Beauty Industry
2012 Outlook
Q1 2012 Macroeconomic and Capital Markets
Macro economic improvements, at a painstakingly slow pace, have led to a slight uptick in consumer spending and more
positive sentiment for 2012 (2.5 – 2.9% GDP growth); global headwinds threaten the sustainability of recovery
Impact
Situation
▪
▪
Macro
▪
▪
▪
▪
Headlines of growing unemployment, sinking
consumer confidence, the EU debt crisis, and a
double-dip recession are beginning to wane as the
economy improves, albeit slowly
Unemployment has fallen to 8.5%, the lowest level
in 3 years, and down from 9.4% one year ago
Household balance sheets continue to improve,
home building and factory output are picking up
Housing prices, however, the heart of the financial
crisis and recession, sit 33% below 2006 levels and
more than 1 in 5 home mortgages are underwater
Gasoline prices currently 12% above year prior,
while a pending global supply disruption looms
Capital markets had a mixed year; the Dow
increased 5.5%, while the NASDAQ and S&P 400
decreased 1.8% and 3.1%, respectively
– Beauty companies on average gained 4.4%
Capital
Markets
▪
g
U.S. IPO volume remained flat vs. 2010 although
total dollars raised decreased 16.7%
▪
Consumer M&A volume decreased slightly (-2.9%)
but total transaction value increased 4.7%;
strategics, accounting for 85.4% of volume,
continue deploying stockpiles of cash toward M&A
▪
Total private equity volume fell 10% in 2011 as
second half activity slowed
Source: Capital IQ, ComScore, NPD, NRF, PitchBook, S&P, and Demeter Group Estimates.
2
▪
▪
▪
▪
January consumer confidence at 61.1, slightly below
December 2011 (64.8), the highest level in 8 months
Holiday spending,
spending which includes November and
December sales, grew 4.1% over last year, with
Ecommerce up 15%
– Spending in Beauty, particularly in Prestige
Fragrance, Skincare, and Color drove double
digit increases for most retailers
Despite improved Q4 results, consumers still face a
long road to recovery given unemployment, deflated
personal wealth and very little wage growth
The Federal Reserve forecasts GDP growth of 2.52.9% in 2012, above 1.8% for 2011E
▪
Beauty M&A volume increased 4.5% in 2011, but
transaction size decreased 11.3%
▪
Key themes of channel diversity and international
development will continue to drive M&A in 2012
▪
q y took a g
Private equity
greater share of transactions
in 2011 vs. 2010 (20% vs. 15%) and remains
focused on high-growth independent brands
capable of achieving global success
▪
M&A valuations remained flat with 2010 at ~10x
LTM EBITDA, but innovators and those with
differentiated products receive premium
multiples
U.S. Beauty Industry — 2012 Category Outlook
Demeter Group estimates a $59.8 billion 2012 U.S. Beauty market, slightly lower-than-forecasted by Euromonitor due
to recent economic tribulation, causing concern at the consumer level
2012E
2011E
Skincare
(19% of Total)
Bullish expectation for a 5.5% increase
in total sales to reach $11.6
$11 6 billion
billion,
which is in line with expected global
category growth, as consumers
continue to trade-up for facial, antiaging innovation
2011 proved the category is critical
and won’t be sacrificed despite
economic tremors; expect nearly 9%
lift over 2010 due to premium
launches, demand for spot correctors,
and a modest rise in Professional sales
The $10.1 billion category grew by
2 0% in 2010 following 5
2.0%
5.3%
3% growth in
2009; premium facial nourishers and
anti-agers grew 13%
Haircare
(17% of Total)
Category likely to remain flat at $10.2
billion, a culmination of basic shampoo
billion
& conditioner dollar declines
countered with higher sales of hair
oils, smoothers, and problem-related
solutions
Expected to inch up 1.4% in 2011 due
to depressed Professional product sales
No longer the largest U.S. Beauty
category 2010 sales declined slightly
category,
but didn’t slip below $10.0 billion;
appliances also decreased by 1%
Color Cosmetics
(16% of Total)
Category likely to plateau, realizing a
1% growth rate, or $9.8 billion in retail
sales; “extreme” eyes and pared-down
lips will influence segment sales
accordingly
Unexpectedly strong in 2011 — will
post significant gains to reach nearly
$9.7 billion; palette, nail and eye
products boost the category
The 3rd largest Beauty category made a
remarkable turnaround in 2010,
growing 3.8% to reach $9.4 billion in
retail sales after 2 years of decline
Sales will slip due to oversaturation;
expect the category to decline by a
total
2010 tto 2015
t t l off 0.5%
0 5% CAGR from
f
Despite massive 2011 launches,
broadening Fragrance distribution, and
a strong
Holiday
Prestige,
the $5
$5.3
t
H
lid ffor P
ti
th
3
billion category is expected to remain
flat
Sales have steadily declined since
2005; nevertheless, subtle consumer
optimism
helped
boostt th
the category
by
ti i
h
l db
t
b
1.7% in 2010; Premium was up 3.1%,
while Mass suffered a 3.8% decline
Sales are not expected to rebound
through 2015 as the category remains
heavily promotional; majority of sales
are Mass, with private label and cover
label sales accounting for nearly 25%
share
Sales will slide 1% in 2011 due to
category maturity; wipes and
sanitizers help stem the decline
The $5.3 billion Bath & Shower
category declined 2.0% in 2010 despite
the Body Wash & Shower Gel
segment’s growth of 7.5%
Fragrance
(9% of Total)
Bath & Shower
(9% of Total)
Source: Euromonitor, Mintel, NPD, GCI, and Beauty Cross Channel Monitor.
