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On the verge of an agreement to acquire one of the hottest new makeup names, the directors of besieged beauty giant Coty Inc. had some unconventional concerns.
Will sales fall if the chief executive decides to have another child? Can a 22-year-old social media star stay out of trouble with security? What role will your mother play?
Last year, Coty was plotting a plan to pay $ 600 million for the equity control of the cosmetics startup founded by Kylie Jenner, star of “Keeping up with the Kardashians,” a move that aims to revive a beauty business dependent on basic drugstore products like Cover Girl and Max Fator.
KIM KARDASHIAN WEST BEAUTY LINE AND GREAT FUTURE COTY PLAN WHEN CLOSING $ 200M DEAL
Coty’s directors ended up deciding that Kylie Cosmetics’ indicators – $ 200 million in annual revenue with fewer than a dozen employees and virtually no advertising spend – outweighed their concerns. Also convincing were the assurances of Ms. Jenner’s mother, Kris Jenner, who helped launch the company in 2015 and led the negotiations.
A year after closing the deal, Kylie Cosmetics reinforced its new parent company and gave it a few hits – although none that the company had initially foreseen.
The deal gave Coty a hot brand with experience in social media and a new line of skin care, a segment in which women have invested more recently.
When Coty announced the deal in November 2019, executives said the plan was to combine Kylie’s broad appeal and core business structure with Coty’s reach and capabilities in manufacturing, research and development. Company executives said they planned to take over the production of Kylie makeup and expand the brand geographically and in the lucrative and growing skin care category.
Jenner has a social network of followers similar to that of Nike or Starbucks, Coty CEO Sue Nabi said in an interview. “On the one hand, you have Kylie Jenner knowing the next thing people are looking for,” she said. “So you combine that with the fantastic machinery of a company that is Coty.”
Peter Harf, Coty’s chief executive, praised the deal in a recent call with Wall Street analysts. “I personally think this is a brand that can reach, that is, hundreds of millions,” he said. “It may very, very soon be the biggest brand we have.”
Through a spokeswoman, Kylie Jenner and her “momager” – or manager mother – Kris Jenner, declined to comment.
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But the side effects of the coronavirus pandemic hurt Kylie Cosmetics’ production this summer, while sparking trends that analysts said could hurt brand sales.
Without revealing figures, Coty executives said sales of Kylie Cosmetics fell this year because of disruptions in Covid’s supply chain. The company said sales of Kylie Skin – which launched in early 2019 and includes facial moisturizers, body scrubs and serums – tripled in the quarter that ended in October, compared to the same period last year. Coty said Kylie Skin reached $ 25 billion in sales in 2019.
| Ticker | Safety | Last | change | Change % |
|---|---|---|---|---|
| COTY | COTY INC. | 7.00 | +0.04 | + 0.57% |
| NKE | NIKE INC. | 144.95 | +2.60 | + 1.83% |
| SBUX | STARBUCKS CORPORATION | 103.35 | -0.84 | -0.81% |
A third-party estimate indicates that, excluding Kylie Skin and in-store sales, revenue fell significantly in 2020.
The acquisition also faces another challenge: a lawsuit filed in June by the private label manufacturer that manufactures and distributes Kylie Cosmetics products. Seed Beauty LLC, based in Oxnard, Calif., Claims in the process that it played a key role in driving the company’s initial success and that Jenner shared trade secrets with Coty as part of the deal.
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Coty, whose brands also include Clairol hair dye, OPI nail polish and a range of luxury fragrances, has sunk since the acquisition of dozens of beauty brands from Procter & Gamble Co. in 2016. Coty’s shares have lost 70% of their value since that deal, and the company last year earned $ 4 billion in write-offs from the P&G business.
Kylie Cosmetics entered the company’s radar when it was looking for an acquisition that would provide growth potential and entry into the world of consumer-driven beauty, driven by influencers.
In conversations with Coty, Kris Jenner played the role of negotiator, working closely with Harf, the company’s president. He is one of the two managing partners of JAB Holding Co., Coty’s largest shareholder.
Coty said last January that it was installing Christoph Honnefelder, an executive at European specialty retailer Douglas, as CEO of Kylie Cosmetics. He resigned from office in June, he told Coty, citing personal reasons. Mr. Honnefelder declined to comment.
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Instead, Coty installed its head of luxury brands to manage Kylie Cosmetics. As it continued to build the newly acquired unit, Coty also increased its stake in the Kardashian-Jenner clan. In June, Coty said it would pay $ 200 million for about 20% of the makeup brand owned by Jenner’s star sister, Kim Kardashian West, KKW Holdings LLC.
Jenner was 18 when she started Kylie Cosmetics, selling lip liners and nude lipsticks that promised the appearance of fuller lips. She had already recognized the use of fillers to enlarge her lips amid controversy over her appearance. Kylie Cosmetics’ first products were $ 29 “lip kits” that combine a pencil and matte liquid lipstick to make your lips look fuller.
Jenner has amassed a legion of loyal customers, like Kristi Murguly, 24, who claims to have between $ 8,000 and $ 10,000 in Kylie Cosmetics products. The products are sold online, in department stores and at specialized retailers such as Sephora. The Kylie Cosmetics and Kylie Skin lines are more expensive than most pharmacies, with offers that include lip gloss for $ 12 and facial moisturizer for $ 24. Expensive limited edition packages are popular with loyalists who, like Murguly, spend hundreds of dollars on a new release.