• Investment Banking

Beauty Industry Embraces Digital Disruption & Social Makeover

Digital-savvy consumers are giving the global cosmetics industry a makeover, and prompting investment bankers to parallel that disruption with a touch-up of their own.

A stay-at-home mother of three wonders how she can supplement her family’s income. A recent college graduate, running into a tough job market, looks for creative ways to start paying down her student loans. A midcareer professional searches for new ways to channel her entrepreneurial drive.1

These are some of the women Derek Maxfield and Melanie Huscroft never dreamed might become an integral part of their lives, when the brother and sister team took the age-old Tupperware party-selling model and fully digitalized it. “I didn’t know anything about makeup when we started this,” says Maxfield, who developed the software. “It was my sister Melanie’s idea to sell beauty products.”

Their company, Younique, has gathered a 200,000-strong army of Presenters in 10 countries over the past five years, selling more than $400 million of cosmetics a year over social media networks, livestreaming online parties from their living rooms, kitchen table, or even in their cars. They call themselves “The Sisterhood” and train one another on how to create the most engaging digital makeup parties. They live by the code of online algorithms and how to make their parties pop to the top of social feeds. And, they can make anywhere from hundreds to thousands of dollars a month selling makeup through their personal networks.

Younique’s remarkable growth represents the kind of disruption the beauty industry hasn’t seen since the invention of the metal lipstick tube. A new generation of digital-savvy consumers, raised on social media and smartphones, are forgoing trips to the department store or mall to hang out online with other people just like them; testing new products, demonstrating new looks and buying products based on personal, rather than brand, trust.

Peer-to-Peer Model

“The biggest global beauty companies are experiencing massive disruption by the shift in consumer behavior that online shopping and social media has caused,” says Irina Adler, a Managing Director with Morgan Stanley’s Consumer Investment Banking group. "Traditionally, cosmetics companies are one step removed from their end customers. That’s because they sell products in department stores, which end up having the direct relationship with the consumer. But through a peer-to-peer sales model, they are able to dramatically grow their direct sales to consumers, at a time when department stores are suffering a decline in retail traffic.”

For Younique, the significant growth of its online social-retail platform presented both opportunity and challenges. Maxfield and Huscroft wanted to keep expanding their reach, especially in a global way, but they would need more market know-how to make it happen. That’s when they asked Morgan Stanley for help figuring out their best options.

In January of 2017, Morgan Stanley engineered the sale of Younique to Coty Inc., a major beauty incumbent with market depth and global reach, which was looking to leverage the growth of a dynamic digital startup. The deal, a 60% stake valuing the business at $1 billion and with Maxfield and Huscroft retaining operational control of Younique, may seem like an obvious fit in hindsight. Yet, it came together because Morgan Stanley’s bankers have created a multi-disciplinary in-house social network of their own, to connect often disparate-seeming ends of the market spectrum.

Social-Financial Network

“Up until very recently, technology-enabled companies were mostly sold to larger tech companies,” says Ed Liu, Managing Director and Head of Internet and Software Banking for Morgan Stanley. And the same often held true for retail and other market segments. “But we’ve seen a significant shift. With the world changing so rapidly, all companies are becoming software and technology driven, and this technology convergence trend has dramatically expanded the universe of buyers for our tech clients.”

Younique, with its robust digital platform, started out as a tech client, and ended up working closely with bankers in multiple sectors, representing an array of different buyer groups. “Digital disruption has certainly affected our advisory business,” says Liu. “We now bring multiple sector experts into the room when we discuss options for our tech clients. Our team is constantly collaborating with other industry teams, across Retail, Consumer, Healthcare, Transportation, Travel, Industrial and Real Estate groups, to name a few.” 

Volume of Non-Tech Companies Acquiring Tech-Companies

Source: Thomson Reuters and Morgan Stanley Internal M&A Database

In Younique’s case, Liu brought together Consumer, Retail, Financial Sponsors and Capital Markets bankers, to help Maxfield evaluate  private and public market options. After analyzing all potential partners and paths it could take,  Maxfield ultimately decided on a partial sale to Coty. The synergies were significant. Coty offered Younique a global platform with well-established supply chains and distribution logistics.  

For Adler the opportunity for Coty was clear. Adler had advised Coty in 2016 on its $12.5 billion acquisition2 of Procter & Gamble’s beauty brands, and knew that its senior management was keen to pursue digital expansion, and build a more direct relationship with its end customers.

Maxfield chose a partial rather than a full sale to Coty, so he and his sister, and their Younique Foundation for abused women, could benefit from the long-term upside of having a partner like Coty. “Coty is the perfect partner in every sense,” says Maxfield. “It even supports the reason why we started this in the first place — to fund our Younique Foundation. It’s an outcome above and beyond our expectations.”