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Estée Lauder’s purchase of fashion house Tom Ford for $2.3bn last month was the biggest deal the beauty industry has seen in some time. There have been many smaller transactions, such as Puig’s acquisition of fragrance brand Byredo, L’Oréal investing in Japanese personalized beauty start-up Sparty and Shiseido’s investment in Perfect Corp, but none on this scale.
The deal, which is expected to be financed through a combination of cash, debt and $300 million in deferred payments to sellers, could hurt Estée Lauder’s bank balance, but in the long run the beauty giant will reap the rewards, according to in GlobalData.
“Its acquisition of Tom Ford will better enable Estée Lauder to compete with L’Oréal as it adds another in-demand, luxury and high-performing brand to its portfolio, evolving the offering its important to ensure it remains relevant to consumers,” Sofie Willmott, sector head for health and beauty at GlobalData, told CosmeticsDesign-Europe.
Acquisitions as a strategy to stay relevantThe
Willmott said global beauty companies, particularly L’Oréal, have recently focused on acquisitions and investments to respond to emerging consumer trends and strengthen their propositions. For example, in November, L’Oréal’s venture capital fund BOLD acquired a minority stake in French biotech firm Microphyt. This, he said, showed the company’s commitment to sustainably sourced ingredients.
Conversely, beauty companies that fail to change their offering to stay relevant to consumers are paying the price, according to GlobalData.
“Revlon filed for bankruptcy earlier this year, partly due to debts but also because it failed to continue to develop its brand offering and rely on its hero brands Revlon and Elizabeth Arden. Although still popular with many consumers, these brands cannot meet the high expectations of young consumers who are looking for a change and want to try new beauty products and brands,” Willmott said.
From longtime partner to sole proprietorThe
Estée Lauder’s acquisition of Tom Ford was a natural progression, as it has licensed the designer’s cosmetics and fragrances for over a decade. Tom Ford Beauty was first introduced by Estée Lauder in 2006, offering a collection of luxury fragrances, make-up and skin care products, and has had a strong track record of growth. The brand delivered double digit net sales on a compound annual basis from 2012 to 2022 and in Estée Lauder’s fiscal year ended 30 June 2022, Tom Ford Beauty achieved nearly 25% net sales growth over the previous year. In the next two years, Estée Lauder said it expects the brand to reach annual net sales of $1bn.
“The brand continues to have strong momentum across channels and key markets resulting in a prestige fragrance ranking in the top 15 in the United States and top 10 in China,” Estée Lauder said in a press release.
GlobalData said this long-term relationship means Estée Lauder does not want to risk Tom Ford going to a competitor – even if it is a big investment in times of unprecedented inflation and macroeconomic challenges.
According to the data and analytics firm, sole ownership of the Tom Ford brand will allow Estée Lauder to be more profitable in the long run. Benefits include securing long-term cash flow from brand ownership beyond the existing license expiration in 2030 and the elimination of beauty royalty payments at closing, as well new licensing revenue streams and other synergies.
Best outcome for all partiesThe
From Tom Ford’s perspective, the acquisition of Estée Lauder also represents the most favorable outcome for reasons explained by GlobalData’s senior health & beauty analyst Lia Neophytou: “Tom Ford’s robust beauty and fragrance portfolio is likely to be in better hands at Estée Lauder, compared to rival bidder Kering, as it is historically committed to its expertise exclusively in cultivating high -end beauty and fragrance brand.”The
As well as making Estée Lauder the sole owner of Tom Ford, the deal also expands Tom Ford’s long-standing licensing relationships with Zegna for fashion and accessories, and Marcolin for eyewear.
GlobalData says Estée Lauder is smart to partner with Zegna as a long-term fashion licensee, as, unlike Kering, Estée Lauder “grossly lacking in clothing expertise”.
Under the agreement, Tom Ford, founder and CEO of Tom Ford International, is committed to remaining in the business as a creative visionary until the end of 2023. Domenico De Sole, chairman of Tom Ford International, will remain as a consultant for the same period .
GlobalData said that it is very important that Estée Lauder continues to offer the strong handwriting of the brand developed by Tom Ford, led by its founder.
“The creative founders of other strong brands acquired by Estée Lauder in the past, including Jo Malone and Bobbi Brown, stayed with the company years after their brands were acquired, so there is a risk of losing some of the legacy and prestige when the owner leaves” warned Willmott.
The acquisition is expected to close in the first half of 2023.
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