If you can’t beat it, buy it: The retail trends behind fashion and beauty’s biggest mergers in 2017

December 22, 2017

2017 saw a constant stream of successful mergers and acquisition, rumored buyouts and unfinished deals. The theme of all these fashion and beauty deals: If you can’t beat it, buy it.

Whether that’s a customer set, a technology skill or the label of your closest competitor, fashion and beauty legacy companies are shelling out more in acquisition dollars than ever before, according to a survey by Deloitte that showed acquisition spend increase by 30 percent in 2017 in the fashion and beauty sectors.

“This is the new normal. Brands in this sector can’t make the assumption that any business will grow from 2 to 3 percent a year on its own anymore,” said Antony Karabus, CEO of HRC Retail Advisory. “You have to figure out how e-commerce is cannibalizing your business, how Amazon is cannibalizing your business, and how to make money going forward. That’s absolutely critical.”

Tracking the year in mergers and acquisitions is a telling way to understand the underlying forces that are shaping the retail industry. Here are the biggest trends that emerged from 2017’s biggest buys.

The Walmart vs. Amazon rivalry ramps up
The retail rivalry between massive companies Walmart and Amazon created a new exit path for digitally native companies — one their customers don’t particularly love. This year, Walmart acquired indie women’s fashion brand ModCloth for between $50 and 75 million dollars, modern menswear brand Bonobos for $300 million, outdoor apparel company Moosejaw and online footwear retailer Shoebuy.com. Signal the sell-out alarm.

“A loyal customer base questions the significance of the brand once it has ‘sold out’ [to Walmart],” said Emily Kahn, branding consultant at the firm Vivaldi, at the time of the Bonobos acquisition in June. “For Walmart, they’re diversifying their portfolio. They need to grab more online spend.”

Walmart’s efforts to bulk up its fashion and apparel category through a series of digital brand acquisitions took shape in order to compete directly with Amazon. While Amazon’s biggest acquisition of the year was in the grocery market, not fashion, with its near $14 billion purchase of Whole Foods, it still made headway in the category. In March, the company acquired Souq.com, the biggest fashion e-commerce company in the Middle East, for $800 million. It also inked a deal with online beauty retailer Violet Grey, in which Violet Grey will list a curated selection of products on Amazon for 20 percent commission.

The majority of Amazon’s fashion moves took place in house with a private-label buildout, but rumors floated that the company was eyeing a bevy of fashion brands, including Asos, Everlane, Le Tote, Zalando and even Nordstrom.

“Expect this competition to heat up,” said Karabus.

Beauty deals follow customer dollars
Thanks to the rise of indie beauty brands and the avid social media fan bases that fuel them, there’s an apparent power shift taking place in the industry. In response, legacy beauty and consumer package goods companies are opening their wallets and buying up the competition at a rapid pace. Most often, the deals are in pursuit of purchasing a new industry sub-category that customers are gravitating towards.

This year, Unilever made the most moves, purchases cosmetics brand Hourglass, premium hair styling brand Living Proof, Korean cosmetics brand Carver Korea, all-natural deodorant brand Schmidt Naturals, and ethnic personal-care company Sundial, which owns Shea Moisture, Madame CJ Walker and Nubian Heritage brands.

While young cosmetic brands like Urban Decay, Tarte, Too Faced and Becca were bought for big dollars in 2016, this year, companies gravitated toward trends like natural beauty and skin care. Estée Lauder made an investment Deciem – The Abnormal Beauty Company, which owns nine skin-care brands, while L’Oréal bought CeraVe, AcneFree and Ambi skin-care brands for $1.3 billion. P&G made its first acquisition since 2009 when it bought natural skin-care brand Native for $100 million.

The lesson: The list of desirable color cosmetics brands has dried up, while plenty of brands in skin care, prestige hair care, natural beauty and Korean beauty are still on the table.

Contemporary consolidation continues
As fashion customers float to the high- and low-end of the brand spectrum, mid-tier and contemporary brands have found themselves in tough spot. So, they joined forces.

The biggest deals: Coach Inc.’s $2.4 billion acquisition of Kate Spade in May, and Michael Kors Holding Group’s $1.2 billion purchase of Jimmy Choo in July. Both Michael Kors Holding Group and Tapestry, which Coach, Inc. rebranded to this fall positioned their purchases as the early makings of forthcoming global luxury groups, one of which has yet to be established in the U.S.

But what they’re really playing at is a chance at survival.

“Coach wants to reach a more millennial customer, but it’s too dangerous for them to create a brand derivative and stretch their brand further,” said Steven Dennis, founder of the luxury and retail consulting firm SageBerry and former svp of strategy at Neiman Marcus. “If you want to capture the current state of mid-level luxury, consider the fact that Coach and Kate Spade are two brands that can no longer stand on their own.”

As Michael Kors bets on the prestige footwear category to bolster it up, PVH Corporation also shared plans to make acquisitions, adding to its portfolio that includes Calvin Klein and Tommy Hilfiger. In 2017, it acquired the online lingerie startup True & Co., which is known for its online quiz that matches a customer to the proper bra using data algorithms.

Expect more of this space to come together as the brands fight against falling foot traffic and Amazon’s growing influence.

“This is not cyclical. This is seminal,” said Antony Karabus, CEO of HRC Retail Advisory. “This is never going to get better, this is only going to get worse. E-commerce is going to continue to grow and Amazon will continue to take market share, and weaker retailers are dying off one by one.”