Beauty in the eye of the shareholder

Posted by Liz Rees in Latest insights category on 12 Dec 19

With Christmas festivities around the corner, well-known beauty brands are on many people’s wish lists. This made me wonder what opportunities high-end cosmetics, skin-care and luxury fashion present for investors and which funds might invest in the companies that make them.

A thriving market

According to management consultant Bain & Co the market for personal luxury goods grew by 6% in 2018, reaching a record €260m. Europe accounts for most sales, followed by America, Asia and Japan, whilst China is rapidly increasing its share.

It’s not just face creams and perfumes, today’s consumers desire the highest quality products when it comes to clothes and accessories too. Prestigious brands are aspirational and, when demand is strong, can deliver high profitability.

Sought-after handbags, such as a Hermès Birkin or Kelly, are produced in strictly limited quantities and only the lucky select few can get their hands on them. That’s if they have £10,000 to spare of course.

Beauty goes digital

Far from being disrupted by challengers, many luxury brands are capitalising on their heritage, quality and design proposition with digital marketing. Other companies have held back, believing their products need to be seen and touched before purchase.

Certainly, those quick to adapt to the online marketplace have found they can reach a new group of millennial consumers who follow popular bloggers. Half of Gucci’s sales now come from consumers under 35. For Yves Saint Laurent, a Kering brand, it is 65%.

Ecommerce provides a huge opportunity for cosmetics companies. Their products are small, light, easy to post and suitable for demonstrating on social media. It remains difficult for new brands to achieve scale; consumers prefer trusted names.

L’Oréal leads

French company L’Oréal, with 100 years of history, spends more on research and development than any competitor to retain its pole position in the beauty industry. It was the first to hire a chief digital officer and has relaunched products using apps to show the latest colours.

Personalisation is a proven way to increase customer loyalty. L’Oréal brand Lancôme’s tailor-made foundation takes a picture of the customer’s skin and produces a custom-made product. Such offerings allow L’Oréal to build a database of information about their customer’s skin and market other products to them.

Unilever on the acquisition trail

Anglo-Dutch conglomerate Unilever, already the number 2 in beauty, is seeking to add premium beauty brands to its ‘Prestige’ group as it diversifies away from its core food business to products with greater pricing power.

The company has over 400 names in its stable, most of which dominate their local markets. Dermalogica, Hourglass and Ren Skincare are recent purchases that focus on sustainability and are aimed at millennials.

LVMH: bringing it all together

Despite the success of digital and the role of ‘influencers’, traditional advertising channels and physical stores still play an important role for some.

LVMH’s products encompass fashion and leather goods, perfumes and cosmetics, jewellery and retailing. It owns the brands Christian Dior, Louis Vuitton, Givenchy, Marc Jacobs, Thomas Pink, Guerlain and Bulgari.

The company recently acquired US jeweller Tiffany for $16.6bn, illustrating the large sums being paid for strong brands. The plan is to use its marketing power and distribution channels to take the brand more up-market and strengthen its position relative to main competitor Richemont (owner of Cartier, Montblanc and Dunhill).

The company is to re-open a grand department store in the heart of Paris. This may seem a risky strategy but Chief Executive Bernard Arnault describes it as a virtual shop to showcase a growing portfolio of brands. If he is right, it will prove that flagship stores retain their value as a marketing tool. Harrods would no doubt concur!

Emerging markets want western brands

Asia has a young and growing population. It’s estimated that over 2bn people will join the middle and upper classes by 2030 and their spending on aspirational goods is expected to surge.

Spending on beauty products per capita is currently low. Chinese nationals accounted for approximately one in three personal luxury purchases in 2018 but spend was just €60 per person, compared with €176 in the USA and €205 in Japan.

Hermès has launched its own Chinese ecommerce website, following in the footsteps of Louis Vuitton and Gucci. Prada also entered China in 2018 with ‘Prada Spirit’ pop-up experiences whilst Burberry has announced an alliance with Tencent to open a fully digitised store in the country.

Japan well placed

The Japanese already spend more on skin care and cosmetics than any other country but this continues to grow, particularly in male grooming. Its proximity to the rest of Asia means it is well placed to tap into those markets where there is growing recognition of taking pride in appearance.

Shiseido, a leading Japanese beauty company recently reported an impressive 26% of sales coming from China (it has a target of 40%) as their luxury cosmetics lend themselves well to ecommerce and digital marketing.

Funds which value luxury brands

I find it fascinating when a fund invests in companies whose products I admire. It feels good to know I have a stake, however tiny, in the prosperity of that business. Europe is home to several listed luxury good companies and Morningstar bronze-rated BlackRock Europe Dynamic has nearly 6% invested in LVMH.

Meanwhile, Threadneedle European Select, also bronze-rated counts L’Oréal and Pernot Ricard in its top 10 holdings whilst global fund, silver-rated Lindsell Train Global Equity invests in Unilever, Prada, Kao (owner of Molton Brown) and Shiseido (which sells Bare Minerals and NARS in the UK).

Important Information: We do not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.