Will P&G’s Beauty Segment Look Better after Divestment to Coty?
Coty Wins 3 Auctions for P&G Beauty Brands: A Win-Win Deal?
The challenges for P&G’s beauty segment
As we’ve already seen, Procter & Gamble (or P&G) (PG) may have divested three of its fragrances, cosmetics, and hair-care businesses to Coty, Inc. (COTY) for $12 billion.
It may make sense for P&G to divest its more fringe beauty brands. Competition in the segment is fierce and rising. P&G’s global market share for beauty products fell 0.4% in fiscal 2014.
Market share for P&G’s hair-care business fell 0.5%. Volumes in salon professional also fell, as market share eroded and volumes in Europe contracted. The business includes brands like Wella, Clairol, and Vidal Sassoon.
Established brands like Olay are also feeling the heat. Skincare volumes fell last year, as the company faced a challenging market in China. Its two main hair-care brands, Pantene and Head & Shoulders, also faced sales headwinds. Sales were flat for Pantene and down slightly for Head & Shoulders.
Fragrances and cosmetics performance
Volumes for P&G’s fragrances and cosmetics businesses grew last year, primarily on new product launches. But the businesses lack scale to make a more significant impact on P&G’s bottom line.
P&G’s beauty segment reported sales of $19.5 billion in fiscal 2014. The size of the global beauty market is estimated at $300 million. The world’s largest cosmetics firm, L’Oréal (LRLCY), reported sales of $29.9 billion in 2014. Estée Lauder (EL) and Coty (COTY) reported sales of $10.9 billion and $4.9 billion, respectively, in their last fiscal years.
More importantly, cosmetics, fragrances, and hair care are core products for COTY, EL, and L’Oréal (LRLCY) (OR-PA). By divesting smaller brands, P&G can aim for better results from the larger brands in its portfolio, where it enjoys a market leadership position. You can read more about this in the second part of this series.
Procter & Gamble (PG) is a consumer staples stock. It’s the top holding in the Consumer Staples Select Sector SPDR Fund (XLP), with 11.9% weight.
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