- The Kylie Cosmetics merger comes in the wake of a sectorial recession.
- Analysts highlight some risks about the merger.
- Jenner's large and devoted fan base is essentially hard-to-reach.
Last Monday, reality TV star Kylie Jenner sold a 51 percent stake of her company, Kylie Cosmetics, to Coty for a whopping $600 million. Coty shares spiked momentarily following the news, and reached $12.22, but have now receded to $11.53 per share.
Reasons behind the pullback are unclear, but some market pundits and investors believe that Coty overpaid, hence the 5.5 percent decline since the merger. Coty currently owns other notable brands such as Rimmel London, OPI, CoverGirl, and Sally Hansen.
The Kylie Cosmetics takeover comes in the wake of an industry-wide slump. The cosmetics sector is having a hard time selling products as more women choose to embrace the au naturel look. According to recent report by Vogue Business, consumers are opting to invest in skincare products than on colored cosmetics.
Major companies such as L’Oréal and Estée Lauder are currently experiencing diminishing sales. Their moisturizer lines are said to be the only segments experiencing growth right now. The makeup boom that was initially propelled by the selfie trend is believed to be losing momentum. According to Vogue, consumers are realizing that healthy skin is ultimately more important. Cosmetics companies that are thriving right now typically have widespread supply lines and maintain a connection with the younger generation of consumers.
This explains the reason behind the Kylie Cosmetics merger. Kylie Jenner, who is now 22 years of age, has access to this rare demographic of loyal celebrity fans and beauty enthusiasts. She currently has over 150 million followers on Instagram, 22 million on Facebook, and 29 million on Twitter. Her devoted fan base is essentially hard-to-reach. Coty is seemingly also buying the influence, which costs a premium. Kylie’s promotional involvement plus Coty’s distribution reach is expected to improve margins in the long-term.
A Few Highlighted Risks
Some analysts believe that the company’s valuation is overinflated. Kylie Cosmetics has, for example, been revealed to have generated just $177 million in sales in the past 12 months. These numbers are much lower than those reported by major media houses within the past year. Most estimations indicate than the company had revenues of at least $360 million within this period.
Some market observers have warned that Coty is taking on a significant risk by buying into a company with a celebrity branding. This is primarily because their popularity ebbs and flows with that of the celebrity.
Coty CEO Pierre Laubies, however, has a different view about this. The following is his statement regarding the argument.
“Combining Kylie’s creative vision and unparalleled consumer interest with Coty’s expertise and leadership in prestige beauty products is an exciting next step in our transformation and will leverage our core strengths around fragrances, cosmetics and skincare, allowing Kylie’s brands to reach their full potential.”