Premium Skin Care Market As An Area For Private Equity .
Premium skin care marketas an area for privateequity investmentAndres Saenz Managing Director, Co-head of Private Equity, EY-ParthenonEnoch Minn Managing Director, EY-ParthenonDecember 2015
Agenda Summary Market summary Growth drivers BiosEY-Parthenon Page 2
SummaryWhy do we like the premium skin care market as an area for PE investment?MarketCustomer ProductGeographyStrategyA large category ( 10b ) with strong growthdynamics (5% ) and underlying trendsHighly involved consumer enables willingnessto pay, trial and loyaltyVarious product positionings, innovation, pricetranches and channel choices allow for a diverse“playbook” by which brands can growLarge international markets provideadditional runwayMajor strategies exist and are acquisitive —good to be willing to play “early”EY-Parthenon Page 3
Key findings for the premium skin care market in the USSummary of premium skin care in the USCompetitive landscapeMarket overview Premium skin care represents 30% ofthe skin care market; “masstige,” prestigeand ultra-prestige premium segments aredefined by price, availability, customerservice and marketingPremium skin care has grown 5.5%annually (compared with mass marketdecline by of -0.5%), with prestige andmasstige segments showing the strongestgrowthPremium skin care is heavily focused onfacial treatments and anti-agingproducts, whereas the majority of masssales are body care and cleansersLong-term growth is expected to continueto be driven primarily by sales of anti-agersand facial moisturizers; however, a moreclinical focus and scientific efficacy willbe increasingly important L'Oréal, Shiseido and Estée Laudercomprise over 60% of the premium marketacross their portfolios of brands Win themes Large skin care companies have used acombination of acquisition and internalbrand development to play across skincare retailers and segmentsNew product innovations — specifically,cosmeceuticals, and those with clinicalevidence supporting their claims, and athome electronic devices — will satisfyconsumer demand for professional-qualitytreatment at home Premium skin care companies are focusedon scientific efficacy and“cosmeceuticals” to drive growth, asincreasingly savvy consumers seek keyingredients and scientific support formarketing claimsEffective marketing to (i) increaseconsumer recognition of key activeingredients and delivery mechanisms, and(ii) target consumers for up-selling isimportant for success in a market with somany players and options Few ultra-prestige brands haveestablished a reputation for “clinicalluxury,” presenting opportunities for newentrants or emerging playersDermatologist support of products willcontinue to be an important source ofendorsement and sales for brandsemphasizing scientific efficacy Securing distribution channels intointernational markets, particularly in Asia,will enable US companies to capitalize onthe large skin care market ( 50b) and themore comprehensive Asian beautyregimenEY-Parthenon Page 4
Agenda Summary Market summary Growth drivers BiosEY-Parthenon Page 5
Premium skin care represents 30% of the market; masstige, prestige and ultraprestige segments are defined by price, retail availability and marketingTotal US skin care marketby segment, 2015E100% 12.4bUltra-prestigeRepresentativebrands LaMer ChanelRepresentativechannels BluemercuryBeauté Neiman SaksRelativepriceCustomerserviceSegmentdescription 10x Ultra-prestige 5x–10x Prestige 2x–5x Masstige 1x MassMarcusFifth AvenuePrestigeand prestigesegments are expensive andexclusive. In particular, theultra-prestige segment has lowaccessibility80Masstige Shiseido Sephora Estée Macy’sLauder Ulta60 LaRoche-Posay Vichy40Beauty CVS DuaneReade WalgreensMass20 Olay CVS Neutrogena Target Walmart0brands are lessexclusive than ultra-prestigebrands; prestige brands can befound at places like Sephora andUlta and many department storesbrands includedermatologist brands, which areusually offered in pharmacies,and other “less exclusive”brandsbrands are readilyavailable across mass retailersand have no sense of exclusivity;marketing is primarily focused onlow prices but occasionally onthe scientific effects2015EFull serviceNote: Premium skin care relative price ranges are based on analysis of average /oz. for eye creams and moisturizersSource: Euromonitor, EY-Parthenon interviews, company websites, EY-Parthenon analysisNo serviceEY-Parthenon Page 6
