A beautiful buy?

For that alabaster complexion

Looking good does not come cheap. Just ask Coty, the self-proclaimed “world’s largest fragance company”. Last month the New York-based firm bought nail-care OPI Products and beauty company Philosophy – both for about $1 billion – plus Dr Scheller Cosmetics of Germany for an undisclosed fee.

Then last week, it spent a further $400 million on TJoy, a Chinese skincare label.

If you’re unfamiliar with TJoy, you are not alone. In fact, TJoy isn’t a household name, even in China. But the Chinese company, established in 1995 and headquartered in Suzhou, owns a series of famous skincare brands – one being Pure Plant Extract – which are sold in supermarkets in second and third-tier cities.

Analysts say Coty sees a chance to build up its own brand business in China using TJoy’s existing distribution channels. It will also be hoping to interest more Chinese women in its extensive range of celebrity and fashion fragrances, including lines for Jennifer Lopez, Vera Wang and Marc Jacobs.

Has Coty made the right move? For a start, TJoy has a market share in China estimated at 1%. Worse, reports 21CN Business Herald, an insider is saying that TJoy has over-diversified in its own product profile, and is struggling to manage its expansion. “China’s cosmetics companies usually face more and more operational problems as their scale increases, especially while they are facing competition from international fragrance giants,” the insider is quoted as saying.

Analysts say smaller companies often struggle as they try to grow – some blame management skills, others point to limited access to funding. Chinese companies sometimes overdiversify, or hold on too long to a struggling business unit rather than restructure it. All this leads to private businesses being easy targets for foreign takeovers, says the Southern Metropolis Daily.

That looks true in skincare. Coty’s deal comes after Johnson & Johnson bought Beijing Dabao Cosmetics in 2008. L’Oreal bought Mininurse, a mass-market skincare brand in 2003. More patriotic observers are worried that the Coty acquisition is another example of a homegrown label being replaced by a foreign one. “More homemade cosmetic brands will disappear in supermarkets as purchases by foreign brands continue,” Feng Jianjun, a cosmetics marketing expert, told the Global Times. Feng explained that there are fewer than 10 domestic cosmetic brands with annual sales in the Rmb1 billion ($150 million) range in China.

Perhaps understandably, Chuang Wenyang, chairman and founder of TJoy, is rather less concerned. He sees the deal as a significant milestone for TJoy and is confident that the combined businesses will enjoy rapid growth through Coty’s global reach and marketing expertise.

Coty is not a stranger to China. The fragrance giant shed its direct China operations in 2004 by selling the skincare brand Yue-Sai, a company it purchased back in 1996, to L’Oreal. Today, the three biggest manufacturers, L’Oréal, Procter & Gamble of the US and Japan’s Shiseido, together account for more than one-third of China’s skincare market, says Euromonitor.

This time round, through the TJoy deal, Coty will also get access to an increasingly profitable segment: men’s skincare. The mainland company’s portfolio includes male grooming products (as reported in issue 63, L’Oréal owes part of its current success to appearance-conscious men in China). In fact, the French group says the retail sales market for men’s skincare products in the country rose 27% last year and is up 40% this year – about five times the growth for women’s skincare products.

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