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Kering\’s Creed Buy Meets the Smell Test for Gucci Owner

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By

Bloomberg

Published



Jun 28, 2023

There’s a new beauty behemoth on the block. Kering SA’s acquisition of high-end fragrance house Creed is the first step in the Gucci owner building a powerful position in fragrance, and potentially cosmetics and skin care. 

Creed

Kering has made no secret of its desire to break into beauty, where bigger rival LVMH already has a sizable business.

No financial terms were disclosed for the deal, but Kering said Creed — which it is buying in cash from BlackRock Long Term Private Capital Europe and the fragrance house’s Chairman Javier Ferrán — had sales of more than €250 million ($274 million) and very high margins, in the year to March 31.

Beauty brands don’t come cheap. Analysts at RBC Capital Markets estimate that comparable businesses have recently changed hands for about four times sales and 20 times earnings before interest, tax, depreciation and amortization. This would imply an enterprise value for Creed of €1 billion to €2 billion ($1.1 billion to $2.2 billion), they said, and more likely toward the upper end.

The usual playbook is for a beauty giant — such as L’Oreal SA, which recently bought Aesop for $2.5 billion, and Estée Lauder Cos., which last year splashed $2.3 billion on the Tom Ford brand — to pump perfume, face cream and lipstick through their established distribution networks, lifting sales and making the high purchase price look better value to investors.

Kering’s rationale is different. Creed is about building a bridgehead in beauty. Here, the company has chosen wisely.

To establish a convincing position, Kering needs to begin with fragrance.  

Creed operates at the very highest echelons of the perfume market, which is worth about €5 billion ($5.5 billion) in total, according to consultants Bain & Co. For example, its signature male scent Aventus sells for €295 ($323) per 100 mls.

Creed, established in 1760, has credibility in the “haute parfumerie” segment, which is expanding at least three times the rate of premium and mass-market categories, as consumers trade up to luxury, artisanal fragrances.

Along with a global market share of about 10%, Creed also brings manufacturing, research and development and distribution capabilities.

The business is strong in men’s fragrances, as well as in the US and UK. But there are opportunities to expand in Europe, China and other parts of Asia. Women’s fragrances and travel retail are other promising categories, along with home and body scents. It won’t be as easy for Kering to tap into these streams as rivals L’Oreal or Estée Lauder, which have established beauty distribution networks.

But Kering is a master of transforming fashion brands, which bodes well for developing women’s products. It also has a store network in Asia and strong e-commerce capabilities.

And this deal is about building scale and a platform for the future, not just for Creed. Kering has already brought some fragrance brands in-house, including Alexander McQueen, Bottega Veneta and Balenciaga, previously produced by Coty Inc. This was part of the creation of Kering Beauté, led by former Estée Lauder executive Raffaella Cornaggia, in February.

But the big prize would be to bring Gucci’s beauty and fragrance business into the Kering fold. It’s currently licensed to Coty, but analysts at Barclays Plc estimate that this arrangement could expire around 2027.

Longer term, if the fragrance push is successful, then it’s also possible that Kering could eventually produce and distribute perfume for brands outside of the group, luxury consultant Mario Ortelli told me.

This would be following the strategy in eyewear, where Kering took this business in-house around eight years ago. It now produces eyewear for Cartier owner Richemont

Further down the line, Kering should look to develop color cosmetics and skin care capabilities, although in the latter category it could face competition for deals from LVMH. Skin care is one of the few areas where the world’s biggest luxury company punches below its weight. 

For Kering, bulking up in beauty would be particularly advantageous as it would reduce its reliance on Gucci, which last year accounted for about half of its sales and around two-thirds of operating profit but hasn’t been firing on all cylinders.

Kering and LVMH each have deep pockets, so there’s another reason why the Creed deal stands out.

Sellers of fragrance, beauty and skin-care businesses have already been able to command high prices as the likes of L’Oreal, Estée Lauder, as well as Coty and Uniliever Plc battle it out for attractive brands, particularly those that appeal to younger consumers.

With Kering now signaling serious intent in beauty, that should smell good to the founders and financial sponsors seeking an exit. 

 



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