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Building the Beauty Industry: What to Expect in M&A in 2014

By: Abby Penning
Posted: February 21, 2014, from the March 2014 issue of GCI Magazine.

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According to Jane Wurwand, founder and owner of professional skin care brand Dermalogica and The International Dermal Institute, “The advantages of being an independent company is that we are agile, nimble and can respond to what’s happening on the ground. It allows us to react quickly to situations and opportunities as they arise without having to go through any red tape. We can develop products that we feel are interesting, unique and niche. We are planning for the long-term brand identity—not just the next quarter of profits.”

Dermalogica, which launched in 1986, targets consumers that are skin-savvy and seeking results-oriented professional products through the recommendations of a licensed skin therapist or esthetician, says Wurwand. “Today, Dermalogica retails in more than 7,000 selected skin care centers, salons and spas across the U.S., and many more globally in more than 80 countries,” as well as online, she notes.

Another independent brand, Mode Cosmetics, which specializes in nail care products among other high impact color cosmetics and skin care products, launched in 1997 with sisters Cristina Samuels and Jennifer Isaac at the helm. “With 383 SKUs, Mode’s distribution includes pharmacies, supermarkets, salons and online, and Mode’s uniqueness also allows us to target unconventional distribution channels in the market,” explains Samuels, who, in addition to being Mode’s cofounder and co-owner, also is a GCI’s editorial advisor.

Samuels reflects on the agility of being independent, saying, “From creative freedom to financial freedom, the advantages of being an independent beauty brand, for us, are innumerable. We are quick to market new innovations, source unique ingredients from around the world, and develop and market never-before-seen technologies and products that normally take non-independent companies many years to bring to market. As an independent company, our hands are not tied to the bureaucratic chain that mandates the approval or rejection of projects, decision-making, and dependency on the monies or lack thereof allocated for projects.”

However, while the excitement and flexibility of being an independent brand is enticing, there are downsides as well. “The disadvantages really are the same as the advantages—that we do everything ourselves,” says Wurwand. “There is not much in the way of insulating ourselves from the hard work of our business.”

And thus the always open potential for M&A. As Samuels notes, “Entertaining the idea of M&A is never out of the question, but it is never a black-and-white issue, as many factors play heavily in M&As.”

Watching for Change

With sectors like beauty devices and professional skin care already targeted for M&A activity in 2014, what other factors are pushing mergers and acquisitions in the beauty industry? “The areas in the beauty industry where we tend to see the most acquisitions are skin, hair and color cosmetics,” says Mellage. “They’re generally more active areas and faster growing, in addition to having the most opportunity for smaller brands that exist. Once we start getting to more toiletry categories, like toothpaste, those are pretty much dominated by the large players. There’s not a ton of smaller, niche brands out there anymore. And the same is true, probably, for the soaps category. And then fragrance brands, for a different reason, aren’t necessarily an attractive acquisition area—usually because those companies will be more active with licensing agreements, as opposed to M&A.”

Additionally, the explosion of omnichannel retail has fostered new opportunities. “For years, people were afraid of e-commerce, then it became everyone’s biggest door. Then brands and retailers fought against TV shopping. I think it’s fair to say now that everyone realizes the brand awareness and profitability that this channel creates,” explains TPR Holdings’ Robinson. “It’s a big focus for brands to be on TV shopping, and retailers love to see the bump in business and don’t worry about a lack of prestige by selling on TV any longer.”

On the horizon, Robinson notes, “What I see as the next frontier is direct sales. Countries like Mexico, Brazil and Russia enjoy extremely high rates of sale through the direct sales channels. With the traditional retail landscape getting more crowded and competitive, there could be room for brands that otherwise would be squeezed out to be sold through direct sales. The key here winds up being the distribution. Once you have it and you can deliver a good value and high quality, you can sell most anything through this distribution channel.”