Luxury Institute News

LVMH has made a significant move into the natural skincare market, acquiring two eco-beauty brands within days. Anne-Louise Fogtmann finds out why

By Anne-Louise Fogtmann
CNBC Magazine
May 2011

Bernard Arnault, chairman of the world’s largest luxury goods group, LVMH, created its environmental affairs department in 1992 – the year Al Gore began writing his first conservation treatise, Earth in the Balance. Back then, however, Louis Vuitton’s geothermally powered warehouses and rainwater-recycling drums were considered the antithesis of the sort of glamour deemed essential to sell pricey frocks. It was not until 2007 that Arnault declared that the French conglomerate’s health depended on it heeding the ethical concerns of its consumers (particularly younger ones) in Western countries. And it would be another two years before LVMH would make a foray into the eco-fashion business, buying a stake believed to be between 40% and 49% in Edun, the ethical clothing group owned by U2′s Bono and Ali Hewson, his wife.

Now LVMH is making what could well be a much bigger leap into the growing eco-beauty market by buying, in the space of several days, the Danish-American botanical skincare brand Ole Henriksen and a 70% stake in cult British label Nude Skincare, co-created by Hewson. LVMH has a strong beauty division – brands such as Benefit, Make Up For Ever and Fresh have each achieved significant growth – but until now, unlike its rivals, the conglomerate had no overt eco-credentials. These latest deals are seen as part of a strategy to continue the acquisition of high- end beauty labels and tap into new markets and distribution channels, especially with Sephora, its aggressively expanding beauty retailer, and DFS (Duty Free Shoppers), the world’s largest luxury travel retailer, in which LVMH is majority owner.

With reported revenues rising 19% and exceeding the €20bn mark for the first time, LVMH had a good 2010. Tellingly, the perfume and cosmetics sector overall recorded revenue growth of 12% and an increase in profit from recurring operations of 14%, in part thanks to the success of Sephora, which showcases more than 200 classic and emerging beauty brands. Launched in France in 1969, and acquired by LVMH in 1997, the retailer today has 1,000 stores across 24 countries. While continuing to gain market share and recording comparable store growth across all regions, last year it increased its presence in Asia and Europe and entered the Latin American market through the acquisition of Brazilian rival Sack’s.

Sephora has become a real gem for the conglomerate, a solid retailer, but also a strong distribution channel for its many beauty brands, which is why LVMH has grown it in recent years through takeovers of local rivals such as Sack’s and Russia’s Ile de Beauté. Indeed, it was the collaboration with Sephora that ultimately led to the takeover of Ole Henriksen, a skincare-and-spa brand founded and owned by its Danish namesake. LVMH managing director Antonio Belloni told CNBC Business: “Ole Henriksen will benefit from working closely with Sephora – our fast-growing, global prestige beauty retailer – to accelerate the brand’s worldwide expansion.”

According to Milton Pedraza, CEO of US research and consulting company The Luxury Institute, the Ole Henriksen acquisition makes a good deal of sense. “LVMH owns Sephora, giving it a window into the brand. It’s a great brand and has equity and profile for the future, such as the spa aspect, hence there is lots of potential to grow the brand, especially in places such as China.” He does have one qualm, however. “Other skincare and make- up brands will worry how Sephora will treat them, so it could cause some concern.” Kline & Co.’s recent Natural Personal Care 2010 survey revealed that natural personal care products had a wholesale global value of $23bn and were growing around 15% a year. Skincare accounted for 41% of this.

Muriel Zingraff, senior adviser at London’s Oak Tree Management, says acquisitions were a way of bulking up a weak segment for Sephora. “LVMH had yet to acquire a natural brand, and these acquisitions were in some ways them playing catch- up. They needed this as their rivals were already active in this market. Clarins had invested in this, Estée Lauder owns Aveda – they are all investing in natural.”

