What Beauty M&A Looks Like Now That The Era Of Rapidly Growing DTC Brands Is Largely Over

In the 2010s and the outset of the 2020s, the beauty industry saw several brands scale quickly and sell at strong multiples. A prime example is Drunk Elephant, which Shiseido purchased for $845 million, a valuation of 8.5X sales, in 2019, seven years after it launched.

But the conditions that enabled upstarts to surge, most notably relatively affordable and effective digital advertising and influencer marketing have gotten trickier, especially in the wake of Apple’s iOS 14 update that decimated the return on investment of digital advertising. Meanwhile, the investment required to achieve success in the beauty specialty channel dominated by Sephora and Ulta Beauty has become greater as competition in it has mounted.

At a Beauty Independent Dealmaker Summit panel on May 22, Nicole Fourgoux, operating partner at private equity firm Stride Consumer, Dan Hodgdon, founder of haircare brand Vegamour, Rich Gersten, co-founder and managing partner at venture capital firm True Beauty Ventures, and Joel Palix, founder of beauty advisory Palix Unlimited, broke down the changing landscape of beauty deals and strategies emerging brands should pursue with the golden age of direct-to-consumer distribution-fueled growth in the rearview mirror. 

Strategic acquirers have snapped up founder-led brands like Drunk Elephant, Charlotte Tilbury and Tatcha for sales multiples of 8X to 10X.

As he peers into the future, Palix prognosticates it will take brands longer to achieve exits commanding high multiples. “But time is not a bad thing,” he says. “In fact, when you are in Europe, we don’t always talk as much about fast growth and exit. There is this family capitalism where the brands grow organically, more slowly. It stays in family hands, and they are profitable. And they’re not talking about exit or finding a strategic partner.”

Gersten concurs with Palix’s prognostication and cautions beauty brand founders not to be under the impression that a gigantic exit will manifest following a few years on the market. He stresses, “If you think you’re going to grow unnaturally fast and all you care about is the exit, you’re honestly never going to get there—and it’s just the wrong mentality.” 

Still, Palix, former CEO of Feelunique, which Sephora bought in 2021, doesn’t anticipate lofty sale multiples totally going by the wayside because strategic buyers usually don’t have a problem absorbing the prices. “Their job is to identify what are the winning brands, the ones that they can grow faster once they are included in the group,” he says. “When you look at the multiple, remember that they have a way to increase very quickly the top line of such brands because they can transform a lot of sales which are done through distributors.”

Fourgoux spent more than 24 years at L’Oréal guiding acquired brands such as La Roche-Posay, IT Cosmetics and Carol’s Daughter before joining Stride in 2021. Stride’s portfolio houses the beauty brands Patrick Ta and Skinfix. During her time at L’Oréal, strategic buyers were picking up nimble brands better than them at leveraging performance marketing to garner eyeballs and revenues. Today, as ROI on digital ads has tanked, it’s harder for emerging brands to carve out advantages. 

Fourgoux says, “It’s coming to haunt some of the brands who are trying to figure out what is the core message that I want to communicate now that I have to make choices in what I’m investing in.”

Strategic buyers won’t typically be interested in prestige beauty brands until they hit $50 million to 80 million in annual sales, and mass beauty brands generally have to hit double that amount. For brands attempting to set themselves up for a lucrative exit, Fourgoux suggests they have to prove they’re performing robustly in several areas—and that they’re leaving room for an acquirer to realize substantial upside. 

“The innovation will come from new brands, I’m absolutely convinced of that,” says Joel Palix, founder of boutique beauty advisor Palix Unlimited, during a panel at Beauty Independent’s Dealmaker Summit last month. “Beauty reinvents itself all the time.”

She says, “You’ve maybe touched international with one strategic market that you have a foothold in or a place where you can communicate with a consumer because you see them a lot on social, and then a strategic can take that initial proof point, build a business case around it, and then grow from there.” 

As omnichannel distribution has become coveted, brands have been pulled in a myriad of directions, but Gersten is adamant that focus is essential. TBV often counsels budding beauty brands to nail down a single anchor retail partner. Only two brands in TBV’s portfolio are currently not sold in retail. The retail presence of the others is split roughly evenly between Ulta Beauty and Sephora. TBV’s portfolio contains Aquis, Crown Affair, Feals, K18, Kinship, Maude, Moon Juice, Cay Skin, Youthforia, Vacation, Dieux, BeautyStat and Caliray. 

“There is so much runway even with one retailer in terms of sizing, if we do it the right way,” says Fourgoux. Speaking of brands that secured large exit deals in recent years, she elaborates, “Some of these brands were huge with one retailer before they exited, and that ultimately led to the valuations they saw. The strategic then has all these other options [to] take it to other retailers, take it around the world. If we can [register] proof of performance that is still tight, that is still anchored in a really strong brand product performance story, that’s the hope and a very clear path from a business perspective.”

Gersten advises founders not to launch too many products or too many territories before knowing what their brands’ hero products and productive markets are. “If you can find the right retail partner with the right assortment and have it be productive, that’s how you scale profitably,” he says. “It’s when you dilute your inventory over too many products—and we’ve seen brands doing $3 million in sales in 32 countries, and they think that’s a good thing—that’s the worst possible story someone could ever tell.” 

Gersten outlines that Caliray, the clean cosmetics brand co-founded by Urban Decay founding partner Wende Zomnir, is carefully advancing its assortment and retail reach. At the moment, the brand sits on one shelf in a clean makeup endcap at all Sephora doors in the United States. “For us to be successful with Caliray, Wende needs to get a second shelf,” says Gersten, adding, “She’s got great innovation coming out, but we want the innovation to be incremental onto another shelf, not taking off what might not be selling so fast on the first shelf. It’s all about growing your space and location in the doors you’re in.”

For wannabe entrepreneurs cowed by the state of the beauty industry, Palix says there remains plenty of opportunity for innovation to fulfill unmet needs. He identifies oral care, sexual wellness and longevity as categories with interesting entrants cultivating unique value propositions. “The innovation will come from new brands, I’m absolutely convinced of that,” asserts Palix. “Beauty reinvents itself all the time.”

A timeline of hair wellness brand Vegamour’s rise. Launched in 2017, the brand received an $80 million minority investment from private equity firm General Atlantic in 2021, which helped support its entrance into 200-plus Sephora doors.

And there’s no shortage of new brands. Gersten mentions that, in the past three years, TBV has been approached by nearly 1,400 brands. “There are hundreds and thousands that don’t make it. The failure rate is incredibly high, and it should be,” Gersten. The brand failure rate notwithstanding, he emphasizes that beauty “remains the most resilient category. It’s by far, in my opinion, the most attractive in all of consumer, and there are a lot of ways to create value for small brands.” 

On the whole, Gersten underscores that emerging beauty brands grow faster than their established counterparts—and he foresees that dynamic persisting. “There’s a consistent share-shift game from indie brands and larger legacy brands,” he says. “Those larger brands desire to continue to show their own growth, and they do it through M&A. So, you can argue that it’s R&D they’re looking for, and I can also argue that it’s growth and capabilities that they’re looking for, and it’s a flywheel that is very hard for them to get off of because they need to show continued sustained growth…and those players that are showing that continued sustained to growth tend to be the smaller indie brands.”