Premium skin care has grown 5.5% annually since 2003, with prestigeand masstige segments showing the strongest growthTotal skin care market segmented byultra-prestige, prestige, masstige and mass, 2003–2015E 15.0bUltra-prestigeHFPrestigeMasstige 12.4 11.9 12.2 11.7 11.5 11.4 11.3 11.3 11.5 11.2 11.2 10.9 11.0MassCommentaryCAGR('03–'15E)1.1%Consumers returned to premiumproducts during the economic recoveryand continue to do so after tradingdown for more affordable massproducts during the recession; longterm growth will be continue to bedriven primarily by sales of anti-agersand facial moisturizers A larger pool of customers willing toinvest more money into skin care andexpanding skin care regimes is theprimary driver of growth in the ultraprestige and prestige segments Increased efforts from drugstores suchas CVS and Walgreens to offer andpromote dermatologist brands at higherprice points, and consumer willingnessto trade up from mass, are driving thegrowth of masstige segment The mass segment, compared to allpremium segments, is expected toexperience negative growth aspremium segments capture customersfrom the mass segment6.5%5.1%10.0 Premiumskin '12'13E '14E '15ENote: Subsegments under premium skin care are based on analysis of average /oz. for eye creams and moisturizersSource: Euromonitor, EY-Parthenon interviews, EY-Parthenon analysisEY-Parthenon Page 7
Agenda Summary Market summary Growth drivers BiosEY-Parthenon Page 8
Growth drivers have positively impacted premium skin care segmentsand have been generally neutral to negative in the mass segmentImpact on segment growthDriverDescriptionCommentaryMass1 “Asia has always had a lengthy and complexskin care regimen — it is much shorter in theUS. So I think we are trying to make that shift— how do we get people to buy more?– Current director of product development,leading cosmetics company New product introductions have fueled skincare sales, such as at-home electronicdevices; such innovations are expected toimpact the market in the long term “Clarisonic has been ahead in this space.Born out of the dermatologist’s office,Clarisonic sold its cleansing device for 120– 150, which has contributed a lot to theirsales growth” – Former SVP ofmerchandising, US cosmetics chain3Greaterchannelavailability Specialty stores, such as Ulta and Sephora,have increased masstige/prestige/ultraprestige skin care availability; big pharmaciesare committing more shelf space “‘Skin Care Sets’ are available all year‘round. This is a great way to discount thepremium end of the market without reallydiscounting — this eventually brings morecustomers – Former SVP of merchandising,US cosmetics chain Customers are willing to pay a premium forproducts containing ingredients proven towork and with claims backed by scientificevidence “‘Customers are quite savvy — they knowwhat [ingredients] to look out for and theyknow new ingredients are coming through.The science side is where we can offer more”– Former SVP of merchandising, UScosmetics chain Brands have identified white space in existingportfolios and aggressively addressedproduct gaps either through new productdevelopment or strategic acquisitions “We regularly evaluate opportunities in ourproduct line to innovate and develop newproduct. As you know, we have also notbeen shy about acquiring new technologywhen we see promise” – Current director ofproduct development, leading cosmeticscompany “Some of the more expensive brands aredramatically cheaper in the US than in China.Macy’s has dedicated tour operators fortourists on shopping tours” – Current directorof business development, global cosmeticschainIncreasedefficacyBrandportfolios 6InternationalgrowthBrands have realized growth frominternational expansions; also, tourists to theUS have increased purchases due to largeprice gaps of prestige and ultra-prestigebrands across different geographiesPrestigeUltraprestigeRelative impactProductinnovations5Premium brands have been marketingtoward expanded skin care regimes; forexample, serums and retinol creams haveexpanded typical skin care regimes fromthree to five stepsExpandedregime24 MasstigeEY-Parthenon Page 9
1Premium skin care has a heavy focus on facial treatments and anti-agingproducts, whereas the majority of mass sales are body care and cleansersSkin care subcategories breakdown by segment, 2015E 8.0b 0.9bPremium tonersP remium lip careP remium hand careP remium tonersP remium face masksP remium acnetreatmentsPremium lip carePremium facial moisturizers80Premium acne treatmentsPremium facialmoisturizers60Premium tonersPremium liquid/cream/gel/barcleansersPremium liquid/cream/gel/bar cleansersPremium facialmoisturizers20Premium general purpose body care0MassFacial careCleansing productsBody careLip carePremium anti-agersMasstigePrestigePremium anti-agersPremium anti-agersPremium anti-agersPremium liquid/cream/gel/bar cleansers40Source: Euromonitor, EY-Parthenon analysisPremi um tonerspurpose body carePremiumgeneralpurposebodycarePremium liquid/cream/gel/barcleansersTotal 12.4b 0.5b 3.1bPremi um generalPremi um fac ial m ois turiz ers100%Ultra-prestigePremium skin care: 4.5bEY-Parthenon Page 10