Henriksen – a strong personality with a equally strong product line – had built up a brand that retailed in 22 countries and had in recent years shown impressive growth. But rapid growth requires a brand to expand into new markets and distribution outlets, a daunting task if it does not have the requisite experience or know-how – hence the marriage to LVMH. (Nude, which positions itself as a luxury performance skincare product, also has a strong following and is already a Sephora brand.) must have liked them, because today the retailer is my best retail outlet in the US. I have always been fascinated by the store – it’s a fun, caring and innovative place. We work closely together and that’s why this marriage is so ideal.” Having reached a plateau in terms of expanding the business, he says the most taxing process was trying to cope with red tape. “You need to arrive on the scene with bells and whistles, something which is very difficult to do alone; it is easiest done with LVMH. LVMH allows you to stay alone and retain your DNA, helping take us to the next level.”

He adds that he has no qualms about going back to being a treatment expert and product developer. “The LVMH team will bring muscle and creativity my way, and I am embracing it with open arms. I knew they could not have knocked on the door at a better time. We launched in China last year with Sephora, a big and an important market for us, and doing it with LVMH in the driving seat will be ideal.” DFS Group also has a significant presence in Asia, where it operates DFS Galleria stores, as well as more than 200 outlets at airports in the Asia Pacific region, North America, India and Abu Dhabi.

It’s in LVMH’s interests to keep Henriksen onboard, not least because the larger-than-life skincare developer – whose clients include Elton John, Barbra Streisand, David Bowie, Cher and Mark Wahlberg – has become quite a celebrity himself, using his public appearances to promote his products. “The brand has a good founder with global appeal and a great personality, which is really important,” says Pedraza.

From now on, Henriksen will be the brand’s visionary/creative director and will likely be a key figure when the brand expands into new markets. “Mine is a business of wellness and positivity,” says the effervescent, ever-smiling Dane. “To succeed you must feel confident and create positivity around you, reaching for the moon and the stars. You must have focus, take chances and take a reality check when things go wrong.”

Pierre Mallevays, managing partner at London-based boutique M&A advisory firm Savigny Partners and a former head of M&A for LVMH, says of Sephora: “Over the last decade, the leverage in cosmetics has shifted from the brands to the retailer. Sephora is a fantastic vehicle to not only gauge the success of a brand but also to help speed up its development. This gives LVMH a valuable edge in its acquisition policy in the sector.” Concetta Lanciaux, former advisor to Arnault and now head of consultancy Concetta Lanciaux Advisory, adds that these are Sephora acquisitions more than LVMH ones. “In other words, it is a continuation of Sephora tactics to acquire participations in new concepts and cosmetic brands.”

Sephora US has also entered into an agreement to sell The Body Shop products, a retailing collaboration that is highly uncommon in this business, as since 2006 the stridently green UK company has belonged to French beauty behemoth L’Oréal. The tie-up between Sephora US and The Body Shop, says Pedraza, could be the first of many such alliances. “There are lots of corporate alliances and cross-brand ventures currently cropping up in the luxury market. Companies now understand how distribution and social media affect and change customer behaviour, and they’re aware that they must understand their competitors’ strengths and occasionally they have to tap into those when they are unable to copy them.”

After a sluggish start for its new owner, The Body Shop has been performing well recently for L’Oréal, particularly in Northern Europe and the Middle East, with sales rising 6.2% to reach €172m in the third quarter of 2011, even though like-for-like sales were down 0.6%. The brand is embarking on significant expansion over the next few months in India and Russia. During the third quarter, The Body Shop launched its Rainforest haircare range, the first to feature the brand’s new eco- conscious product symbol.

LVMH’s shopping spree is likely to herald a new wave of acquisitions, according to Zingraff, who points out that L’Oréal, which a few years ago took over the high-end beauty unit YSL Beauté, is also back on the acquisition trail. The world’s largest fragrance company, Coty Inc, was busy too last autumn, picking up beauty company Philosophy from the New York private investment firm Carlyle Group and Dr Scheller Cosmetics from Russia’s OAO Concern Kalina. “It’s similar to the situation in the late 90s and early noughties, when there were a lot of acquisitions of small, quirky brands,” Zingraff concludes. And of course, it’s from small, quirky brands that household names are made.

http://www.cnbcmagazine.com/story/in-with-the-skin-crowd/1370/1/