The European beauty scene continues to morph, with Kering taking beauty in-house and Richemont constructing a Laboratoire de Haute Parfumerie.

It’s an indication of the times, as luxury makers’ once red-hot trades in China and in fashion cool, and wonder proves its endurance despite the continued tough geopolitical and macroeconomic climate.

Still, success within the industry isn’t easy, and there isn’t a cookie-cutter approach to constructing the business.

Beauty is a lure today for 4 primary reasons — growth, resilience, desirability and margins — in response to Laurent Droin, head of Europe, Middle East and Africa at Eurazeo Brands.

Fragrance and cosmetics is a giant, fast-developing business, with the category generating sales last 12 months of roughly $430 billion, in response to a McKinsey study that projects those are expected to succeed in about $580 billion by 2027. That represents projected annual growth of 6 percent.

“Luxury is the fastest-growing sub-segment in beauty globally over the past decade — outstripping mass,” said Céline Pannuti, managing director, head consumer staples research Europe at J.P. Morgan, pointing to high single-digit annual growth. “It has had an enormous draw from China, so we’ll must see how the market develops going forward.”

Droin highlighted beauty’s resilience. Whereas the style business, with its discretionary categories, has turn out to be tougher, “beauty is a component of a every day routine, and other people will keep buying beauty,” he said.

Pierre Tegner, head of food, spirits, home and private care at Oddo, said humankind has all the time needed beauty. “Short term, on top of this, there may be a latest generation giving traction to the sweetness business,” he said.

Beauty also has a high frequency of use “and eventually, the perceived value is sort of high,” said Droin. “The pleasure for the worth is absolutely high, so persons are still buying it, even in times which can be a bit tougher.”

As with handbags, beauty’s margins are amongst the best in luxury.

Success in beauty can bring enormous rewards, and potentially change the dynamics of the industry, with the massive luxury groups grabbing ground from industry stalwarts reminiscent of L’Oréal, Coty Inc. and Interparfums.

Luxury groups are already making big moves, and shaking up markets in the method.

“Luxury is about control,” said Erwan Rambourg, global head of consumer and retail research at HSBC. “It gets pricing power and builds brand equity.”

Kering’s decision to take beauty in-house in early February 2022 and Richemont’s to construct a Laboratoire de Haute Parfumerie et Beauté, announced in September, are only two examples.

Shares in Interparfums, Richemont’s longtime licensee for fragrance brands including Montblanc and Van Cleef & Arpels, sank 9.4 percent on Sept. 6, the day of the announcement, which also revealed Richemont had named Boet Brinkgreve the division’s chief executive officer.

Clearly, the specter of a beauty-savvy Richemont is a really real one.

Kering Beauté’s purchase of Creed — which closed in October — made investors sit up and take notice, too.

“Kering’s acquisition of Creed at a 14-times sales multiple was an excellent end result that has reverberated through the category,” said Peter Wells, an associate at Lempriere Wells, a world M&A firm specializing in beauty and private care.

Wells added the firm has been seeing “increased M&A activity within the sector,” and that the Creed deal will most actually make buyers and sellers alike interested by what other deals may be done, and multiples achieved.

More market shifts are contributing to the increased give attention to beauty.

“Mega brands wish to appeal to a broad audience, without making brands ubiquitous of their core categories. Subsequently, they’re increasing the typical entry price of purses, while introducing latest product categories on the entry point — costume jewelry, for instance, or small leather goods,” said Luca Solca, managing director, luxury goods at Bernstein. “Amongst these categories, beauty is the right category to draw the biggest possible consumer audience, because it has the bottom possible absolute price point.”

An investor who asked to not be named believes Richemont is seeking to just do that with its latest fragrance platform.

“They appear to be tearing a page out of the LVMH playbook by creating multiple avenues into the brands, and potentially spreading their marketing budgets across all of the fragrance brands,” the person said. 

Wells believes it is smart for these groups to give attention to fragrance first.

“Consumers are increasingly fascinated with wellness, and in broader terms, and valuing the ability of scent to remodel space and mood,” he said. “Additionally it is highly personal to the wearer, and anchors customers to a brand. Combined with attractive margins at scale, it’s a natural category for luxury groups to pursue.”

There are other reasons for bulking up on beauty.

