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Consumer Giants Turn From Diapers and Detergent to Eye Rollers and Jelly Masks

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07/21/2019 | 05:45am EDT

By Sharon Terlep and Jaewon Kang

Facing stagnant sales of household mainstays from diapers to detergent, the world's biggest consumer-products companies are trying to crack the lucrative market for influencer-pitched, millennial-approved skin-care products.

Long the domain of beauty companies, household-goods makers such as Procter & Gamble Co., Colgate-Palmolive Co. and Unilever PLC have begun snapping up skin-care startups selling pricey creams, serums and lotions while relying on Instagram and Sephora, a U.S. beauty chain, to drive sales instead of drugstores and shopping malls.

Colgate said on July 11 it would pay $1.7 billion for Filorga, a luxury French skin-care line. Last year, P&G bought two high-end skin-care companies, First Aid Beauty and Snowberry, for several hundred million dollars.

In the past two years, consumer-products companies acquired nearly a dozen skin-care brands, far more activity than in previous years, according to Dealogic.

Drunk Elephant LLC, a popular skin-care startup that touts limited ingredients, is considering a sale and has drawn interest mostly from consumer-products companies, said people familiar with the matter.

Makers of household goods are striking such deals partly because they are being squeezed by both demographic and competitive pressures. Americans are having fewer babies and households are shrinking, denting demand for staples. Consumer-products companies haven't returned to prerecession sales growth, and analysts don't expect sales gains to accelerate in the near term.

Consumers, meanwhile, are increasingly gravitating to smaller, niche and online-only brands that are stealing share from big names like Gillette razors and Colgate toothpaste.

In contrast, skin-care products represent a lucrative and fast-growing global market, attractive to more millennials and men while still holding appeal for aging baby boomers. Sales are growing in overseas markets as well, particularly in Asia, where the expanding middle classes are willing to spend big on better skin.

Mainstream offerings have grown well beyond basic cleansers, night creams and face masks, to include a range of serums and products from facial oils to charcoal acne treatments. P&G's First Aid Beauty's products include a $26 detox eye roller and a $32 jelly mask. Colgate's Physician Care Alliance Skin charges $100 for a 1-ounce tube of "antioxidant corrective."

Skin care is a $135 billion global industry, more than cosmetics and fragrances combined, according to Euromonitor. Sales of skin-care products have grown more than 30% since 2013.

All that adds up to bidding wars for trendy names, bankers and consultants say, with deep-pocketed consumer companies driving up valuations.

"We see a race right now for these brands," said Gary Stibel, chief executive of New England Consulting Group. "Our clients are looking to acquire and they are prepared to pay more than we think they should pay for beauty startups."

Skin-care product makers tend to be a better fit for big consumer companies than makeup or fragrance brands, Mr. Stibel said, because they are more reliant on efficacy and less style-driven. While the brands strategically make sense, companies are overpaying in a rush to drive sales growth, he said.

P&G's recent activity comes a few years after the company sold most of its beauty business to Coty Inc. in a $12 billion deal. The unloaded brands -- mass-market names such as Cover Girl and Clairol -- have proven costly for Coty, which has struggled since the acquisition.

One of the beauty brands P&G kept, SK-II, a high-end Japanese skin-care line popular in Asia, has been growing sales. Another, drugstore perennial Olay, has received a makeover as P&G works to restore the brand to growth.

P&G historically has focused on skin-care products with broad appeal, such as Olay, a mainstay of drugstores, grocery stores and big-box retailers. The company sees rising demand among younger women who, in addition to investing in skin-care as early as their 20s, are building regimens involving an array of products. A woman in her 20s or 30s who buys skin-care products on average uses six products daily and spends about $260 a year, a company spokeswoman said.

Whereas brands and dermatologists once had to convince people to consider skin-care regimens, "now women are more educated about skin-care and are proactive about investing in their skin at a younger age," the spokeswoman said.

Brands in demand play to niche markets, from products with all-natural ingredients to lines with a medical pedigree. They are mostly companies founded in the past decade or so, often by entrepreneurs who found their audience on social media, and existed only online before moving into retailers.

Unilever has been a prolific buyer of beauty brands over the years, having purchased names such as Hourglass, Kate Somerville and Dermalogica. In June, the company agreed to pay about $500 million for Japanese beauty-inspired skin-care company Tatcha, people familiar with the matter said. The price tag equates to a multiple of nearly five times its projected revenue for 2019, the people said.

Unilever, which looked at Tatcha during its previous capital-raise process in 2017, approached the business earlier this year and pre-empted a broader auction, the people said. Bidders in sunscreen brand Sun Bum's auction, too, were mostly other companies, including consumer conglomerates, the people said. S.C. Johnson & Son Inc. struck a deal in June to buy the brand.

"These businesses are trying to sustain their growth profile," said Rich Gersten, a partner at private-equity firm Tengram Capital Partners who specializes in backing beauty brands. "And one of the main ways to do that is through M&A."

Write to Sharon Terlep at sharon.terlep@wsj.com and Jaewon Kang at jaewon.kang@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
COLGATE-PALMOLIVE COMPANY 0.59% 73.04 Delayed Quote.22.72%
PROCTER & GAMBLE COMPANY 0.18% 119.42 Delayed Quote.29.92%
UNILEVER ADR -0.44% 60.55 Delayed Quote.12.55%
UNILEVER PLC -1.80% 5025 Delayed Quote.22.31%
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