Demeter Group Beauty Industry Outlook

Demeter Group publishes semi-annual Beauty Industry whitepapers with the investment bank’s perspective on the macro economy, industry growth rates and trends, and M&A. Below is an excerpt from Demeter Group’s 2012 Outlook.

by Jeff Menashe, CEO, Demeter Group

While the economy showed signs of modest improvement in 2011, lingering global headwinds threaten the sustainability of a full recovery. Strong holiday shopping and a spike in consumer confidence (64.8 in December, the highest level in eight months) drove a 2.2% increase in consumer spending for 2011, slightly above a 2.0% increase in 2010.

The Federal Reserve is currently forecasting real GDP growth in the range of 2.2% to 2.7% for 2012. Enthusiasm is tempered, however, by persistent unemployment, deflated home values, and soaring gasoline prices. While the economic climate is improved from prior years, cautious optimism is still the key theme.

U.S. Beauty Industry Growth Rates

Beauty and Personal Care sales in the U.S. grew 4.0% in 2011, reaching $59.9 billion. Growth was led by Color Cosmetics and Skincare as well as Prestige channel gains.

Demeter Group forecasts the U.S. Beauty market to reach $59.8 billion in 2012 and is bullish on expectations for further growth in Skincare. Haircare and Color Cosmetics will likely plateau while Fragrance and Bath & Shower will decline.

Four Trends to Watch

1. A New Incubator Model: Sephora is the original beauty incubator for innovative, independent prestige brands and continues to develop and nurture brands across an increasingly integrated global platform. Duane Reade’s Look Boutique is emerging as a strong challenger to Sephora’s role as industry incubator in the U.S. and is investing heavily in upscale fixtures, high-traffic real estate, and meaningful promotional support for brands to play this role effectively. Unlike Sephora, Look Boutique is less concerned with brand exclusivity or the boundary between Prestige and Mass, and instead, focused on scale and reach.

2. Migration from Medical to Consumer Channel: As pharmaceutical brands develop breakthrough technologies in skin repair and rejuvenation, and marketing and editorial stimulate demand of such products by touting efficacy, the potential for Retail distribution becomes appealing if it’s not dilutive to the brand’s distribution with physicians. Not all women can or do shop at their dermatologist, and given the lack of channel conflict, there is the potential for brands with medical positioning to co-exist with some form of Retail or direct-to-consumer.

3. Mobile Retail Concepts: Consumers want unfettered access when it comes to when and how they make purchases. Progressive Beauty brands and retailers are reaching the consumer in new and unexpected ways, breaking the mold on traditional channels and eliminating the reliance on promotions and discounting at retail. Two interesting new concepts to watch include roaming Beauty trucks (à la the food truck craze in California) and Korean Air’s in-flight sales of prestige beauty brands via onboard kiosks.

4. Nut Oil Optimism: Brands like Moroccan Oil, Josie Maran, Ojon, and Carol’s Daughter are investing heavily in educating women on the healing, restoring, and protective properties inherent in nut oil-based beauty solutions. While these brands successfully launched with a single ingredient as their point of differentiation, over time the ingredient (or modest variations) is incorporated into competitive brand assortments as either the basis for a collection or a single product extension. The long term trend here looks remarkably similar to what was witnessed over a decade ago in the mineral makeup category.

Public Market and M&A Trends

In 2011, the Dow increased 5.5% while the NASDAQ and S&P decreased 1.8% and 3.1%, respectively. U.S. IPO volume remained flat compared to 2010, but total dollars raised fell by 16.7%. Beauty and Personal Care stocks on average gained 4.4% and public market valuations ended the year slightly below where they began, with a median Enterprise Value / EBITDA multiple of 9.0x in December 2011 vs. 9.9x in December 2010.

Beauty M&A volume increased 4.5% from 2010 to 2011, but transaction size decreased 11.3%, signaling an increase in smaller deals. Strategic buyers continued to make up the lion’s share of transactions (81% in total) as they actively deployed internally generated cash in pursuit of incremental growth from alternative distribution channels and emerging markets. Private equity buyers made up 19% of transactions, up from 15% in 2010.

Author the Author: Jeff Menashe is CEO of the Demeter Group. Access the full report at