3
2010A
Trend Watch — A New Incubator Model
It isn’t about Mass vs. Prestige, or even Masstige this time around, instead it’s about being a retail incubator for
independent brands with innovative, problem-solving solutions as their point of differentiation
The Original
▪
Sephora is the original
Beauty incubator where
niche prestige Beauty brands
found a home when they
couldn’t fund a department
store presence or compete
with the big CPG behemoths
at Mass
▪
Sephora’s support comes with a degree of exclusivity for the
retailer, the implication being brands must choose between
Mass and Prestige channels, as well as between growing
quickly through expanded distribution or staying the course
within the extended Sephora
p
familyy
▪
▪
The Newcomer
▪
▪
Sephora University trains unbiased Beauty experts who are
present on the selling floor; consultants are credible at telling
a product’s story and personally endorsing efficacious brands
However, as Sephora has become a large, global powerhouse,
resources are reserved for the launch of a few special brands,
as well as for Sephora-only cover brands, leaving a void in the
market for many indie brands
Look Boutique’s strategy is
less dependent on brand
exclusivity and more
dependent on pure scale and
reach, as is evidenced by
Walgreen’s acquisition of
Duane Reade and
Drugstore.com; they don’t
require brands to choose
between Mass and Prestige
This reworked “Masstige” concept is not about putting
prestige brands into a drugstore format and is not about price
point, rather it’s about creating a fertile environment for
emerging and innovative niche brands to find the consumer
and vice versa
▪
Education is no less important within this model, but the
brands do the heavy lifting, not the retailer
▪
Physically, the model has been upgraded – drugstores now
find
reall estate in
fi d premium
i
i high-traffic
hi h
ffi urban
b areas and
d make
k
heavy investments in the store’s look & feel, highlighting
newness and innovation with special fixtures and tables
▪
Convenience alone can’t carry all the weight to drive traffic
to these stores, rather innovation and being ahead of the
curve will determine their success
Baring the actual experience of pleasure shopping, the savvy consumer is armed with product detail via digital
sources and looks beyond channel boundaries while heading straight towards new Beauty solutions
4
Trend Watch — Migration from Medical to Consumer Channel
Regardless of origin, brands must follow the Consumer — not all women can or do shop at their dermatologist,
therefore, some form of Direct-to-Consumer (“DTC”) is essential for Medical and Professional brand growth
▪
As more pharmaceutical brands emerge with scientific discoveries in skin repair and rejuvenation, the deliberation continues as to
the optimal distribution channel, and the possibility of a brand coexisting profitably in both the medical and the consumer markets
–
Physicians, Dermatologists and Plastic Surgeons hang their reputation on recommending “professional-only” products that are
exclusively
l i l sold
ld through
h
h medical
di l providers,
id
and
d not available
il bl to the
h consumer via
i traditional
di i
l retail
il channels
h
l
–
Several professional brands have tip-toed into the Consumer market via DTC portals like Dermstore.com, on TV through QVC or
HSN, and through prestige retail outlets that also provide services, as a way to broaden their customer base
▪
Due to marketing and editorial, there is a high perception of efficacy with medically-positioned products, and therefore consumer
demand for access to these products
▪
In order to reach this consumer, Professional brands need to understand the intricacies of the Consumer channel, how to service
and staff retailers, and priorities for marketing investments, all which are uniquely different from Professional distribution models
Medical Brand Attributes
▪
▪
Credibility
Clinical claims
through extensive
in-house and 3rd
party testing
Medical Brand Challenges
▪
Big budgets for launch
and ongoing support
▪
Will Consumer market
give them credit?