2The success of many premium brands is predicated on a “hero” productor line, which can drive brand equity and salesCrème de la MerLa Mer (Estée Lauder)As the company’s first offering, Crème de laMer is an essential component of thecompany’s brand identity and its highestselling product La Mer draws extensively upon the history ofdeveloping Crème de la Mer in its marketingmaterials — when aerospace physicist Dr. MaxHuber sustained burns from an accident, hedeveloped the product from sea kelp Based on the popularity and brand equity of itshallmark product, La Mer has been able toexpand into new beauty categories, includingtonics, sun, skin color, masks and bodySource: Euromonitor, EY-Parthenon analysis, company websitesC E Ferulic SerumSkinCeuticals (L'Oréal )C E Ferulic Serum has helped cement thescientific and clinical image thatSkinCeuticals attempts to convey SkinCeuticals launched C E Ferulic Serum in2005, the same year that the company wasacquired by L'Oréal. The product wassupported by Duke University researchindicating a doubling in photoprotection fromuse of C E Ferulic Serum only In 2008, the Journal of the American Academyof Dermatology published a double-blind,peer-reviewed study that upheld the product’sclaims Because of the reputation it enjoys, theproduct is able to sell for a premium of three tofive times the price of other comparable ferulicacid-based beauty productsEY-Parthenon Page 11
3Skincare brands are expanding across retail channels, blurring price anddistribution boundaries to fuel growth, but creating potential channel conflictAverage /oz. for eye creamsHighUltaWalgreensNeiman MarcusSephoraLancômeClé de Peau BeautéChanel PrécisionPriceDiorGuerlainLa MerGiorgio ArmaniEstée LauderYves Saint LaurentTom Ford BeautyDarphinSK-IIFreshThe Body ShopOlayLowMassBobbiLauraElizabeth osophyArtistryBiotherm OriginsLa Roche-PosayJo MaloneMAC Kiehl'sbareMineralsRoCBenefitAveenoNeutrogenaNu SkinPositioningUltra-prestigeThis dynamic has mixed impacts for premium brands: on one hand, there is greater freedom for brands at various price points under the same ownership topenetrate the same retail channels without diluting brand name; however, channel conflict could cause confusion among less savvy consumersNote: Price per ounce for eye creams were calculated based on online searches and are represented as above.Dotted boxes represent retail channels where certain products are availableSource: Euromonitor, company websites, retail websites, EY-Parthenon analysisEY-Parthenon Page 12
4Premium skin care companies are increasingly focused on scientificallyproven efficacy and cosmeceuticals, but white space exists in clinicalultra-prestigePrestige skin care market segmentationUltra–prestigeEstée LauderDiorIncreasingly savvy consumers are looking for keyingredients and scientific support for marketing claimsin premium skin careLaMerChanel Précision For example, La Roche-Posay’s sustained double-digitgrowth relies on recommendations from healthprofessionals and little on advertising; the brand isreputed for robust clinical testing Both scientific efficacy and consumer recognition anddemand for key ingredients are critical to productsuccess Key ingredients with high consumer recognition includeretinoids, hydroquinone, antioxidants (e.g., ALA, vitaminC, CoQ10, green tea), alpha hydroxy acids (e.g.,glycolic acid), hyaluronic acid and neuropeptides The success of marketing cosmeceuticals is dependentupon avoiding claims requiring FDA approval butpromoting consumer awareness of key ingredients andevidence of efficacy Few ultra-prestige brands have established a reputationfor “clinical luxury,” such as SK-II and Orlane, butconsumers are demanding more robust trials to justifyhigh price points and claims, presenting opportunitiesfor new entrants or emerging dCliniqueKiehl'sLa ng/luxury brandsNatural/organicbrandsRoCStriVectinClaims based/science brandsNote: *Natural/organic brands highlight natural ingredients, but may not be completely organic or all naturalSource: EY-Parthenon interviews, company websites, retail websites, EY-Parthenon analysisEY-Parthenon Page 13
L'Oréal, Shiseido and Estée Lauder comprise over 60% of the premium marketacross brands; growth is driven through creating and acquiring brands4Prestige skin care brandsby market shares, 2003-2015EParent ownership ofpremium brands, 2015EH100%F 2.3b 2.4b 2.5b 2.6b 2.7b 2.7b 2.6b 2.8b 3.1b 3.4b 3.7b 4.1b 4.5b 4.5BCAGR2003-2015EOthers80LVMH Moët Hennessy Louis Vuitton SANu Skin Enterprises IncElizabeth Arden IncJohnson & Johnson IncAmway CorpCoty IncShiseido Co Ltd6.5%20.2%5.4%3.5%L'Oréal Groupe5.5%Estée LauderCos Inc4.9%ChanelSAKlein-Becker USAClarins SA6040Note: CAGR represents total for skin care brands owned by parent (excludes non-skin care revenue)Source: Euromonitor, EY-Parthenon 62005200402003202015EEY-Parthenon Page 14
