While makeup deals have been the focus of headlines recently when it comes to M&A, there is also action happening behind the scenes.
That’s because in addition to snapping up beauty brands, investors, including a number of private equity players, are increasingly turning their attention to manufacturers and formulators in the beauty and personal care space.
The reason? The side of the industry has long been fragmented and is ripe for consolidation, say analysts, who note it’s an attractive sector for investors who are skittish about investing in a singular beauty brand or subsector but eager to play in the category overall.
At the same time, demand for these services has surged over the past decade, driven by the exponential multiplying of indie beauty brands.
“Independent brands want to launch very quickly — making speed-to-market very important. They have increased the need for turnkey manufacturing facilities that offer innovation, R&D, manufacturing, quality assurance and safety testing, filling, assembly and packaging all under one roof,” said beauty industry veteran David Chung, the founder of Farmacy, who now runs ILabs, a contract manufacturer-slash-beauty-incubator, and Morae Packaging, a manufacturer of glass and plastic packaging for the cosmetic industry.
KCD/One, one of the largest investors in the space, has made more than a dozen acquisitions over the past decade. Other notable deals include San Francisco-based investment firm Knox Lane acquiring a majority stake in premium beauty products formulator and manufacturer Elevation Labs for an undisclosed amount in 2022. In April of this year, Elevation Labs acquired Boomerang Labs, another beauty and personal care formulator and manufacturer, expanding its geographical presence and masstige offering.
Elsewhere, TruArc Partners, a private equity firm focused on the middle-market, last year invested in Trademark Cosmetics, a formulator and manufacturer of beauty and personal care products, partnering with a variety of established and emerging brands.
And private equity firm Core Industrial has created Cohere, consisting of four manufacturers — Marianna Beauty, Arizona Natural Resources, Health Specialty Inc. and Contract Filling Inc. — which have been integrated to offer product formulation, manufacturing and packaging under one roof. Its primary categories are hair care, fragrance and skin care.
“It really gives us an opportunity to circle the brands as they grow or as they expand into new categories. We have a product or a category to be able to support them,” said Cohere’s chief executive officer Christine Staples.
Other large players include Intercos Group, PLZ Corp., AccupacBright Innovation Labs, and SV Labs. In the case of Italian cosmetics manufacturer Intercos, which makes lipsticks, eye shadows, mascaras, foundations, powders, pencils, nail polishes and skin care products, it went public in 2021.
While deals were slower in 2023 due to inventory destocking as some retailers pulled back on orders, activity is expected to ramp back up over the next two years, with sources telling Beauty Inc that a number of manufacturers and suppliers are currently in market, including Japan’s Tokiwa Cosmetics International.
“We anticipate there’s going to be a rebound in the sector with a very good amount of activity over the next 12 to 24 months,” said Brian Oleniczak, a director at William Blair. “These platforms continue to get a lot of attention from the private equity community. There are several scaled platforms that have been established already by private equity, many of whom are looking to grow their platforms further via M&A. We continue to be bullish on the sector.”
One of those is the aforementioned Cohere Beauty, with Staples telling Beauty Inc that she is on the lookout for an additional skin care manufacturer.
“We spent the second half of last year laying out our strategy for growth, and as we did that, we realized we’ve got a few gaps,” she said. “In skin care we’ve got capability, but I’d like to have more capabilities. That would be the area where we would continue to invest.”
Staples believes that the changing regulatory landscape is making the option of being acquired more attractive to some smaller manufacturers. The landscape is currently made up of many small mom-and-pop-style manufacturers.
“It’s hard for the small players to be able to really keep pace with MoCRA, for example,” she said. “If you’re a $20 million CDMO, you don’t have the resources to keep pace with that change in the regulatory landscape.”
The Modernization of Cosmetics Regulation Act, known in the industry as MoCRA, is the first major statutory change to the Food, Drug and Cosmetics Act regarding the regulation of cosmetics since the FDCA’s enactment in 1938. As part of this, cosmetics companies will have to register with the FDA, report products and ingredients as well as fragrance allergens, adopt good manufacturing practices and report serious adverse events caused by using products within 15 days.
Away from regulation, the other reason that the consolidation is attractive to manufacturers is that it enables them to become true innovators, instead of being viewed as bottle fillers, through giving them access to larger R&D teams.
“It’s created this exciting business model for an investor where it’s a play in beauty and personal care to capitalize on the growth of brands that are scaling really quickly and have exciting new launches,” said Maggie Wilmouth, also a director at William Blair. “But without betting on a single brand. You get to play across a basket of really high-growth brands across all different channels of beauty.”
