Cosmetics deal with Kylie Jenner delivered promise and peril for Coty

On the eve of a deal to acquire one of the hottest new names in makeup, the directors of struggling beauty giant Coty Inc. had unconventional concerns.

Will sales drop if the CEO decides to have another child? Can a 22-year-old social media star reliably stay out of trouble? What role will his mother play?

Last year, Coty hatched a plan to pay $ 600 million for a controlling stake in cosmetics startup founded by “Keeping Up with the Kardashians” star Kylie Jenner, an initiative to revive a beauty business. dependent on drugstore staples like Cover Girl and Max Factor.

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Coty’s principals ultimately decided that Kylie Cosmetics’s metrics – $ 200 million in annual revenue with less than a dozen employees and virtually no ad spend – outweighed their concerns. The assurances of Ms Jenner’s mother, Kris Jenner, who helped launch the business in 2015 and led the negotiations, were also compelling.

A year after closing the deal, Kylie Cosmetics both beefed up its new parent company and dealt it a few hits, though none that the company initially expected.

The deal gave Coty a hot brand with social media awareness and a new skincare line, a segment women have recently spent more on.

When Coty announced the deal in November 2019, executives said the plan was to merge Kylie’s broad appeal and straightforward business structure with Coty’s reach and capabilities in manufacturing and research and development. Company executives said they plan to eventually resume production of Kylie makeup and expand the brand both geographically and into the fast-growing and lucrative skincare category.

Ms. Jenner has a social network similar to Nike or Starbucks, Coty CEO Sue Nabi said in an interview. “On the one hand, Kylie Jenner knows what people are looking for next,” she says. “Then you combine that with the fantastic machines from a company that is Coty.”

Peter Harf, executive chairman of Coty, praised the deal on a recent call with Wall Street analysts. “Personally, I think it’s a brand that could reach, I mean, hundreds of millions,” he said. “It could very, very soon be the biggest brand we have.”

Via a spokesperson, Kylie Jenner and her “mom” – or mom-manager – Kris Jenner, both declined to comment.

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But the fallout from the coronavirus pandemic has hampered Kylie Cosmetics production this summer while spawning trends that analysts say could hurt the brand’s sales.

Without disclosing any numbers, Coty executives said Kylie Cosmetics sales have been depressed this year by supply chain disruptions linked to Covid. The company said sales of Kylie Skin – which launched in early 2019 and includes facial moisturizers, body scrubs and serums – tripled in the quarter compared to the same period a year earlier. Coty said Kylie Skin hit $ 25 billion in sales in 2019.

Teleprinter	security	Latest	Change	Change%
COTY	COTY INC.	7.00	+0.04	+ 0.57%
OF	NIKE INC.	144.95	+2.60	+ 1.83%
SBUX	STARBUCKS CORPORATION	103.35	-0.84	-0.81%

A third-party estimate says that excluding Kylie Skin and in-store sales, revenue has dropped 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 lawsuit that it played a key role in the company’s early success and claims Ms. 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 stable of luxury fragrances, has melted since acquiring dozens of beauty brands from Procter & Gamble Co. in 2016. Coty stock has lost 70% of its value since that deal, and last year the company took $ 4 billion in write-downs on P&G operations.

Kylie Cosmetics came on the company’s radar as she sought an acquisition that would offer growth potential and an entry into the influencer-fueled beauty world and aimed directly at consumers.

In discussions with Coty, Kris Jenner played the role of deal maker, working closely with Mr. Harf, the president of the company. He is one of the two managing partners of JAB Holding Co., Coty’s largest shareholder.

Coty said last January that he was installing Christoph Honnefelder, an executive at European specialty retailer Douglas, as CEO of Kylie Cosmetics. He resigned his post in June, Coty said, citing personal reasons. Mr. Honnefelder declined to comment.

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Instead, Coty installed their Luxury Brands Manager to manage Kylie Cosmetics. As he continued to build the newly acquired unit, Coty also increased his bet on the Kardashian-Jenner clan. In June, Coty said he would pay $ 200 million for about 20% of the makeup brand owned by Ms. Jenner’s reality TV star sister Kim Kardashian West, KKW Holdings LLC.

Ms Jenner was 18 when she launched Kylie Cosmetics, selling lip pencils and nude lipsticks promising fuller lips. She had previously admitted to using fillers to increase her lips amid the controversy over her look. Kylie Cosmetics’ first products were $ 29 “lip kits”, which combine pencil and matte liquid lipstick to make lips fuller.

Ms. Jenner has amassed a legion of loyal customers including Kristi Murguly, 24, who says she owns between $ 8,000 and $ 10,000 worth of Kylie Cosmetics products. The products are sold online, in department stores and at specialty retailers such as Sephora. The Kylie Cosmetics and Kylie Skin lines are more expensive than most drugstores, with offers that include a $ 12 lip gloss and a $ 24 facial moisturizer. Expensive limited-edition bundles are popular among devotees who, like Ms. Murguly, are spending hundreds of dollars on a new release.