▪
Shelf space is at a
premium
▪
Existing relationship
with Medical channel
▪
Will the consumer
understand the science?
▪
Consumer market requires
unique distribution / sales
force
Pharma Company:
Brand(s):
( )
5
Trend Watch — Mobile Retail Concepts
Beauty and Personal Care brands stretch to reach the Consumer in new and unexpected ways, breaking the mold on
traditional channels and circumventing the increasing necessity of promotions and discounting at retail
Roaming Beauty Trucks
Beauty at 40,000 Feet
▪
Positioning: Convenient Beauty products, marketed at popular
fashion
f hi and
d music
i events
t
▪
Positioning: Convenient Beauty products, in-flight, marketed
to
on-board
t a captive
ti audience
di
b d
▪
▪
Value Prop: Cupcakes, coffee, and now concealer on-the-go
▪
Value Prop: Drench skin, hands and lips during dry cabin
dehydration, and counter boredom by shopping during long
flights
▪
Founders: Korean Air has led the way with prestige, in-flight
mini-stores,
mini
stores, and Emirates Airlines offers spa service with
Beauty products on-board
▪
Game Changer: Brands access the luxury consumer while
undistracted
▪
▪
▪
▪
Distribution: On-board, in-flight for First and Business Class
Founders: Several brands including Urban Decay, Bare
Escentuals, and I Love…Cosmetics have led the trend, although
only L’Oréal and Bare Escentuals have converted the Food &
Beauty combination offering to a 100% Beauty offering
▪
Game Changer: Fast followers of the ever-growing craze around
gourmet food trucks, Beauty brands get mobile and go to the
consumer
▪
Distribution: There are no major branded fleets of trucks selling
Beauty exclusively, but we expect this to be a major trend in
2012 for both brands and potentially retailers
▪
▪
▪
Claim to Fame: Go to the people
Price Points: Mass and Prestige
Claim to Fame: Arrive beautiful
Price Points: Prestige
Expansion Strategy: Customized assortment, all airlines, all
long-haul flights
Expansion Strategy: Unlimited
Concept
Product
Distribution
Concept
Source: WWD.
6
Product
Distribution
Trend Watch — Nut Oil Optimism
High growth expected for new brands with a unique ingredient as the point of differentiation, however, as the
ingredient becomes mainstream, a brand can no longer rely on it solely due to the proliferation of the concept and
increased competition
▪
▪
Nut-based products are coveted for their remarkable moisturizing and protective benefits to hair and skin
Strong demand for these products as nut oils are nature’s version of controversial silicone-based polymers (e.g. dimethicone)
conventionally used in Haircare and Skincare for smoothing and conditioning
The Mainstreaming of a Concept
Ingredient is main point of differentiation
Ingredient as basis for
collection or product line
Ingredient included in
products
Successful Brands
Moroccan
Argan Oil
Macadamia Nut Oil,
Ojon Oil
Monoi Oil, Pequi Oil, Sea
Buckthorn Berry Oil, Daikon
Radish Oil
7
Overview of Public Market Comparables in the Global Beauty Industry
Median EV / EBITDA
Stock Performance Index Graph – Last 2 Years
Median 2011 = 9.0x
Median 2010 = 9.9x
Median 2009 = 9.5x
300%
12.9x
250%
11.9x
11.1x
10.2x
9.7x 10.3x
200%
8.8x
8.6x
7.2x
6.4x
9.8x
7.7x
150%
100%
Global Mega-Cap
50%
Jan-10
Mar-10
May-10
Specialty Retail
Jul-10
Sep-10
Nov-10
Large and Mid-Cap
Jan-11
Apr-11
S&P 400
Jun-11
Aug-11
Small-Cap
Oct-11
Dec-11
12/30/09
Median Change in Last 2 Years to Next 2 Years CAGR = 1.0%
7.2%
3.5%
▪
Large and Mid-Cap: Amorepacific, Avon Products, Beiersdorf,
Church & Dwight, Clorox, Estée Lauder, Kao Corp., Natura
Cosmeticos, Oriflame Cosmetics, Shiseido
▪
Small-Cap:
Small Cap: Aderans,
Aderans Elizabeth Arden,
Arden FANCL Corp.,
Corp Helen of
Troy, KOSE Corp., Mandom Corp., Nu Skin Enterprises, Obagi
Medical Products, Physicians Formula, Prestige Brands, Revlon
▪
Specialty Retail: Limited Brands, Regis Corp., Sally Beauty, Ulta
Salon
1.9%
Large and Mid-Cap
Last 2-Years
Small-Cap
12/30/11
Global Mega-Cap: Colgate-Palmolive, Henkel AG, Johnson &
Johnson, L’Oréal, Procter & Gamble, Unilever NV
2.6%
Global Mega-Cap
12/30/10
Specialty Retail
▪
6.9%
4.7%
3.5%
Small-Cap
Global Mega-Cap
Historical vs
vs. Estimated Revenue Growth CAGRs
6.7%
Large and Mid-Cap
Specialty Retail
Next 2-Years
Source: Capital IQ; LTM data as of December 31, 2011.
