s Beauty Industry?

While mergers and acquisitions activity in the beauty industry is down, Andrew Ross, senior advisor and venture partner at XRC Ventures and former EVP of strategy, new business development and integration at Estée Lauder, argues, “It’s never a buyers’ market for a beautiful brand.”

L’Oréal’s $2.5 billion purchase of Aesop, Estée Lauder’s $2.8 billion deal for Tom Ford and Puig’s $1 billion pickup of Byredo are evidence for Ross’s argument. But what goes into cultivating a beautiful brand that can command an eye-popping sale price?

Ross was joined by Dave Smith, SVP of business development at Estée Lauder, and Pascal Houdayer, CEO of Orveon, for a panel discussion on the state of beauty dealmaking at Beauty Independent’s Dealmaker Summit in New York City venue Convene on May 22. During the discussion, they delved into the qualities of high-value beauty assets.

To Ross, the main distinction between a high-value and low-value beauty asset is customers returning to it. “Is there repeat? If you don’t have repeat, you’re dead. You can’t make money, it’s impossible,” he says. “To get in the game, you have to demonstrate loyal customers’ replenishment rates.”

Along with examining replenishment, when Ross takes stock of a brand, he asks the following questions to figure out its current worth and future potential: “Does it have global reach? Does it have an equity on which you can build? Is there something technological there that differentiates you versus just a marketing story?…Do you have good cost of goods? Can you expand maybe into another category?”

Speaking about a brand’s formulas, he continues, “Do I own them? Where are they coming from? Is that scalable? Do I really have everything regulatorally nailed? It’s boring, but it’s super important.”

To Smith, a high-value asset can’t be disentangled from exceptional brand equity, an attribute that’s difficult to quantify. He points out it’s not necessarily an attribute that business school graduates vetting brands at strategic buyers like Estée Lauder for advantageous acquisitions (Smith obtained his MBA at The Wharton School of the University of Pennsylvania) learn about in lectures.

Even though mergers and acquisitions activity is down in the beauty industry, there have been a few major deals recently, notably L’Oréal’s $2.5 billion purchase of Aesop. Andrew Ross, senior advisor and venture partner at XRC Ventures, says, “It’s never a buyers’ market for a beautiful brand.”

“We learn a set of somewhat staid, rigorous analytics. What multiple of EBITDA or revenue, and what is the discounted cash flow and so forth? All that applies to most beauty companies, but where there’s a significant departure is thinking through the things that are harder to get your arms around, brand equity,” he says. “You can kind of come at it by thinking about a net promoter score or other kind of social metrics, but brand equity is ephemeral. It can be here today and gone tomorrow. Understanding that and getting comfortable with that is a bit of a unique skill, and for the folk that have been in beauty forever, you get it.”

At Orveon, the parent company of Laura Mercier, Bare Minerals and Buxom backed by private equity firm Advent International, notions of brand quality are being tested as it pursues acquisitions. Houdayer says, “I’m looking to buy a skincare brand, but we’re a human-size company, so we want to buy two brands around $50 million, prestige because we don’t know what to do mass, and then basically scale them up with the machine that we have built. We moved from 20 to 48 markets in one year.”

Orveon isn’t adhering to the customary beauty M&A playbook. “A lot of companies are trying to buy assets which are great already, but then you don’t build value creation. You don’t really go for internationalization, digitalization or accelerating innovation, for instance,” says Houdayer. “So, instead of going after the Aesops of this world, just to quote one, sometimes you go for a brand, which is smaller, which has 5% EBITDA margin, and thanks to your big machine, you basically bring the value…that basically makes it very interesting after five years when you exit.”

“Brand equity is ephemeral. It can be here today and gone tomorrow.”

Certainly, founders can be integral to brand equity, not to mention operations. However, Houdayer, previously CEO of Bioderma owner NAOS, EVP at Henkel and VP at Procter & Gamble, emphasizes that not all founder stories are equal. “How many stories [do] you hear about somebody, man or woman, who say, ‘Oh, I have sensitive skin, and then I had to launch my brand because no strategic was proposing me something?’ Thousands,” he says. “How many of those will basically make it? 10 maybe.”

He adds, “It’s not because you are an independent brand with a concept that you’re going to make it…You need to have fantastic formulation…and then you need to have the opportunity to scale it up, but you don’t have the cash. So, do you go for venture capital, family office, which is big now, private equity? Very few strategics will buy a $10 million brand. They wait for you to be bigger. We can do that.”

Today, as Smith checks out predominantly bigger brands in fragrance, skincare, haircare and makeup, he identifies “the rapid evolution in commerce models” as a critical factor in his assessments. He elaborates, “What does a brand bring over and above the brand equity and the brand ethos that demonstrates the ability to be nimble, to be lithe in terms of meeting consumers where they are? What unique capabilities and technologies do you have?”