“Bring beauty back in-house and also you control the narrative,” said Cindy Palusamy, an entrepreneur and the founding father of CP Strategy, a boutique consulting firm focused on concept development for consumer-facing businesses, especially within the hospitality, beauty and wellness sector. “If you’ve a license there’ll all the time be a disconnect, and also you don’t all the time have control over execution.”

Having full control of a brand’s fashion and wonder business can pack a robust punch, giving synergies and power alongside consistency. Puig has been pioneering in that.

“Beauty, possibly taken in-house and controlled directly, could possibly be scaled up and help enhance the positioning and the image of the brand, especially with this more aspirational consumer,” said Chiara Battistini, executive director, head of European luxury and sporting goods equity research at J.P. Morgan.

More beauty makers are muscling up to some extent they’ll outbid fashion makers in their very own field. In late November 2022, the Estée Lauder Cos. acquired Tom Ford for $2.3 billion, marking the sweetness giant’s first enterprise into fashion. The deal included the posh brand’s beauty activity, which Lauder had been running under license, and eyewear.

“The massive players are even greater than before,” said Tegner.

Promoting and promotional spend at L’Oréal — the world’s number-one beauty maker — represented 31.5 percent of its 2022 sales, which were 38.26 billion euros, for example.

“They’ve this big weapon they’ll manage in a really agile way,” said Tegner. 

Quite a few strategics have the financial wherewithall to launch into beauty.

“It’s going to be quite interesting when it comes to the investment phase,” said Pannuti.

Patience is essential. For luxury groups, it will possibly take five to 10 years before their beauty business will yield results — so it’s not necessarily going to assist offset the slowdown being experienced in luxury fashion and jewellery.

Challenges

Constructing blocks must be put in place.

“Probably the most obvious thing these corporations miss in beauty — by definition, as they begin now — is scale. Beauty distribution is fragmented; serving a fragmented distribution with no local scale could be very difficult from a value standpoint,” said Solca. “You would like scale to deliver incessantly and with decent drop sizes, or your logistics cost will prove to be a burden.”

Why else would Kering establish a complete latest division with Creed on the core?

On the time of the acquisition, Kering said Creed was not only a “perfect fit” with its portfolio of renowned luxury brands, “it immediately provides Kering Beauté with the required scale, an excellent financial profile, plus a platform, supporting the long run development of other Kering Beauté fragrance franchises, by leveraging particularly Creed’s global distribution network.”

“It’s a special go-to market,” said Pannuti. “It’s something you could learn in addition to ensure that you’ve the correct capabilities. It’s a much bigger distribution suite that you’ve to be comfortable with.”

Further, Palusamy said that if the posh groups can work out how one can marry fashion and wonder marketing, they may strike gold.

She speculated that had Louis Vuitton launched makeup this summer during Pharrell Williams’ debut show, the result would have been spectacular.

“What if the models wore LV lipstick, and the corporate integrated the ad campaigns? What if the LV marketing budget … was monetized across fashion, accessories and wonder? If these brands could work out how one can integrate the style and wonder storytelling,” it will be an existential crisis for the broader industry, and to big groups like L’Oréal, she said.

But that’s one big “if.” Palusamy said that, in point of fact, fashion and wonder teams don’t are inclined to speak to 1 one other. They often come from different skilled backgrounds, and are used to chatting with vastly different audiences.

One other challenge is beauty’s already crowded space. Consumers also have to consider in a brand.

“A very powerful challenge is certainly one of credibility,” said Solca. “Couture and designer brands expand easily into beauty, and success cases abound: Chanel, Dior and Saint Laurent. But accessories brands have a harder job in making beauty relevant to their DNA.”

Palusamy said there are such a lot of more hurdles, explaining: “The wonder business is fundamentally different from the style business.”

That’s true, for a lot of reasons.

“Are the posh brands underestimating the complexity of product development, formulations, distribution and compliance?” asked Palusamy.

Burberry, which briefly took its beauty business in-house, stays a cautionary tale.

Former CEO Angela Ahrendts terminated Burberry’s license with Interparfums SA and took the sweetness business back in-house in 2013. The stand-alone activity had been a key pillar of Ahrendts’ strategy: She’d imagined that it could someday grow as big as that of Chanel or Dior. At one point, there have been even plans for a skincare line.