8
M&A Trends in the Beauty & Personal Care Industry
Strategic vs. Financial Sponsor Acquisitions
Median Transaction Multiples
13.6x
11.1%
11 7x
11.7x
11.1x
11.0x
11.1x
31 0%
31.0%
38 0%
38.0%
69.0%
62.0%
2006
2007
27.3%
14.7%
19.0%
85.3%
81.0%
2010
2011
9.7x
88.9%
1.5x
1.2x
2006
2007
2.0x
1.9x
2008
2009
Median EV / Revenue
3.0x
2010
1.8x
2011
2008
Strategic
Median EV / EBITDA
2006 – 2011 Median EV / Revenue by Category
13.0x
2.1x
Color Cosmetics
Haircare
Financial Sponsor
Overall Median = 11.7x
2.4x
2.3x
1 8x
1.8x
2009
2006 – 2011 Median EV / EBITDA by Category
Overall Median = 2.0x
1 8x
1.8x
72.7%
11.1x
12.1x
11.7x
Bath & Body
Oral Care
10 2x
10.2x
Skincare
Bath & Body
Color Cosmetics
Oral Care
Source: Public company filings, press releases, Capital IQ, & Demeter Group estimates as of December 31, 2011.
9
Haircare
Skincare
2011 M&A Rationale
Most strategic transactions in 2011 were a result of corporate portfolios acquiring brands in alternative distribution
channels and / or geographies
Color Cosmetics
Skincare / Bodycare
Alternative
Channels /
Prestige
Professional
Channel
Mass Channels
10
Haircare
Notable 2011 M&A Comparables
Closed
Enterprise
Date
Target
Acquirer
Target
Enterprise Value/
Value*
Value
Revenue
EBITDA
$772
$386
$70
Revenue
EBITDA
2.0x
11.1x
Skincare
Pending
Concern Kalina
Unilever plc
Pending
Somang Cosmetics Co.
KT&G Corporation
N/A
N/A
N/A
N/A
N/A
Dec-11
Dermik Laboratories, Inc.
Valeant Pharmaceuticals International
425
240
N/A
1.8x
N/A
N/A
Nov-11
Jurlique International Pty. Ltd
Pola Orbis Holdings, Inc.
300
N/A
N/A
N/A
Nov-11
Pacific Bioscience Laboratories (Clarisonic)
L’Oréal USA
N/A
105
N/A
N/A
N/A
Jul-11
H20 Plus, L.P.
Pola Orbis Holdings, Inc.
91
50
10
1.8x
9.6x
Jul-11
Marbert Holding AG (Marbert Brand)
Straub GmbH
N/A
N/A
N/A
N/A
N/A
Jul-11
Freeze 24▪7 Skin Care Brand
TPR Holdings LLC
N/A
N/A
N/A
N/A
N/A
Jun-11
Jun
11
Laboratories Dermatologiques d
d´Uriage
Uriage SA
Exea Corporation (Puig Beauty & Fashion Group S.L.)
N/A
N/A
N/A
N/A
N/A
May-11
Pomega, Inc. (Private Placement)
mBeach Software, Inc.
N/A
N/A
N/A
N/A
N/A
May-11
Aero Pharmaceuticals Inc.
Biozone Pharmaceuticals Inc.
321
N/A
N/A
N/A
Apr-11
Paras Pharmaceuticals Ltd
Reckitt Benckiser Group plc
726
88
24
8.2x
30.5x
Feb-11
Beiersdorf AG - Juvena brand
Troll Cosmetics GmbH
N/A
N/A
N/A
N/A
N/A
N/A
Feb-11
Nude Skin Care
LVMH Moet Hennessy Louis Vuitton
N/A
N/A
N/A
N/A
N/A
Feb-11
Ole Henriksen of Denmark, Inc.
