The Natural Personal Care market segment is about to make a big comeback according to a new report from London-based Organic Monitor, which said to expect a “sharp rise in investment activity” throughout 2010.
The natural personal care industry was embraced by the investment community until the beginning of the financial crisis, which started in 2008. “The global recession created a liquidity crunch in which financial institutions curbed investment activity,” explained Amarjit Sahota, director and president of Organic Monitor. “Private equity firms and investment banks thus ceased investments, and large cosmetic manufacturers could not obtain finance for mergers and acquisitions. Improved global economic conditions (since the end of last year) are easing capital restrictions, raising investment activity.”
After a relatively quiet 18-month period since then, all signs are pointing to a renewed interest in investment dealings. For instance, Shiseido recently acquired Bare Escentuals for $1.7 billion (US), while the cosmetics company Clarins also purchased Kibio.
More such deals are forecast for the near future because investors are attracted by high market growth rates and profitable product categories, the report said. European companies are also expected to be involved in major deals in 2010 because of the “lack of ‘investable’ companies” in North America, a phenomenon attributed to the number of leading American companies that have already been acquired, leaving relatively few suitable privately-owned companies. In contrast, Europe has a high concentration of sizeable private companies.
Mr. Sahota outlined two trends characterizing the re-emerging natural personal care industry. “The major trend in the natural personal care industry is that market growth is continuing at healthy rates,” he said. “Although they are no longer double-digit in countries such as the U.S. and U.K., growth is still much higher than the conventional personal care industry (0-2% growth). Until 2008, growth rates upwards of 15% were observed. Since then, most countries have reported 5-10% growth.
“A second defining trend is that the natural personal care industry is characterized by a high concentration of small companies,” he continued. “Investors are attracted to this market as they see many 'investable' companies, i.e. small companies that can be scaled upwards.”
Most of these upscaled companies are akin to Bare Escentuals and Burt’s Bees, which were purchased for three to five times their sales revenues. “High prices are being paid by investors looking to emulate Estee Lauder’s success with Aveda,” the company said, noting that since its purchase in 1997, Aveda has grown manifold to become a global brand of natural personal care products.
“Large firms are attracted to these companies as they see them as excellent investments,” Mr. Sahota said. “For instance, Burt's Bees increased revenues from below $50 million to almost $200 million within a few years. Such high growth made Clorox pay about five times the sales of Burt's Bees. Similarly, Shiseido paid about three times the revenues of Bare Escentuals because it believes it will recuperate the investment in coming years. Large cosmetic firms believe they can greatly increase the revenues of these natural brands.”
The report went on to note that the most successful natural personal care companies are those that both receive investment and continue to operate as separate entities, like Aveda and Burt’s Bees. In comparison, those that have been acquired and integrated into larger corporations have not realized their growth potential. A driving reason, it said, was that natural personal care companies are typically small enterprises with strong ethical values that do not always fit well into larger profit-driven organizations.
“Our research (and various other studies) show that acquired companies that have a different business culture/ethos and product lines than their new parents tend to perform better when left as independent entities than when integrated into larger firms,” Mr. Sahota explained. “This is especially true in the natural personal care industry where many small-firms have strong ethical values and are product-focused, whereas large cosmetic firms tend to be more profit-driven and marketing-oriented.”
By maintaining the independence of natural personal care companies, he said, the ethical values and corporate culture remain intact. Thus, the brands maintain their integrity and customers do not perceive them as a “sell-out.” “This is a major danger when acquiring natural and organic brands, which are built up on strong ethical values and brand identities,” he said.
The Organic Monitor study, titled "Strategic Insights: Mergers, Acquisitions & Investments in the Natural Personal Care Industry," will be featured in the upcoming Sustainable Cosmetics Summit, which is being held in October.