All-New Coty Growth Strategy Revealed, Stock Briefly Tops $10
Global beauty giant Coty
plans to accelerate its luxury fragrance business, with bigger contributions from skincare and prestige cosmetics led by Gucci and Burberry, while also repositioning and rejuvenating its mass brands like CoverGirl, Rimmel and Max Factor.
Ahead of revealing its quarterly results on May 10, the New York-based company laid out its long-term strategy on Friday. Investors have responded positively sending the share price up by 8% this morning. At 11am it broke through $10, the first time it has reached that price in more than a year.
Coty—whose new CEO Sue Y. Nabi took over in September 2020—has outlined six priorities it believes will underpin sustainable growth. Nabi, a former L’Oréal Group veteran, said in a statement: “We anticipate a rebound in demand for beauty products as pandemic restrictions ease, led by luxury beauty, clean beauty, China and skincare. Our performance will be supported by a purpose-led portfolio anchored in luxury.”
The priorities she has set out aim to:
• Stabilize consumer beauty make-up brands and mass fragrances
• Accelerate luxury fragrances and make Coty a key player in prestige make-up
• Build up a skincare portfolio across both prestige and mass divisions
• Enhance e-commerce and direct-to-consumer (DTC) capabilities
• Expand in China through prestige and select consumer beauty brands
• Establish Coty as a leader in sustainability.
Some of these strategies have already been adopted successfully by rivals such as L’Oréal and Estée Lauder
—particularly on the e-commerce and China fronts. Additionally, Coty’s plans will encroach on territory heavily guarded by those bigger players—especially when it comes to skincare, a category that has been a solid performer during the pandemic.
E-commerce might be Coty’s biggest opportunity
Both L’Oréal and Estée Lauder are also strong—and ambitious—on e-commerce and DTC though, in these channels, there is plenty of room for brands. L’Oréal’s deputy CEO Nicolas Hieronimus—soon to take the top job from May 1—recently talked about how ‘algorithm mechanics’ favor big brands. This is something Coty can benefit from given that it’s licensed portfolio includes heavyweights like Boss, Burberry, Calvin Klein and Gucci. In the six months to December (the first half of FY21), e-commerce accounted for 17% of Coty’s sales. At L’Oréal, e-commerce is currently 27% of the business so there is ample opportunity there.
Coty will want to keep costs down and turn a downward sales trajectory around in order to improve profitability—but it will take time. For FY20 (ended June) revenue declined steeply to $4.7 billion from 2019’s $6.3 billion, and 2018’s $6.8 billion. Across all three years the company has made a loss. Revenue guidance for the current FY21 remains lackluster at between $4.5-4.6 billion.
For a revival, Coty is also making sustainability a cornerstone. The company believes this will enable its brands to capitalize on consumer demand for beauty products that are clean and green. Through its ‘Beauty That Lasts’ platform the U.S. beauty house will integrate sustainability and product development and use an index to ensure that robust sustainability criteria are built into the R&D division.
Coty’s plan to strengthen its consumer beauty segment relies on rejuvenating and repositioning several brands: CoverGirl, Sally Hansen, Rimmel, Max Factor, and adidas.
CoverGirl—celebrating its 60th anniversary this year—will get extra focus to appeal to a broader U.S. consumer base. This will be through new launches focused on clean make-up and make-up/skincare hybrid products. A major new marketing campaign for anti-aging foundation Simply Ageless launches next week fronted by supermodel Niki Taylor who was a CoverGirl ambassador in the 1990s.
Weaknesses that need addressing
One of Coty’s biggest weaknesses has been skincare. At a time when the segment has been booming it only accounts for 6% of sales, while prestige fragrances dominate at 52%. Compare that to Estée Lauder’s 58%.
Coty wants to build out skincare at both mass and prestige price points to deliver over 10% of the revenue mix by FY25. The company plans to extend several of its strong designer and consumer beauty brands into the category. It currently has three skincare brands including Lancaster, with a fourth, SKKN by Kim, launching in FY22.
China, and Asia Pacific in general, is another weak area for Coty. In FY20 the region—which is driving significant growth for its competitors—only contributed 12% of sales. At L’Oréal that contribution is currently 32%.
Coty wants to boost its luxury business and its core segment of prestige fragrances by adding prestige cosmetics and skincare which will have appeal in China. By FY2025, the company wants high-end cosmetics to go from a 3% share now to a high single digit percentage while also looking to make China 10% of its revenue mix, triple what it is now.
The company has had some successes with luxury cosmetics and skincare. For example, in the past nine months, sell-out of Gucci cosmetics grew by over 110% in the U.S. and by over 50% in Asia Pacific, while Gucci foundation sold more than 60,000 units in two months. That, however, could be in part by riding on the coattails of the Italian brand’s enormous popularity in recent years.
Gucci Beauty has, since launching on Tmall in February, become one of top four luxury beauty brand openings since 2018. Coty believes that other ‘artisanal’ fragrance brands in its stable such as Chloe, Tiffany & Co.
, and Bottega Veneta, could replicate that success.
The company is also hoping that its presence in the duty-free channel at high-growth locations like Hainan will enable it to capture market share and growth in the rest of China. Gucci and Burberry saw sell-out last year at three times 2019 levels in Hainan, but leveraging that on the mainland might not be easy.
Coty is up against powerful brands already entrenched in the market—not just from pure-play beauty houses like Estée Lauder and L’Oréal, but LVMH’s portfolio which includes powerful brands like Dior and Guerlain, as well as Shisiedo’s brands.
Nabi is not deterred. She said in an investor presentation: “Coty is a unique beauty company that is at an inflection point. We have one of the most comprehensive portfolios in the industry and significant potential among our highly-desirable luxury licences. We have a new sense of urgency and this will help us to grow 15-20 key brands (out of about 70) and phase out low-quality sales.”