LVMH Moet Hennessy Louis Vuitton
N/A
N/A
N/A
N/A
N/A
Jan-11
Tjoy Holdings, Ltd (60%)
Coty Inc.
350
117
10
3.0x
35.0x
Mean
2.1x
10.3x
Median
1.9x
10.3x
Haircare
Dec-11
Golden Sun, Inc. (Newhall Laboratories)
Brynwood Partners
Sep-11
CavinKare Pvt. Ltd
Apax Partners Worldwide
$150
N/A
N/A
N/A
N/A
Sep-11
Darling Group Holdings
Godrej Consumer Products Ltd.
219
N/A
$224
N/A
N/A
N/A
1.0x
N/A
N/A
N/A
Aug-11
Alberto V05 and Rave Hairspray Brands
Brynwood Partners
N/A
N/A
N/A
N/A
N/A
Jun-11
Topz Indústria e Comércio de Cosméticos Ltda.
Cremer SA
47
45
N/A
1.0x
N/A
Jun-11
Vivalis Ltd, (BATISTE Brand)
Church & Dwight Co. Inc.
65
20
N/A
3.2x
N/A
Jun-11
Oscar Blandi Haircare
TPR Holdings Inc.
May-11
Alberto-Culver Co.
Conopco (Unilever)
N/A
10
N/A
N/A
N/A
3,882
1,618
$250
2.4x
15.5x
M 11
May-11
S
Sexy
Hair
H i C
Concepts,
t LLC
TSG Consumer
C
P
Partners
t
N/A
N/A
N/A
N/A
N/A
Feb-11
Beiersdorf AG - Marlies Möller brand
Troll Cosmetics GmbH
N/A
N/A
N/A
N/A
N/A
Feb-11
Kenra Limited
TSG Consumer Partners
N/A
N/A
N/A
N/A
N/A
Jan-11
Vanart and Select Brands
Genomma Lab Internacional SAB de CV
85
42
N/A
2.0x
N/A
Jan-11
Namasté Laboratories, LLC
Dermoviva Skin Essentials Inc
140
90
N/A
1.6x
N/A
Mean
1.9x
15.5x
Median
1.8x
15.5x
Color Cosmetics
Nov 11
Nov-11
W E Bassett Company
W.E.
Pacific World Corporation
N/A
N/A
N/A
N/A
N/A
Jul-11
Fing'rs (Europe) AG and Fing'rs (Deutschland) GmbH
Pacific World Corporation
N/A
N/A
N/A
N/A
N/A
Jun-11
COVER FX Skin Care, Inc.
Catterton Partners (Private Placement)
N/A
N/A
N/A
N/A
N/A
Jun-11
Collection 2000
Li & Fung Limited
N/A
N/A
N/A
N/A
Mar-11
Mirage Cosmetics, Inc., Certain Assets
Revlon, Inc.
N/A
N/A
N/A
N/A
N/A
Jan-11
Dr. Scheller Cosmetics AG
Coty Inc.
49
70
$10
0.7x
4.9x
Jan-11
E.l.f. cosmetics (Private Placement)
TSG Consumer Partners
N/A
N/A
N/A
N/A
N/A
Jan-11
Paris Presents
Mason Wells
82
70
8
1.2x
10.0x
N/A
Mean
0.9x
7.5x
Median
0 9x
0.9x
7 5x
7.5x
Overall Mean
2.3x
16.6x
Overall Median
1.8x
11.1x
Note: $ in millions. Tjoy Holdings, Ltd and Paras Pharmaceuticals Ltd removed from averages. *Enterprise Value = Value of Shareholders’ Equity + Debt – Cash.
Source: Public company filings, press releases, Capital IQ, & Demeter Group estimates as of December 31, 2011.
11
Recent Demeter Group Transactions
Has Acquired
Has Been Acquired By
Has Been Acquired By
Joint Venture With
January 2012
January 2012
August 2011
June 2011
Has Been Acquired By
Has Been Acquired By
Has Been Acquired By
M 2011
May
M h 2011
March
F b
February
2011
12
Jeff Menashe
Chief Executive Officer
menashe@demetergroup.net
220 Halleck Street, Suite 110
San Francisco, CA 94129
(415) 632-4400
www.demetergroup.net