5Large skin care companies have used a combination of acquisition andinternal brand development to play across skin care retailers and segmentsUnileverJohnson &JohnsonProcter &GambleL'OréalEstéeLauderShiseidoLVMHCOTYMost massMass Pond’s (1986) Vaseline (1987) St. Ives (2010)AmwayLeast mass Clean & Clear(1991) Neutrogena(1994) Olay (1985) Noxzema (1989) The Body Shop(2006) Company created Acquisition License agreement Aveeno (1999) La RochePosay (1989)Masstige RoC (1993) Biotherm (1970) NARS (2000) Origins (1990) bareMinerals(2010) Benefit (1999) Philosophy(2010) Kiehl’s (2000) Lancôme (1964) Estée Lauder(1946)Prestigeultra-prestigeSource: Company websites, EY-Parthenon analysis MAC (1994) Shiseido (1916) Fresh (2000) Artistry (1968) Laura Mercier(2006) Clinique (1968) Prescriptives (1979) Bobbi Brown (1995) SK-II (1991) Giorgio Armani(1980s) Yves SaintLaurent (2008) La Mer (1995) Darphin (2003) Tom FordBeauty (2005) Clé de PeauBeauté (1982) Dior (1984) RéVive (2006) Givenchy (1988) Guerlain (1994)EY-Parthenon Page 15
Securing distribution in international markets, particularly in Asia and LatinAmerica, will enable US companies to capitalize on large growing markets6Global skin care market size, 2013The global skin care market reached 107.3bin sales in 201312.5% Growth in global skin care was drivenprimarily by the Asia-Pacific region, but LatinAmerica and Brazil have also emerged askey growth engines and have more thandoubled skin care sales since 2006 Anti-agers remain the fastest growingcategory in global skin care and will add 6bin sales by 2017; the US, China, SouthKorea and Japan are the primary countriesdriving this trend Men’s skin care has emerged as a significantgrowth category, and major international skincare providers have invested in the ca5.0NorthAmericaIndonesia, India and Thailand are the nextbig skin care marketsWesternEurope 2.5 20b0.001020304050Skin care market size by regionSource: Euromonitor, EY-Parthenon analysis, company websites6070 80bIndonesia alone is expected to be the thirdbiggest contributor to skin care growth withsales of 1.2b by 2017The continued expansion of global beautyretailers has driven market growth in certainSoutheast Asian countries Sephora, through its 2014 partnership withZalora, now has online distributioncapabilities for Singaporean and MalaysiancustomersEY-Parthenon Page 16
Agenda Summary Market summary Growth drivers BiosEY-Parthenon Page 17
Andres SaenzManaging Director, Co-head of Private Equity, EY-ParthenonProfileManaging DirectorCo-head of Private EquityEY-Parthenon Andres is a managing director and co-head of EY-Parthenon’s Private Equity practice Andres assists firms with due diligence, investment strategy and portfolio company projects Over the past thirteen years with Parthenon, he has worked in a wide variety of industries,including consumer products and services, retail and restaurants, business and financialservices, industrial and health care His work has addressed a number of strategic issues including growth strategy, sales andmarketing optimization, and operational improvement. Andres also leads the firm’s recruitingefforts.Education Andres received his undergraduate degree from Harvard University and his MBA from HarvardBusiness SchoolAddress:50 Rowes WharfBoston, MA 02110Phone: 1 617 478 2550Andres.Saenz@parthenon.ey.comEY-Parthenon Page 18
Enoch MinnManaging Director, Private Equity practice (focused on consumer sector)Profile Enoch helps lead EY-Parthenon’s Private Equity practice in Boston Enoch has over 12 years of experience and has led over 60 engagements in commercial duediligence, M&A advisory, growth strategy development, strategic brand assessments and brandstrategy development Prior to joining EY-Parthenon, Enoch was a senior engagement manager with L.E.K.Consulting, focused on working with private equity firms in commercial due diligence andstrategic growth opportunities In addition to extensive experience developing brand positioning and growth strategies, Enochhas also worked extensively in the retail and consumer products sectors, helping developgrowth strategies and assessing brand strengthsManaging DirectorEY-ParthenonAddress:155 North Wacker DriveChicago, IL 60606Phone: 1 312 879 2000Enoch.Minn@ey.comEducation Enoch received his JD and MBA from The University of Chicago, and his BA in Economics andMathematics with honors from Northwestern University Enoch is a member of the California Bar AssociationEY-Parthenon Page 19
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11.7 '13E 11.9 '14E 12.2 '15E 12.4-0.5% 7.2% 5.1% 6.5% ('03–'15E) 1.1% CAGR Mass Masstige Prestige Ultra-prestige Premium skin care has grown 5.5% annually since 2003, with prestige and masstige segments showing the strongest growth Note: Subsegments under premium skin care are based on analysis
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