The beauty industry isn’t what it used to be.
“Millennials aren’t buying things the way that their parents did — a lot of purchasing today is social media based and increasingly, interactive,” according to Jodi Burrows, vice president at SDR Ventures, a Denver-based middle market investment bank.
One prominent example of this trend is beauty startup Glossier, which relies heavily on feedback from its one million Instagram followers during the product development process, and has raised $34.4 million in venture capital funding to date. Another brand, Volition Beauty, essentially serves as a Kickstarter for beauty products, where users can submit ideas and vote on products they want to see created; current offerings include turmeric brightening polish and a skincare paintbrush (“channel your inner skincare Picasso”).
“In general, people are looking at health and wellness more holistically,” Burrows says. “With millennials, you see a trend toward self-care that’s driving a lot of their decisions in the beauty space.”
Particularly in skincare, “it’s all about natural and clean brands,” says Rich Gersten, a partner at consumer-focused private equity firm Tengram Capital Partners. Prestige and luxury brands are also growing faster than mass-market brands, according to Gersten.
Brands that check the right boxes — socially conscious, organic/natural, luxury, digitally native — are enjoying attention not only from consumers, but investors as well.
Strategic acquirers have shown particular interest. Faced with competition from upstart brands, long-dominant corporations are looking for ways to regain their edge. “Niche players with unique products and sales platforms experienced consistent strategic buyer demand as large operators opted for inorganic growth strategies rather than internal investment as a means of penetrating new markets and expanding product offerings,” according to Capstone Headwaters Q1 2018 Personal Care Products & Services report.
More than 80 percent of Q4 2017 transactions in the health and wellness sector were completed by strategic acquirers while financials sponsors accounted for only 21 percent of transaction in the space, according to a Q4 2017 health and wellness report published by SDR Ventures. Prominent strategic acquisitions included Unilever’s purchase of Sundial Brands, a personal care company that targets black women, and Colgate-Palmolive’s purchase of professional skincare brands PCA Skin and EltaMD.
Given the demand from corporate acquirers — along with their operational expertise and the premiums they’re willing to pay — private equity firms are having trouble competing. “Across the majority of middle market industries, private equity groups deployed significant levels of capital and captured a larger share of deals relative to 2016. However, the Personal Care Products & Services industry broke this trend as PEG deal share shrunk from 46.3 percent in 2016 to 33.6 percent in 2017,” according to the Capstone Headwaters report.
While mostly on the sidelines, there are mid-market private equity firms asserting themselves in the space. For example, TSG Consumer Partners acquired LuckyVitamin, an e-commerce site focused on natural/organic wellness products, in October 2017, and took a minority stake in cosmetics brand Huda Beauty in December 2017.
For some PE firms, the best way to compete is to look for targets strategics aren’t interested in — yet.
Tengram Capital, for one, doesn’t want to spar with corporate acquirers. “We tend to invest in smaller brands in need of organizational transformation and in need of infrastructure build,” says Gersten. “The strategics are unlikely to invest in the businesses we invest in and we prefer to sell to them rather than compete with them for new investments.”
Tengram recently invested in skincare brands Algenist and ReVive, both “complicated carve out transactions,” according to Gersten. “When we are finished transforming and growing our brands, the strategics will be more interested in them.”