It was clearly tough going it alone. Just three years later, Marco Gobbetti, Burberry’s incoming CEO, wound all of it back and return to a licensed model, and a sure and regular flow of royalty payments, under Coty.

On the time, Solca said: “We never liked the concept of Burberry managing its beauty business directly, as beauty is [a fast-moving consumer-goods] business, where you win on the back of world reach. Burberry was a dwarf within the land of giants on this industry, and never had sufficient scale to run this business effectively and efficiently.”

Strategies Differ

All eyes are on Kering, which rebuilds its in-house beauty activity at a time when the group is undergoing heavy investments, not least for the repositioning of Gucci.

With beauty, Kering was encouraged by eyewear, which it took back in-house in 2017.

“Eyewear was a really big bet once they announced it,” said Battistini. “Kering orchestrated a implausible success story. They’ve really strengthened their operation and enhanced their presence in that segment.”

Kering appointed Raffaella Cornaggia CEO of Kering Beauté — a latest position in a latest division. She is charged with developing a team with expertise in the sweetness category for Bottega Veneta, Balenciaga, Alexander McQueen, Pomellato and Queelin. It’s believed fragrances for the three first brands could launch within the second half of next 12 months.

Kering Beauté wasted no time, and in late June of this 12 months acquired Creed, the oldest existing high-end area of interest fragrance house, in a deal reportedly price 3.5 billion euros.

Before that, alongside Ford, it was reported Kering had been within the chase to buy Byredo, which was snapped up by Puig for an estimated 1 billion euros.

In a call on Oct. 24 with financial analysts and journalists, Jean-Marc Duplaix, Kering’s deputy CEO in command of operations and finance, argued Creed will help to supercharge Kering Beauté. He described the brand new division as a beauty “start-up” with a small top line — and plenty of costs.

“Creed will help it to speed up, and can absorb a few of those costs. It’s a 300-million-euro business and highly profitable,” he said, urging analysts to exercise patience. “This division will likely be loss-making until we reach a critical scale.”

Creed, which has a robust positioning in its area of interest, appears to be a learning platform for Kering, regarding distribution, marketing, ideation and fragrance-making, in response to Battistini.

Duplaix also suggested Kering would take a break from buying, and focus as a substitute on “portfolio, strategy and integrating the brand new brands,” he said.

Some analysts query the Creed-related strategy.

“My fear is that Creed — with 250 million euros of sales — is simply too small a business to function a viable platform for Kering’s beauty ambitions,” said Solca. “I understand, though, that they see significant potential for the brand and a solid skill base throughout the company.”

Others are less hesitant.

With Creed, Kering bought an amazing and sizable brand and category — area of interest fragrances — in addition to knowledge about working with key distributors, said Droin, who believes the dimensions of the acquisition, the brand and its quality make sense for the group. He explained: “They’re bringing the total business model Kering must have.

“Getting the sizable platform with a sales force could be very smart,” continued Droin. “The query you’ve then is: Can you employ it for a special brand? Are you able to synergize those sales forces?”

“[Creed] accelerates the technique of constructing a platform,” said Rambourg, adding: “We all the time though that the tip game for Kering was to recoup Gucci from Coty.”

It’s believed that license is ready to run out in 2028. And Kering executives have been vocal that Gucci beauty could possibly be much greater than it’s today.

Pannuti said that L’Oréal, which in 2007 acquired YSL Beauté — and with it the sweetness license for YSL, a brand owned by Kering — has done a implausible job with the brand, especially in fragrance and makeup.

“In the event you take a look at that as a template for Gucci, there may be plenty of headroom to develop a robust brand,” she said. Pannuti underlined, too, the strength of couture fragrance brands today.

Rambourg said that Dior’s fashion business generates about 10 billion euros, versus roughly 3 billion euros for its fragrance and cosmetics activity. That compares to Gucci’s fashion business, which is about on a par with Dior’s, but its beauty business generates nearly 600 million euros.

“If Kering runs [beauty] appropriately, it will possibly be sizable, prefer it is sizable for Chanel and Dior,” said Rambourg. “It’s sure to maneuver the needle at Kering. I don’t think it would be the case at Richemont.”

It just isn’t believed Richemont is attempting to take all of its beauty businesses in-house at present, but quite plans to supply strategic guidance to the licensed brands about how one can construct their activities and turn out to be more sustainable.

