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Beauty M&A to ramp up as investors polish portfolios

Nov 16, 2023
Illustration of a hand with green money stylized nail polish.  

Illustration: Aïda Amer/Axios

While deal activity in the beauty and personal care sector dropped this year, valuations held relatively steady, signaling there's still deal appetite — albeit selective.

Driving the news: In a survey of 130 investment professionals, 89% believe M&A volume will increase over the next two years, driven by a need to refresh portfolios and respond to shifting consumer preferences, according to a Kearney beauty M&A report

By the numbers: Deal volume dropped to 203 transactions in 2022 from 238 transactions in 2021, per Kearney. This year, there were 59 transactions in the first half.

  • The average deal size was $326 million in 1H. By comparison, the average deal size last year netted $400 million.

Be smart: The report projects more frequent smaller, sub-$100 million deals, or very large, $1 billion-plus deals.

  • The middle market is likely to see a decline, per Kearney, due to a flock to earlier-stage brands.
  • "There's a very broad ecosystem at every stage," says DC Advisory managing director Luc-Henry Rousselle. "But ultimately, there are very few brands that reach $75 million of top line."
  • "Therefore, whether you're a larger private equity firm or you're a large strategic, most of them grow through acquisition. You need to be able to look at and have a strategy to integrate smaller brands."

Zoom in: Earlier-stage brands are particularly attractive from a price standpoint, says Pauline Mexmain, senior manager in Kearney's consumer practice.

  • Indie brands, as well as celebrity or influencer-backed upstarts, are looking for cash infusions or are struggling to raise capital, resulting in lower multiples in the coming months — and likely increased M&A, per Kearney.

What they're saying: "It's not a good market and a good time to sell your business if it's a mediocre brand," says Lauren Antion, co-head of the beauty, personal care and wellness practice at Intrepid.

  • "What we've seen is valuations that are pretty consistent with what we would have seen in 2021 and 2022," Antion adds. "People are really focused when it's a great brand."
  • In the end, "those who kind of ticked all those boxes are gonna still attract very high valuations" Rousselle says.
  • "With customer acquisition costs rising, as well as shipping costs rising, the profitability crunch for those smaller brands has been an issue," Mexmain says.

The big picture: The industry is facing structural shifts, such as new consumer preferences (one that favors authenticity and natural ingredients) and emerging digital models.

  • Meanwhile, a direct-to-consumer brand must master e-commerce, as well as crack an e-retail environment with players like Amazon.
  • This is also key to winning the hearts of Gen Z consumers, projected to drive about 30% of the beauty industry's growth, Mexmain says.

The bottom line: "In the next six to 12 months, we'll see much more activity and much more deals closing," Rousselle says.

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