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Consumer-goods makers paying top dollar for prestige beauty labels

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Consumer-goods makers paying top dollar for prestige beauty labels

Consumer-goods makers are snapping up high-end beauty companies and paying multiples as rich as a fine face cream.

Colgate-Palmolive Co.'s recently announced purchase of France's Laboratoires FILORGA Cosmétiques SAS for $1.68 billion will add creams, masks and other skin care products to the New York-based company's portfolio. Filorga prices most of its products at less than $100 and sells them at upscale retailers, including those located at airports and other travel hubs, positioning the brand in a particularly lucrative area of the already high-growth beauty market, experts say.

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The deal demonstrates that large consumer companies are willing to pay six or seven times annual revenue for such appealing targets. Filorga's revenue was $250 million in the 12 months to the end of June, giving it an estimated multiple of 6.7 times revenue. That puts it at a similar level to other recent acquisitions in the prestige beauty space, according to an analysis by S&P Global Market Intelligence.

That level is above what companies have paid for similar targets in the personal care space over much of the last decade, said Linda Bolton Weiser, an analyst at D.A. Davidson. She noted that throughout the late 2000s and early 2010s, paying between five and six times revenue was considered a rich valuation. Bolton Weiser cited The Estée Lauder Cos. Inc.'s 2016 purchase of Too Faced Cosmetics LLC as well as The Clorox Co.'s 2007 acquisition of Burt's Bees Inc. as examples of beauty deals struck at multiples in that range.

"We all thought they were nuts" for paying that much, she said of the Burt's Bees buy in an interview with Market Intelligence. Now, "that kind of valuation today looks low."

Along with paying more, many large consumer goods players will have to make investments to expand the brands' marketing and distribution infrastructure, Bolton Weiser said. But growing a nascent skin care brand could be worth it if the companies build a loyal customer base.

"The bigger companies understand that you truly have to make a product that's going to generate repeat purchases," she said.

Colgate-Palmolive did not respond to a request for additional comment on its strategy in acquiring Filorga.

A bright spot for beauty

Sales of prestige beauty products — those sold at luxury outlets to affluent customers — have represented a bright spot in the consumer good industry in recent years. Sales of skin care products have shone even brighter.

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Skin care is the segment of the prestige beauty business seeing the swiftest growth, according to data from The NPD Group. In 2018, prestige skin care sales in the U.S. rose 13% to $5.6 billion, while sales across all categories of prestige beauty advanced 6% to $18.8 billion.

Makeup sales increased 1% to $8.1 billion, while fragrance sales totaled $4.3 billion, 4% higher than the previous year.

Recent deals have featured high-end brands with niche appeal. Filorga promotes its products for their anti-aging properties — a feature that Colgate-Palmolive contends will attract consumers in economies where populations are graying. Tatcha LLC, which Unilever PLC agreed to buy in June for an undisclosed amount, emphasizes its high-end ingredients, such as extracts from Japanese indigo, which it uses in creams.

Such small, focused brands have become increasingly common in beauty, Larissa Jensen, executive director and beauty industry analyst at NPD, said in an interview. Their growth rates tantalize large consumer goods companies, many of which have seen sales growth slow to single digits — if not decline — in recent years.

"They're bringing in a whole portfolio of brands into the corporations that are growing at a very rapid rate," she said.

A channel where sales take off

Executives at Colgate-Palmolive are also counting on Filorga's established business at retailers in airports — historically an area of strength within beauty products.

"Everything indicates that there will be more and more people flying" for the foreseeable future, said Muriel Zingraff-Shariff, a consultant and former retail director at London's Heathrow Airport. Filorga already has a business in China, where the construction of new airports and an increasing number of consumers vacationing abroad is likely to be a boon for brands' travel retail business, Zingraff-Shariff said in an interview.

In the longer term, the channel is likely to also benefit from a growing number of travelers from India and Africa, she added. Many consumers from developing countries turn to shopping in airport terminals since branded products are guaranteed to be authentic.

East Asia travelers are venturing into other beauty products. But many are still focused on skin care products, Estée Lauder President and CEO Fabrizio Freda told an audience at an industry conference in May. Freda predicted that purchases by Chinese travelers would continue to grow at double-digit rates for the foreseeable future. Much of the growth is likely to come from travel retail due to the limited distribution of prestige beauty products outside of China's very largest cities.

For consumer packaged-goods makers, the prospect of capturing sales in the high-growth Chinese market remains an alluring proposition, Zingraff-Shariff said.

"If you're a brand today and you want to grow, there's the internet, and then there's travel retail," she said.