The optimism and momentum of 2019 that led to a very active market for M&A and investment activity in beauty and wellness carried over to the early part of Q1 2020. The COVID-19 pandemic and its economic impact significantly changed the story in March. Read the full article on BeautyMatter.com
To say the crisis has been disruptive to deal-making is as obvious as a connection error during a virtual team meeting. As the industry sheltered in place, investors focused efforts on their existing portfolio companies to ensure those companies could weather the crisis.
As the quarter came to an end, we saw the confluence of the operational and cash-flow issues of the pandemic merge with the questioning of values and diversity of beauty and wellness businesses as the Black Lives Matter movement took hold. But, through all of the chaos, the crisis may help to create pockets of opportunity for smart companies and savvy investors and acquirers. While this crisis is different in its uncertainty, we can look back to the financial crisis of 2008 for an indication of investment and M&A activity.
“You can only stay sitting in the lobby waiting for the rain to stop for so long. If you move too quickly, you get wet and if you wait too long, all the [good opportunities] will be gone,” Brian Salsberg, Global Buy and Integrate Leader at EY, said during the Financial Times Global Boardroom digital conference.
The beauty industry has been a historically resilient category; while investments may have slowed down in Q2, experts expect deals to pick back up. Long term, the global industry is attractive. It has grown steadily with the exception of the 2008 financial crisis, when spending fell slightly but fully bounced back by 2010. The industry may be resilient and in a relatively stronger position than other consumer categories, but COVID-19 will leave a profound imprint on the category, and 2020 looks to be one of the worst years the category has endured.
Crisis creates opportunities and whitespace—COVID-19 has been an accelerant for trends that were already shaping the market. The rest of the year will be defined by how businesses respond to this never-before-seen situation.
Seasoned beauty investor Rich Gersten, founder and managing partner at True Beauty Capital, told WWD, “The M&A activity, putting Charlotte Tilbury aside, right now is not going to be very active. The ability for larger funds to deploy what their mandate requires them to deploy will be relatively quiet for at least the next three months in beauty.” Gersten added, “Even more traditional private equity deals—a brand raising $30 million or so—may be quiet for a while … while smaller deals of between $1 million and $5 million are likely to be plentiful. Those smaller companies are generally less reliant on brick-and-mortar sales, which are expected to have a reluctant return post-COVID-19, and don’t often have massive overhead costs because of their few employees.”
The coronavirus disruption could spur a wave of mergers and acquisitions as a struggling economy surfaces takeover prospects in the retail and supply-chain sectors. There’s the potential for landscape-altering deals if investors capitalize on what could be bargain prices for assets of important, but struggling, players.
One pool of investors will be looking for distressed investments and discounted brands in need of a turnaround; another group of investors will be eyeing sound businesses that might have been too expensive in the past but might be open to a tie-up for takeover.
This environment poses an interesting opportunity for brands like e.l.f. and Morphe and e-commerce retailers like The Hut Group and Grove Collaborative that made their interest in building or expanding their portfolios clear.
It’s also never been a better time to be a contract manufacturer as new private equity players get into the platform-building game. Both ShawKwei and Core Industrial Partners have thrown their hat into the ring with recent investments—expect the consolidation to continue.
BeautyMatter was born from Founder Kelly Kovack’s desire to provide a fresh voice to a beauty industry hungry for more content from her perspective, and through her lens. BeautyMatter aims to fill the void, connect the dots, and provide an informed, analytical, and compelling point of view. Exploring limits and blurring boundaries, they offer highly curated news and original content by thought leaders and beauty insiders. Purchase the full BeautyMatter Beauty Deals: Capital Raises and M&A Transactions Q2 2020 report here.
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