Kering’s Next Frontier: Beauty | BoF

When Kering announced the creation of its eyewear division in 2014, the consensus view was that it was a risky move, almost a step too far. Kering’s eyewear division is now targeting annual revenues of more than $2 billion, with much of that coming from expired licenses with Italian eyewear maker Safilo, leaving Safilo’s valuation in crisis. (To make matters worse for Safilo, LVMH, which had initially set up a joint venture with the company, ended up creating its own eyewear division, Thélios, in partnership with Safilo’s rival Marcolin, resulting in the loss of new licenses for the group with glasses in difficulty. ).

Now, Kering has hired former Estée Lauder executive Raffaella Cornaggia to lead a new beauty division, which is expected to develop the beauty category for several of its brands, including Bottega Veneta, Balenciaga and Alexander McQueen, echoing the formation of its division. of glasses in 2014 . Why? And what are the implications of the move, especially as two of Kering’s top brands are still under license from beauty giants Coty and L’Oréal?

It’s no secret that Kering lost out to Estée Lauder in the bidding process for Tom Ford. Tom Ford Beauty has been the main driver of the brand’s sales and profits and Estée Lauder couldn’t lose the license, but more importantly, it knows how to grow that side of the business. Kering was effectively surprised, but he was right not to fight to the bitter end.

It was a big change from a beauty group, though not the first. Most famously, Chanel is owned by its former beauty partner (which dates back to the 1920s), but other beauty groups have made Estée Lauder-like moves to protect a beauty cash cow: Clarins acquired the business from Mugler’s 1997 fashion on the back of the huge success of Angel, the brand’s flagship fragrance that she created as a licensee. (Both the fragrance business and fashion line were later sold by Clarins to L’Oréal).

Puig has been following the same playbook for some time now, acquiring Nina Ricci, Carolina Herrera, Paco Rabanne and taking a majority stake in Jean Paul Gaultier in 2011 before acquiring the brand’s fragrance license from Shiseido in 2016. Ford so unique is its size and notoriety.

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

And yet, many lesser brands have fallen on their swords entering beauty independently. Burberry ended its beauty license with Interparfums in 2012, taking over operations in-house, only to grant a license to Coty in 2017. Prada first entered the beauty category in 2000 on its own terms, eschewing fragrances in favor of skin care and makeup into three main divisions: “multidose” items, mainly for basic skin care; “monodose” products, for specific treatments; and “minidose” units for colors. The launch proved too complicated and was eventually scrapped in favor of a 50/50 joint venture with Puig focused exclusively on fragrances. In 2019, the brand signed an agreement with L’Oréal, effective January 2021, to develop and sell luxury beauty under the Prada brand.

Kering may be hedging its bets by starting with its smaller brands, but in the longer term, the more valuable Yves Saint Laurent and Gucci beauty lines, still under license from others, are sure to come into focus.

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

Coty appears particularly vulnerable as its business model is centered around licensing (its biggest license is Gucci), although the group’s size and diversified portfolio offer a degree of protection. It’s also the preferred licensee for brands that don’t want to operate their own beauty business. While the group’s share price didn’t change much after Kering’s announcement (in fact, Coty’s share price has increased by 9% since then), Safilo’s struggles should serve as a wake-up call.

Alternative licensing players such as Interparfums and (on a much smaller scale) Euroitalia have been careful to enter into long-term licenses and have looked to acquire the rights to some of their brands in the category (such as Lanvin, owned by Interparfums in the trademarks 3).

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

The Savigny Luxury Index (“SLI”) rose 16.8% in January, outperforming the MSCI by more than 10 percentage points, buoyed by a string of positive earnings announcements for 2022 and refueled optimism about China unlocking after ‘zero Covid’.

SLI vs. MSCI

Going up

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

Going down

• Safilo is the only stock to lose value in January, with a 9.9% drop in share price. Shares have been trading around the €1 mark since 2019 when the company lost its licenses to Dior and Fendi, marking the end of its relationship with LVMH. Shares in the eyewear group traded between €30 and €40 for a few years after it changed its name from Safilo Holdings to Safilo Group in 2005 before suffering a steep decline.

what to watch

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

Sector assessment

Pierre Mallevays is a partner and co-head of commercial banking at Stanhope Capital Group.