As beauty strategics look to trim the fat in an ever-tightening market, the brand ownership model is shifting once more.

While strategics selling off assets is nothing latest, the undeniable fact that an unusually high number are on the block, combined with the rumored tranche of brands expected to come back to market in the approaching 12 months, opens the door for other players to extend their participation in beauty — namely private equity.

As a refresher, Unilever said in late October that it’s preparing to give attention to the highest 30 high-growth brands in its portfolio — in beauty that features Dove, Dermalogica, Paula’s Alternative and Pond’s — as a part of an motion plan unveiled by the corporate’s latest chief executive officer, Hein Schumacher.

Divestitures are most probably within the offing, including the Elida Beauty business, with brands similar to Impulse, Caress, Tigi, Timotei and Monsavon, although Unilever declined to comment on that possibility.

Rumors are rife, too, that Kao Group might sell some beauty holdings. Its cosmetics business is undergoing a reorganization and has already completely consolidated 18 brands and is considering consolidating the remaining 12. 

“We’re currently not considering any sales,” an organization spokesperson said. “Kao Group is discussing brand consolidation on a person basis.”

There’s also speculation over whether the Estée Lauder Cos. will sell or shutter any brands as troubles in its China business persist, combined with the potential risks of further business disruptions in Israel and other parts of the Middle East.

Last week, the corporate slashed its full-year forecasts and laid out a road map for a 2025 and 2026 profit-recovery plan, through which it expects to drive $800 million to $1 billion of incremental operating profit. The plans include making changes to its innovation pipeline and product offering, amongst other areas.

If anything has to go, industry sources consider it could be one among the California brands — Smashbox, Too Faced or Glamglow. They’ve all initiated layoffs previously 12 months as those businesses face challenges, while international operations have also been scaled back for some.

A spokesperson for Lauder didn’t reply to a request for comment on plans for its portfolio.

And that’s not all. Industry sources say there are persistent rumors that Shiseido is considering the sale of its fragrance division, with brands including Issey Miyake, Narciso Rodriguez and Serge Lutens, because the group prioritizes global dominance within the skin health and wellness categories.

Sanofi, meanwhile, intends to spin off its Consumer Healthcare Business within the fourth quarter of 2024, on the earliest, to give attention to its Biopharma business.

The list goes on.

For lots of these listed corporations, there’s increasing pressure from financial markets. Subsequently, they should overdeliver and give attention to core assets of their portfolio, and possibly divest noncore or underperforming assets.

“Even if you happen to’re performing thoroughly, when the economic context and market is a bit tougher, persons are under pressure from the market to deliver and to give attention to the best brands,” said Alban Gérard, a partner at Experienced Capital. “That’s cyclical, and we see it in a variety of industries.”

For beauty, it appears to be in overdrive.

“There have all the time been periods of time where strategics had divested a brand or two, but at once, you’re mainly seeing a complete host of the core strategic buyers divesting brands,” said Lauren Antion, co-head of the wonder, personal care and wellness practice at Intrepid Investment Bankers, of the trend.

“Across the board, we’re seeing a way more selective approach to M&A from a variety of the strategic buyers, and so they’ve all just turn out to be way more narrowly focused on areas where they feel like they’ll drive essentially the most value,” she said.

One other a part of the rationale is that these big strategics have gone on an unprecedented spending spree over the past decade and are having to refine their strategies for what’s working for them — and what isn’t. 

“It’s a standard arbitrage of your resources. You reallocate, refocus on the best brands,” said Laurent Droin, head of Europe, the Middle East and Africa at Eurazeo Brands. 

“They’re specializing in what they see as most promising,” agreed Ariel Ohana, a cofounder and principal at boutique investment firm Ohana & Co. “One other way of putting it’s that they’re really attempting to follow the patron — or more precisely, where they see the high LTV [or lifetime value consumer].”

Within the case of Unilever, on the identical day it presented its strategy, the group said it has sold a majority, 65 percent stake in Dollar Shave Club to Nexus Capital Management LP, a U.S.-based private equity firm. That sent shockwaves through the industry.

Unilever’s purchase of the brand in 2016 was a flagship acquisition of a direct-to-consumer asset, considered a superb move by industry experts on the time. It not only gave Unilever entry into the razor category, but additionally access to Dollar Shave Club’s preexisting, broad-range online consumer base. 

“The news from Unilever and Dollar Shave Club is amazing, since it really shows the very fact they struggled to grow the brand to the best level, and so they think they’re not the best backer now,” said one industry expert.

For strategics’ exits, there are three fundamental options to think about: sell, spin off or shutter altogether.

“Probably the most incessantly used is to sell. There’s one other one, which is to separate — it’s what J&J [Johnson & Johnson] did with Kenvue,” said Ohana. “After which there’s a 3rd option, which L’Oréal has done a couple of times and Kao has done recently, which is to only shut down brands.”

A recent Kearney report found that 89 percent of surveyed respondents consider the wonder and private care M&A volume is ready to extend over the following two years.

“We expect to see more large ($1 billion-plus) deals and significantly more small (lower than $100 million) deals,” the study said. “The one anticipated decrease shall be in medium-sized transactions. A driver especially for the smaller transactions is that investors want to make acquisitions or investments earlier within the lifecycles of brands or pick up a minority share.”

If that thesis holds true, and early-stage investing is gaining popularity, who’re the likely purchasers for the underperforming assets that strategics want to shed? Industry experts unanimously agree there’s a “massive opportunity” for personal equity players today.

Not only has valuation gone down, “most PEs would favor the corporate that’s doing 500 million [euros] and growing at a gradual rate of, say, 5 to 10 percent,” than one with very fast growth rates, “so long as the brand has a history of profitability over a protracted time period,” continued Ohana.