“They’re studying the choices that they’ve for Cartier only, not for the opposite brands,” said Battistini. 

Cartier is a mega-luxury brand.

“Subsequently, should you just go by scale, reach and perception, the brand must have similar power as Gucci, which can also be a 10-billion-euro brand, [in fragrance and beauty],” she said.

Might Richemont ink joint ventures to develop its beauty business, because it did for eyewear?

“It would be interesting to see if that’s another choice that they might consider,” said Battistini.

Droin has two questions regarding Richemont.

“Does it have brands which can be relevant to play in beauty? Does the buyer want those brands to be in beauty?” he asked.

LVMH Moët Hennessy Louis Vuitton, already a powerhouse in beauty, in early March named Stéphane Rinderknech chairman and CEO of the group’s Perfumes and Cosmetics division. Within the role, he oversees the group’s 15 beauty brands, organized under Parfums Christian Dior, Guerlain, LVMH Fragrance Brands and Kendo, while continuing to guide LVMH Hospitality Excellence. Nobody had held that beauty post since 2004.

“You don’t recruit someone of that caliber to run a small portfolio of beauty,” said Rambourg, of the previous chief of L’Oréal USA.

LVMH has a novel positioning in beauty, as a result of its existing brand portfolio plus the ownership of Sephora, the world’s largest omnichannel prestige beauty player.

“How can they expand on this market?” asked Droin. “Should they go higher luxury? What are the most important addressable markets, where they’ve good assets to play? Typically, LVMH is excellent at doing beauty in-house or in the event that they buy assets, buy very early and develop them through their very own channel.”

He believes for LVMH growth goes to be less about acquisitions — but that if it does snap up other brands, they’d be tactical acquisitions for segments the group just isn’t already in. Droin sees plenty of potential for LVMH in beauty, including Sephora.

“I’d say they’re at the extent of Estée Lauder, Shiseido or L’Oréal,” he said.

Rambourg believes the Estée Lauder Cos., in addition to indies, could possibly be potential targets for LVMH.

For Tegner, the most important challenge for LVMH and Kering just isn’t to give attention to beauty brands already working well for them.

“You may have to construct a portfolio to be ready to reply to the following trend,” he said, adding diversification is essential in the sweetness category, which is growing while becoming more volatile. “That’s clearly the massive competitive advantage of L’Oréal. They’re in all places.”

It’s expensive to construct resilience and consumer loyalty like L’Oréal has done for a long time.

“That’s the most important challenge,” said Tegner. “My big query is: Are these players fully aware in regards to the big battle they’re stepping into?”

Puig is already firmly within the fray. The Spanish family-owned beauty and fashion company is studying options for its next moves.

“Puig is currently assessing all strategic alternatives for the long run of the corporate, including the choice of opening our capital to 3rd parties via an IPO,” Marc Puig, company chairman and CEO, told WWD in October. “This is just certainly one of several options, and no decision has been taken.

“We could also maintain the established order. Whatever we resolve, the family will remain for the long run,” he continued. “For the previous couple of years, we now have already been running the corporate in response to the best-in-class principles that characterize a European publicly listed entity, as we deeply value the rigor that these principles bring and consider this construct to be fair for all Puig stakeholders, in addition to for the generations to come back.”

 “Puig has been doing a wonderful job previously few years,” said Solca. “An IPO could possibly be a way for them to graduate and crystalize among the progress made — after which move forward.”

“Possibly an IPO could offer them more visibility to make a bolt-on acquisition,” said Tegner, explaining the move could put more operational discipline inside a family-owned group, too.

Industry experts widely lauded Puig.

“Puig is one of the crucial impressive corporations I’ve seen. They’ve been constructing an amazing portfolio,” said Droin. “The Byredo acquisition was so smart. It’s so good, with such a possible.

“What they should do is to proceed acquiring some great brands, like Byredo,” he said, adding of Puig: “They’re excellent at distribution. They’ve an amazing platform. It’s a really compelling story for the markets.”

Having so many strategics honing their focus in on beauty is a positive bellwether.

“It signifies that the market goes to stay very lively with plenty of good players for the following 10 years,” said Droin.

“I’d expect the unexpected — and rather a lot to occur,” said Rambourg.