Q3 2022 Beauty Deals: Investors Are Cautious But Active

“Truth,” said Mark Twain, “is stranger than fiction because fiction has to be possible and truth doesn’t.” The unprecedented economic reality of the last few months has felt very strange indeed, with news of impending doom and gloom led by soaring global inflation, continued supply chain disruptions, multifaceted geopolitical turmoil, and volatile financial markets in direct opposition to record low unemployment, healthy consumer balance sheets and, in the case of beauty, robust consumer spending. Consumers, brands, and investors alike have been trying to make sense of it all, and the net result has been a much more cautious approach to beauty and wellness deal activity in Q3 2022.

During the third quarter of 2022, the BeautyMatter Deal Index tracked 67 deals, a 27% decline from Q2 2022 and a similar decline year over year. In the context of the unprecedented amount of deal activity we saw in 2021 and the early part of 2022, this decline indicates a marked shift in investor and strategic appetite for beauty and wellness deals. Seen against the context of historic, pre-pandemic trends, however, Q3 2022 deal activity was still above average and shows that investors, while more cautious, remain enthusiastic about the prospects of earning meaningful returns from beauty and wellness dealmaking.

Growth investments (seed, venture, minority stakes) have continued their dominance of deal activity during the third quarter, comprising 54% of deals, down from 61% last quarter. M&A (traditional mergers, acquisitions, and majority stakes) comprised 42% of deals during the quarter, up from 37% last quarter. Given the extreme volatility in the public equity markets, it’s not surprising to see that the industry saw zero traditional IPOs during the quarter. But traditional IPOs have always been a bit of a rarity for beauty and wellness brands given the relatively small scale of brands that would qualify for a public market listing and the small number of acquisitive strategic players looking to bolster their brand portfolios through acquisitions. Of particular note was news about two SPAC deals during Q3 2022, despite falling out of favor with investors last year.?Waldencast’s SPAC IPO of Milk Makeup and Obagi?successfully closed during the quarter, but?Bright Lights Acquisition Corp’s deal with Manscaped?was scrapped in late August due to “unfavorable market conditions.

During Q3 2022, about 50% of deals occurred in the retail (13%), skincare (15%), and supply side (21%) categories. Year to date, the strongest category performers have been personal care (+64%), color cosmetics (+55%), skincare (+16%), and supply side (+4%). Supply side deals remain the lion’s share of deal activity in 2022, as they have been for the past two years, with M&A and consolidation fueling transactions. This reinforces the thesis that size and scale drive the economics of the supply side of the business. Deal category laggards in 2022 include health + wellness (-73%), fragrance (-56%), professional (-41%), and retail (-20%). In the case of fragrance, the lack of deals is likely the result of too few deal opportunities of scale to fuel deal growth in the category.

What’s Buoying Deal Activity in Beauty?

Significant dry powder at VCs and PE firms.?The performance of beauty and wellness brands during COVID and the continued resiliency of the category have encouraged a record number of new and existing investors to allocate capital to beauty. The influx of substantial uninvested capital and the longer-term investment horizon of VC and private equity funds will likely buoy beauty deal activity into 2023. The criteria used to evaluate opportunities, however, has changed in 2022, with investors focused on things like the quality of management teams, path to profitability, supply chain resiliency, and ESG initiatives, in addition to all the traditional data points like sales growth velocity and customer demand.

Seismic shifts in beauty distribution.?The pre-pandemic playbook of beauty distribution has been thrown out the window. Retail consolidation, the merging of premium and mass, and consumers demanding to shop anywhere and everywhere has made for a distribution landscape that is ever more capital intensive. Omnichannel has become table stakes, and the hottest brands, large and small, are looking to places like Target, Walmart, Sephora, and Ulta for growth opportunities of scale. These distribution points require large amounts of capital to drive success and have presented meaningful investment opportunities and outsized rewards for investors that bet on the right brands.

Robust consumer interest in the category.?While substantial economic headwinds have dimmed consumer interest in other categories like apparel and home goods, beauty has remained a notable bright spot. As a result, retailers like Target are refreshing their beauty departments and adding new brands to attract customers. Earlier this year, Target CEO Brian Cornell said beauty saw double-digit comp sales growth and the retailer announced a plan to add 250 more of their Ulta Beauty Shops within their stores, bringing the total to 800 doors, or 40% of their store footprint. JCPenney announced in September a plan to roll out 600 Thirteen Lune shop-in-shops to bring BIPOC-founded beauty brands to its customers. Over the last few years, beauty has been an outlier, and investors have taken note.

Continued strategic interest in acquisitions.?One of the unique aspects of the beauty deal ecosystem is the highly acquisitive nature of strategic conglomerates. Strategics use M&A to drive innovation, tap into attractive consumer segments, and drive growth. In Q3 2022, we saw Puig acquire?Loto del Sur?and?Kama Ayurveda. L’Oréal acquired?Skinbetter Science, Shiseido acquired?Gallinée, Church & Dwight acquired?Hero Cosmetics, and Amorepacific acquired?Tata Harper. The reliable cadre of global strategics providing exit opportunities for investors will continue to support deal activity into 2023.

A culture of innovation and entrepreneurship in beauty.?Beauty remains one of the most vibrant, innovative, and entrepreneurial consumer categories. With hundreds of new brand launches every year, innovative branding and new product development, and a robust accelerator ecosystem, beauty provides investors with ample opportunities to put capital to work at all stages of growth.

While the dealmaking landscape has remained a relative bright spot in beauty, it’s important not to overlook the formidable challenges that lie ahead as we navigate Q4 and into 2023. Some of those challenges have already begun to show themselves with the financial devolution of once high-flying businesses such as?Revlon,?Forma Brands,?THG, and the shuttering just this week of clean beauty brand?Lilah B. Investors will remain cautious and will engage in more fastidious due diligence, but, for the best brands, they will continue to put capital to work.

For full details on all the beauty dealmaking during Q3 2022, check out our 116 page report, Beauty Deals: Investment + M&A Transactions Q3 2022