Procter & Gamble and Coty: The beauty brand divestiture
As discussed in previous articles, Procter & Gamble (or P&G) (PG) may have divested three of its business lines to Coty, Inc. (COTY) for $12 billion. The businesses reportedly include brands in fragrances, cosmetics, and hair care.
P&G’s perfumes portfolio includes Hugo Boss, Dolce & Gabbana, Gucci, and others. Its cosmetics brands CoverGirl and Max Factor and hair-care brand Wella may also be included in the sale. Both companies however, haven’t confirmed the transaction.
Beauty segment dynamics
Head & Shoulders, Pantene, Olay, SK-II, and Wella are billion dollar brands in P&G’s beauty segment. Olay is the world’s number-one skincare brand with 8% global market share. P&G also enjoys market share of more than 20% in retail hair care and salons on the strength of its Head & Shoulders and Pantene brands.
Cosmetics brands CoverGirl and Max Factor are some of the smaller brands in P&G’s beauty segment. While these brands have been performing well lately, their annual sales are less than a billion dollars. They compete in a highly fragmented beauty market, worth $300 billion globally.
Sales for P&G’s beauty segment have fallen for two straight years. In fact, at $19.5 billion in fiscal 2014, it’s almost flat from levels in fiscal 2010.
Peer group performance
P&G’s beauty segment earned net income of $2.7 billion on sales of $19.5 billion in fiscal 2014. P&G’s net income margins trail L’Oréal’s (LRLCY). L’Oréal is the world’s largest cosmetics company. L’Oréal clocked sales of $29.9 billion, earning net income of $6.5 billion in 2014. Organic sales growth has been slower, as you can see in the above graph.
Divesting its smaller beauty brands can help P&G focus on businesses that are most likely to have a more significant impact on the company’s top and bottom lines.
The Vanguard S&P 500 ETF (VOO) provides exposure to PG, its tenth largest holding. The fund invests 9.5% of its holdings in consumer defensive companies.
COTY is part of the portfolio holdings for the First Trust Consumer Discretionary AlphaDEX ETF (FXD). FXD invests 2.2% of its holdings in personal products companies.