A year into the pandemic, the health and beauty industry has shown its resilience and ability to pivot. Consumers’ increased time at home has led to new and accelerated trends, many of which will be lasting. Conscious beauty and the social justice movement are at the forefront, with consumers and brand founders demanding change. Amidst these dynamics, deal-making has continued, and the fundamentals are in place for an active M&A market in 2021.
Here, leaders from the Harris Williams Consumer Group share their “at a glance” view of the industry trends that they expect to continue post-pandemic, what has surprised them in recent months, and their outlook on the opportunities for M&A investors in 2021 and beyond.
In the months to come, we plan to explore these trends in greater detail.
What are the most notable consumer trends we see lasting post-pandemic?
- Conscious beauty climbing to new levels, influencing consumer brand choices: Clean is now table stakes, and there’s a heightened focus on sustainability, ethical sourcing, inclusivity, female empowerment, and social justice. A greater spotlight on these issues has driven progress in the last year, while the true measure for consumers will be seeing meaningful change and actions.
- Caring for self and home: Among the most prevalent are self-care (face and hair treatments, bath and body); do-it-yourself beauty (nail care, hair color); self-expression (hair extensions, nail art); a focus on health and hygiene (from personal cleansing and healthy homes to the mainstreaming of ingestible collagen and adaptogens); and home-as-a-refuge (home fragrance).
- A new definition of beauty toward health: Skin health, hair health, makeup with skincare benefits, beauty from within, sun and blue light protection, de-stress, women’s health.
- Online buying without trial: Consumers’ growing comfort level with discovery and purchase online without trial (leading to greater use of tools and imagery); digitally-enabled brands and online platforms are advantaged.
- The fascinating evolution of influencer marketing: Consumers reached a point of fatigue in 2018, but more time at home enabled the start of a new era with TikTok. Today’s authority figures include founders embodying their brand’s lifestyle and dermatologists. Social shopping is in its infancy (e.g., shopping on Instagram) as is livestreaming, both with huge potential.
What has surprised us?
The quick recovery of China: The market moved to positive growth by the middle of last year. In fact, the Chinese beauty market is driving the global recovery of the sector. The emergence of local Chinese beauty brands is notable and likely to attract Western buyers in the future.- The resilience of beauty overall: Although U.S. prestige was down 19% in 2020,1 the global beauty industry is projected to grow 1.2% from 2019 to 2021.2
- The rise of online led by Amazon: 33% of consumers plan to permanently make eCommerce their primary purchase channel for beauty, and Amazon captured $10 billion, or 10%, of U.S. beauty sales in 2020.3 Amazon has been a key contributor in the growth of men’s products.
- M&A continued through COVID-19: Buyers and sellers found ways to virtually complete deals that started pre-pandemic, while strategic and private equity activity accelerated late last year.
- Creative deals and partnerships were struck: These include IPSY’s acquisition of BoxyCharm and The Hut Group’s acquisition of Dermstore, expanding their online ecosystems and landmark collaborations between Ulta and Credo Beauty, Ulta and Target, and Sephora and Kohl’s.
- SPACs in the spotlight: Acceleration of the special purpose acquisition corporation (SPAC) market is now touching the beauty industry with completed (e.g., HydraFacial, hims® & hers®) and newly formed beauty-focused SPACs, such as female-backed Powered Brands.
What do we expect for health and beauty M&A in 2021?
- Robust deal environment: Already off to a strong start, deal activity will continue to rise in 2021. Brands that thrived and those that effectively navigated the challenges of the last year will be able to come to market, and private equity owners will be looking to monetize seasoned assets.
- Digital demand: We expect digitally-enabled brands in attractive categories such as skin and hair health to be in high demand, especially if they are clean, backed by science, and have differentiated ingredient stories.
- Cosmetics comeback: We also believe cosmetics will see renewed buyer interest. Two key factors are the demand in Asia and research showing 80% of Americans plan to go back to their prior cosmetics routines once life normalizes.4
- Strategics seeking strong brands: Sellers will find strong reception from strategics looking to add brands with high engagement and loyalty; address new, lasting consumer and channel trends; and that fill portfolio white spaces—although the bar will be higher around size, profitability, and strategic fit.
- New consolidators are emerging: Beauty platforms and incubators are on the rise, and strategics are pivoting into untapped growth areas. Buyer activity in Asia will be strong.
- PEG demand will be high: Private equity demand for opportunities across the supply chain will stay high from contract manufacturing to ingredients to packaging, as another way to play beauty industry tailwinds.
- Valuations will remain strong for quality assets: Post-COVID-19 valuations have held and the strength of IPO and SPAC markets provide us with public benchmarks.
Conclusion
All indications point to an active M&A climate for beauty in the remainder of 2021. As vaccines roll out, restrictions continue to lift, and people spend more time outside their homes, we expect demand for beauty products to accelerate. Companies aligned to the trends that now have a strong foothold, such as conscious beauty and digital marketing and purchasing, will be well-positioned to capture investor attention.
For more information, please contact our senior bankers.
Select Recent Harris Williams Transactions
Sources:
1. NPD
2. McKinsey
3. Ibid
4. NPD
Published April 2021