What to Expect in Beauty Industry M&A

September 19, 2023

Written By Kwang Lim and Laura James

Deal-makers in Canada remain cautiously optimistic about M&A activity. The beauty industry presents an abundance of prospects for sophisticated Canadian investors and acquirers to pursue quality cross-border and international opportunities, particularly for those who remain able to leverage credit and financing despite higher interest rates and uncertain market conditions. The attractiveness of beauty industry targets may also present additional opportunities for capital raising.

Recent market research gives a positive outlook on deal making in the beauty industry, even when set against the current economic backdrop.

The Beauty M&A Landscape

Market data research from Circana shows that beauty continues to hold the top spot as the fastest-growing industry in Canada. Sales revenue grew by 19% to $1.7 billion in the first half of 2023, compared to last year.

When it comes to M&A, sources suggest that more deals can be expected towards the end of this year and through the beginning of 2024. Many companies are now bolstering their business cases to secure their preferred valuation terms.

McKinsey's State of Fashion reports that beauty’s attractiveness to deal-makers remains steady. While M&A activity was generally down in early 2023, the potential benefits for buyers and sellers remain as strong as ever. The global beauty industry has demonstrated its resilience over the past ~18 months and McKinsey estimates that by 2027 the industry will record over $580 billion of retail sales, growing at 6 percent per year.

Capstone Partners' Beauty Sector Update also says that even though deal volume was lower to start this year, the fundamentals for M&A remain sound, albeit challenged by tighter credit conditions.

Key Takeaways on M&A Activity

McKinsey's State of Fashion

• Conglomerates will likely seek out smaller, but higher-quality assets to fill gaps in their portfolios or modernize product lines to stay competitive. Fewer megadeals are expected.
• Geographic considerations will be key as the U.S. and China remain the beauty industry's top two countries, with the underserved Indian and Middle East markets emerging as new hotspots.

The following considerations will be key for targets in M&A deals, as targets undergo greater scrutiny by increasingly sophisticated buyers:

• Evidence of sustainable profitability;
• Strength of intangible assets such as brand identity, visionary leadership and loyal customer communities; and
• Indication of potential to scale in new markets or categories, using storytelling or product development strategies that can resonate across markets regionally or even globally.

Capstone Partners' Beauty Sector Update

• Strategic buyers have led acquisition activity in early 2023 and are expected to continue to fuel consolidation. They are often moving down market to acquire smaller brands.
• Financial buyers have been increasingly selective in their acquisition pursuits amid elevated financing costs and uncertainty in forecasting cash flows.
• The skincare segment has remained the most targeted area within the beauty sector.

Venture Capital and Private Equity Interest in Beauty

Data from PitchBook shows the beauty industry had several banner years in attracting venture capital investment. This culminated in 2021—when the space reached a record high 358 deals and $3.12 billion in VC raised. Investment in beauty tapered off in 2022 with VC deal count reaching 283 and $1.41 billion VC raised. PitchBook says that despite the drop, the beauty space continues to draw attention from venture capital firms and investors as the sector-at-large grows and bolsters sales by embracing technology and social media.

McKinsey predicts that private equity and other financial investors will likely fuel deal-making to add beauty brands to their portfolio companies or offload previous beauty

acquisitions. They will also look beyond brand opportunities by considering contract manufacturers, turnkey solution providers or ingredient suppliers.

Looking Ahead

From our perspective at Bennett Jones, we expect that smaller targets will be more attainable for acquirers and investors in light of ongoing economic uncertainty and challenging credit conditions. Canadian targets should be conscious of presenting quality assets, which are marketable and scalable, to potential acquirers or investors.

Bennett Jones M&A Practice

Bennett Jones' Mergers & Acquisitions practice spans all industries—particularly those that drive the Canadian economy. Our lawyers account for your risk appetite and the commercial realities likely to apply after closing to guide negotiation strategy and structuring.

To discuss the developments and opportunities shaping the Canadian M&A beauty industry, please contact the authors.

Authors