Typically, in that case, management is incentivized as shareholders and turn out to be entrepreneurs.

Industry sources say strategics often hold on to underperforming assets longer than they need to, then are likely to spin them off — sometimes concurrently. For them at that time, it’s less about finding the best valuation and more about sealing the deal.

Now could be the moment for PE players, especially those specializing in “special situations,” including restructuring.

“It’s way more work, but additionally comes generally with a really decent or low valuation — and due to this fact with great potential by way of returns for personal equity players in the event that they succeed,” said Gérard.

Droin believes there shall be two sorts of suitors. Most shall be value-seekers, focused on restructuring troubled assets and the opposite being specialized beauty players.

Some PE players have made major moves already.

In late October, Natura & Co. said in a company filing that it had entered into an exclusive agreement with Aurelius Investment Advisory Ltd. for the potential sale of The Body Shop.

L’Oréal earlier that month said it had exited its investment in Sanoflore, the green beauty brand it had purchased in 2006. Sanoflore was sold to French investment fund Ekkio Capital and Sergio Calandri, Sanoflore’s latest CEO.

And Orveon, the Advent-backed private equity firm, is actively searching for two skincare brands, after its purchase of BareMinerals, Laura Mercier and Buxom in a $700 million take care of Shiseido that closed in 2021.

“What I find super interesting in beauty is the strategics are totally reshaping their portfolio in beauty,” said Pascal Houdayer, CEO of Orveon, adding he was particularly surprised L’Oréal is ceasing to commercialize Decléor. “But you’ll see the strategics making tough decisions.”

L’Oréal in mid-October said it could be winding down operations of the botanical-based skincare brand, Decléor, which the corporate acquired in 2014.

Nevertheless, other industry experts checked out the Decléor move more as a “housecleaning” endeavor, the shuttering of a small brand in the identical vein as Becca’s closure by Lauder in September 2021. L’Oréal also shut down and liquidated inventory of Clarisonic in 2020.

Houdayer now has a vision to create a collective of 5 brands. “We’re seeing actually in Q4 an acceleration of talks. It was a depressing moment to try to purchase brands in 2023,” he said. “We’re in our forward processes with a few brands and a few of them are to shut their process by the tip of Q1 2024.”

As for if private equity can jump-start growth when strategics — with all their resources — cannot, Houdayer believes the reply is “yes.”

“What we now have done within the carve-out from Shiseido of those three makeup brands is a  perfect example,” he said. “It’s not that the strategics aren’t good, however the strategics have so many brands of their portfolio that they spread themselves too thin by way of innovation, by way of talent, by way of investment.”

As large corporations look to diverst noncore assets, entrepreneurs could be takers, too. “They’re more comfy with restructuring and may operate at lower cost,” said Joël Palix, founding father of boutique consultancy Palix Unlimited. “What we now have seen in other industries are also groups from emerging markets a few of these assets.” 

That’s particularly possible for mass market assets.

Further, there are personal financial holding corporations which might be run like private equities, similar to Impala, which has previously acquired brands similar to Roger & Gallet.

“The portfolios of name will go either to PEs or to smaller groups searching for scale,” said Ohana. “One other category that could possibly be potential buyers are [smaller] strategics which might be more mass.”

Take E.l.f. Beauty’s recent acquisition of skincare brand Naturium, with chairman and CEO Tarang Amin stating that he’s looking out for more brands so as to add to his arsenal, even though it has a high level. 

“We’re definitely open. We have now a fairly high bar, though,” said Amin. “Just given the strong organic growth we naturally have, we now have to have a variety of confidence. It must be a very special business like Naturium was. Naturium was growing at 80 percent CAGR [compound annual growth rate] the last two years. It was also profitable. If we see one other Naturium, we might snatch it up.”

Then there’s CPG corporations like Church and Dwight, which acquired Hero Cosmetics for $630 million in 2022 and is known to still be constructing its beauty portfolio. One other industry source cited Haleon, whose health care portfolio includes oral care and ingestibles like Sensodyne and Centrum, as one other potential buyer.

“I believe they’re going to be occupied with a certain segment of the wonder industry, so that they won’t be buying color assets, but I believe they’ll be very energetic within the skincare assets,” the source said.

Antion believes that ultimately it would rely upon the brand and the style of sale, using Unilever’s Elida division for example.

“It’s just so many various brands. It’s going to be hard for that to suit into one other strategic platform and residential, particularly as all the opposite strategics focus more narrowly on what they’re good at,” she said. 

“They put that business unit available on the market a few years ago, pulled it off, didn’t get the valuation they wanted, and recently re-announced that they’ve hired a banker to sell it,” continued Antion. “The largest change has been putting the infrastructure in place to have that be a stand-alone unit, so that personal equity felt more comfortable buying the business.” 

Once a personal equity firm turns an asset around, it could be sold back to a different strategic.

Gérard explained that if an asset is grown over 4 to 5 years right into a 50 million euro to 60 million euro business, with the best team structure and positioning, it could possibly be of interest to a giant group — private equity or strategic — which could then speed up the activity to a 300 million euro to 400 million euro activity.

Launching an IPO is a possibility, too. “When the markets are hot and the brand is large enough, that could possibly be an option,” said Gérard.

But as beauty corporations contemplate a move to Wall Street, there also loads of cautionary tales, most recently the Advent-backed Olaplex. The hair care brand, once the category’s darling, culminating in a 2021 initial public offering, saw sales slide 30 percent within the three months ended Sept. 30.

Whatever route is taken, one thing seems certain as beauty heads into the 2024: Portfolios are evolving as strategics prioritize strong performers during times of economic uncertainty.