Kering’s Next Frontier: Beauty | BoF

When Kering announced the creation of its eyewear division in 2014, the general opinion was that it was a risky move, almost a step too far. Kering’s eyewear division is now targeting annual revenue of more than $2 billion, and much of that comes from lapsed licenses with Italian eyeglass maker Safilo, leaving Safilo’s valuation in the doldrums. (To make matters worse for Safilo, LVMH, which had initially entered into a joint venture with the company, eventually established its own eyewear division, Thélios, in partnership with Safilo’s rival Marcolin, resulting in the loss of more licenses. for the glasses group in distress. ).

Now, Kering has hired former Estée Lauder executive Raffaella Cornaggia to head a new beauty division, which will develop the beauty category for several of its brands, including Bottega Veneta, Balenciaga and Alexander McQueen, echoing the lineup. of its eyewear division in 2014. . Because? And what are the implications of the move, particularly since two of Kering’s main brands are still licensed to beauty giants Coty and L’Oréal?

It’s no secret that Kering lost out to Estée Lauder in the Tom Ford bidding process. Tom Ford Beauty has long been the main driver of sales and profit for the brand and Estée Lauder couldn’t afford to lose the license but more importantly knows how to grow that side of the business. Kering was dazzled, but he did well not to fight to the end.

It was a great move from a beauty group, though not the first. Most famously, Chanel is owned by her former beauty partner (dating back to the 1920s), but other beauty groups have made similar moves to Estée Lauder to protect a beauty revenue stream: Clarins acquired Mugler’s fashion business in 1997 on the back of the huge success of Angel, the brand’s flagship fragrance it had created as a licensee. (Both the fragrance business and the fashion line were later sold by Clarins to L’Oréal.)

Puig has been following the same playbook for a while, acquiring Nina Ricci, Carolina Herrera, Paco Rabanne and taking a majority stake in Jean Paul Gaultier in 2011 before licensing the brand’s fragrances from Shiseido in 2016. What makes the Tom Ford acquisition so unique is its size and notoriety.

Scale may also be a factor in the timing of Kering’s move towards beauty. While Gucci and Yves Saint Laurent are still licensed to Coty and L’Oréal respectively, Kering may start working on smaller brands Bottega Veneta, Balenciaga and Alexander McQueen.

And yet many smaller brands have fallen on their swords by pursuing beauty independently. Burberry terminated its beauty license with Interparfums in 2012, taking operations in-house, only to license Coty in 2017. Prada first entered the beauty category in 2000 on its own terms, eschewing fragrances in favor of care. skin and makeup into three main divisions: “multi-dose” items, mainly for basic skin care; single-dose products for specific treatments; and “mini dose” units for color. The launch proved too complicated and was ultimately called off in favor of a 50/50 joint venture with Puig focused solely on fragrances. In 2019, the brand signed an agreement with L’Oréal, effective January 2021, to develop and sell luxury beauty products under the Prada brand.

Kering may be hedging its bets by starting with its smaller brands, but in the long run, the more valuable beauty lines of Yves Saint Laurent and Gucci, still under license with others, are sure to take center stage.

What does this mean for beauty groups that rely on licensed brands?

Coty looks especially vulnerable as its business model is centered around licensing (its biggest licensee is Gucci), though the size of the group and diversified portfolio offer some protection. It is also the go-to licensee for brands that are not willing to operate their own beauty business. While the group’s share price didn’t move much after Kering’s announcement (in fact, Coty’s share price has risen 9 percent since then), Safilo’s struggles should serve as a warning.

Alternative licensing players such as Interparfums and (on a much smaller scale) Euroitalia have been wary of long-term licenses and tried to acquire the rights to some of their brands in the category (such as Lanvin, which is owned by Interparfums in trademark category). 3).

Other participants in beauty licensing are less exposed to this risk: L’Oréal and Estée Lauder have enough clout with their own brands to weather any potential disruption caused by the beauty licenses their owners bring with them. Puig has also diversified risk, not only buying fashion brands, but also making major beauty acquisitions such as Charlotte Tilbury and Byredo.

The Savigny Luxury Index (“SLI”) rose 16.8 percent in January, outperforming the MSCI by more than 10 percentage points, boosted by a series of positive results announcements for 2022 and reignited optimism about China’s unlocking after of ‘zero Covid’.

SLI vs. MSCI

Going up

• Brunello Cucinelli gained more than 30 percent in January as the group’s 2022 sales beat already high expectations.
• Swatch’s share price rose more than 25 percent last month on the back of strong 2022 results and forecast record performance in 2023. The Swiss watch group is seen as one of the main beneficiaries of the reopening of China.
• Burberry, which is also seen as one of the main beneficiaries of China’s reopening, saw its share price rise 21 percent in January.

Going down

• Safilo is the only stock that has lost value in January, with the share price falling 9.9 percent. The stock has been trading around the €1 mark since 2019, when the company lost the licenses to Dior and Fendi, marking the end of its relationship with LVMH. The eyewear group’s shares had been trading between 30 and 40 euros for a couple of years after it changed its name from Safilo Holdings to the Safilo Group, in 2005, before suffering a sharp decline.

what to see

Kering’s latest move signals that battle lines are being drawn between the players of fashion and beauty accessories. This could make up for an interesting year in the M&A space for both fashion and beauty.

Industry valuation

Pierre Mallevays is a Partner and Co-Head of Commercial Banking at Stanhope Capital Group.