Beauty & Wellness Briefing: Uncovering P&G’s acquisition strategy

January 19, 2022 Mary

In this week’s briefing, I take a look at what’s under the hood of P&G’s recent skin-care acquisitions and how the conglomerate is learning from its mistakes.

Procter & Gamble is on the prowl for prestige beauty brands, reflecting the appetite of strategic players for indie brands in the M&A space.

In Nov. 2021, P&G announced it acquired skin-care brand Farmacy. Next came Ouai hair care in Dec. 2021 and Tula skin care in early January. All three brands, which have price points of $20-$60, could be considered premium and prestige. Currently, P&G’s pure-play prestige portfolio is minimal, with perhaps only First Aid Beauty and SK-II fitting the bill, though SK-II price points are in an even higher range, at $70-$400. According to WWD, Tula earned about $150 million in net sales in 2021, nearly twice the revenue of Farmacy Beauty and three times that of Ouai.

What led P&G to its rapid absorption of prestige brands has percolated for years. For a company founded 24 years before the American Civil War, P&G has stood the test of time, but it’s also faltered on occasion. In 2005, P&G bought Gillette in a $57 billion stock deal, though reports in 2010 said the acquisition had yet to pay off. And in 2019, it was reported that Gillette lost $8 billion in value over the prior 14 years as it failed to adequately compete with DTC brands including Harry’s and Dollar Shave Club.

“You can’t buy assets until you figure out your own business. That’s because when you buy an asset, it takes on the bad traits of the organization,” said Nik Modi, an analyst with RBC Capital Markets. “[P&G] has learned from their mistakes over the years. The notion of leaving brands alone and letting them grow is correct. It’s about, ‘Let’s not Procter-ize it, because we’re buying this company for a certain reason.”

P&G declined to comment on its acquisitions. Farmacy, Ouai and Tula also declined interviews.

In 2016, P&G sold its specialty beauty unit to Coty Inc. for $12.5 billion, exiting from brands including Covergirl and multiple designer fragrance licenses. At the time, the acquisition for Coty was seen as a clincher to holding the No. 1 position in fragrances, and the No. 2 and 3 positions in salon hair care and color cosmetics, respectively. But it quickly became an albatross for Coty, after it examined the extent of the brands’ neglect and declining sales. Few brands have joined the P&G portfolio since, though Walker & Co., First Aid Beauty and Snowberry were acquired in 2018. But with its newly bought brands, it’s taking a more laissez-faire approach to ownership, rather than coming in with its historical gusto, as with the likes of Gillette.

“Before I got to know P&G, I never really had a great image of it. Historically, when larger strategic buyers [acquire] smaller brands, they sometimes ruin it. They lose the core DNA of the brand, and it becomes part of a big corporation. That was my biggest concern,” said David Chung, founder and former CEO of Farmacy. “As I got to know P&G and how the teams work and are going to run Farmacy, [I saw that they] would not do that. They used to do that many years ago, but now when they buy a brand, they buy a team, as well, and let them run it [while] supporting them from behind.”

In June 2020, P&G introduced a company directive called “Responsible Beauty,” framed as “Our blueprint for generations to come.” Most of Responsible Beauty’s goals are around sustainability. They include reducing the beauty portfolio’s use of virgin fossil-based plastic by 50% by 2025, and achieving 100% renewable energy and reducing greenhouse gases by 50% by 2030. It also

The acquisitions occurring in the public domain are only a fraction of P&G’s modernization strategy. In 2021, the conglomerate moved much of its North American media business in-house, including media planning duties.

In addition, in January, it unveiled its BeautySphere platform, using Herbal Essences’ partnership with Royal Botanical Gardens Kew as its first venture into the metaverse space. Per the Responsible Beauty directive, the partnership is to identify the next generation of natural ingredients that are safe, effective and sustainably sourced. BeautySphere is hosted on its own website. Alexis Schrimpf, vp of design, global skin and personal care at P&G Beauty, developed the initial concept to engage consumers through engrossing brand stories. The idea is that the platform will expand on a brand-by-brand basis, though Schrimpft declined to say what brand will be next and when.

“BeautySphere [spotlights] our Responsible Beauty platform. We were purposeful in starting with that because it’s something we think of as a positive force for beauty in the world. It’s tremendously important that we get that [message] out there,” she said. “We were intentional to say that BeautySphere is experiential and experimental. And we want to learn from this; we’re going to learn how she engages and how we can continue learning.”

When it comes to its brand acquisitions, it’s not only their premium branding and positioning that are modernizing P&G, but also how they conduct business. For example, about one-third of Tula’s DTC revenue is through influencer affiliate marketing, and its DTC sales make up just under 50% of all sales, according to Glossy’s previous reporting. Farmacy has created digital experiences on its DTC site, which live alongside products with creative formulations that include upcycled ingredients. Ouai, founded by celebrity hairstylist Jen Atkins, has made a case for itself as a lifestyle brand, with its recent ventures into body care, candles and dog grooming, as well as its focus on video content.

In Dec. 2020, P&G attempted to acquire women’s DTC razor brand Billie, another digitally-native brand approaching the shaving space differently. The Federal Trade Commission blocked the acquisition over monopoly concerns, and P&G dropped its lawsuit against the FTC in Jan. 2021. Billie later sold to Edgewell in Nov. 2021.

“I would expect P&G to become much more active [with acquisitions] — not only in 2022, but also over the next couple of years,” said Modi. “The two areas where P&G is going to be a lot more active are beauty and self-care, like vitamins.”

Art of Sport sets out to create fragrance franchises with athletes

Art of Sport, a body care brand designed for athletes, launched a new fragrance pillar on Tuesday. Art of Sport was co-founded by Kobe Bryant, who helped craft the brand’s first signature fragrance called “Victory,” in 2018. The brand’s newest fragrance, and only its second, was designed by fellow basketball player and Art of Sport investor James Harden and is called “Defy.”

“I named my signature fragrance Defy for every person chasing a dream,” said Harden. “I picked fragrances like sandalwood, fresh green and musk to create a smell that’s bold, luxurious and uplifting. For the packaging color, I wanted something bold that spoke to Kobe and L.A.”

Regarding Harden’s hands-on involvement in creating the fragrance, Matthias Metternich, co-founder and CEO of Art of Sport, said, “In the same way that Nike or Gatorade work with some of the world’s great athletes on producing products, we’re finding that launching a fragrance without much of a reason for why it should exist isn’t deliberate enough. We want to make sure that the athletes in our business are not just in the boardroom, but they’re also infusing themselves in product creation.” NFL player JuJu Smith-Schuster and four other athletes were previously tapped by Kobe Bryant to help promote the brand.

Harden also invested alongside Bryant in the sports drink brand Bodyarmor, which sold to Coca-Cola $5.6 billion in Nov. 2021. It netted the Bryant estate an estimated $400 million, more than his entire basketball career from which he retired in 2016. Bryant died in Jan. 2020.

Art of Sport raised $6 million in outside funding in Sept. 2020 and has since expanded its distribution to over 1,600 Target stores, and 12,000 doors between CVS and Walgreens. Wholesale represents about 60% of the brand’s sales, said Metternich.