Deal analysis: Estée Lauder plays the long game with Tom Ford acquisition

Estée Lauder’s purchase of fashion house Tom Ford for $2.3bn last month is by far the biggest deal the beauty industry has seen for some time. There have been plenty of smaller transactions, such as Puig’s acquisition of fragrance brand Byredo, L’Oréal investing in Japanese personalized beauty start-up Sparty and Shiseido’s investment in Perfect Corp, but nothing on this scale.

The deal, expected to be funded through a combination of cash, debt and $300 million in deferred payments to the sellers, might make a dent in Estée Lauder’s bank balance, but in the long run the beauty giant will reap the rewards, according to GlobalData.

“Its acquisition of Tom Ford will better enable Estée Lauder to compete with L’Oréal as it is adding another in-demand, luxury and high-performing brand to its portfolio, evolving its offer which is important to ensure it remains relevant to consumers,” ​Sofie Willmott, sector head for health & beauty at GlobalData, told CosmeticsDesign-Europe.

Acquisitions as a strategy to remain relevant​

Willmott said that global beauty companies, in particular L’Oréal, had recently been focusing on acquisitions and investments to respond to emerging consumer trends and strengthen their propositions. As an example, in November, L’Oréal’s venture capital fund BOLD acquired a minority stake in French biotech firm Microphyt​. This, she said, demonstrated the company’s commitment to sustainably sourced ingredients.

Conversely, those beauty companies who had failed to evolve their offer to remain relevant to consumers were paying the price, according to GlobalData.

“Revlon filed for bankruptcy earlier this year, partly due to debts but also because it failed to continually develop its brand offering and relied on its hero brands Revlon and Elizabeth Arden. Although still popular with many consumers, these brands could not meet the high expectations of young consumer who are looking for innovation and are curious to try new beauty products and brands,” ​said Willmott.

From longstanding partner to sole owner​

Estée Lauder’s acquisition of Tom Ford was a natural progression, given that it had licensed the designer’s cosmetics and fragrances for over a decade. Tom Ford Beauty was first introduced by Estée Lauder in 2006, offering a collection of luxury fragrance, make-up and skin care products, and had a strong track record of growth. The brand delivered double digit net sales on a compound annual basis from 2012 to 2022 and in Estée Lauder’s fiscal year ended 30 June 2022, Tom Ford Beauty achieved nearly 25% net sales growth on the previous year. Over the next couple of years, Estée Lauder said it expected the brand to hit annual net sales of $1bn.

“The brand continues to have strong momentum across channels and key markets resulting in a prestige fragrance ranking in the top 15 in the United States and top 10 in China,” ​said Estée Lauder in a press release.

GlobalData said this long-term relationship meant Estée Lauder would not have wanted to risk Tom Ford going to a competitor - even though it was a huge investment to make in times of unprecedented inflation and macroeconomic challenges.

According to the data and analytics firm, sole ownership of the Tom Ford brand would allow Estée Lauder to be more profitable in the long run. Benefits would include securing the long-term cash flow from owning the brand beyond the existing license expiration in 2030 and the elimination of royalty payments on beauty upon closing, as well as new licensing revenue streams and other synergies.

Best outcome for all parties​

From Tom Ford’s perspective, being acquired by Estée Lauder also represented the most favorable outcome for reasons explained by GlobalData senior health & beauty analyst Lia Neophytou: “Tom Ford’s strong beauty and fragrance portfolio is arguably in better hands with Estée Lauder, as opposed to rival bidder Kering, as it has historically focused its expertise exclusively on cultivating high-end beauty and fragrance brands.”​

As well as making Estée Lauder the sole owner of Tom Ford, the deal also extended Tom Ford’s longstanding licensing relationships with Zegna for fashion and accessories, and with Marcolin for eyewear.

GlobalData said that Estée Lauder was wise to partner Zegna as a long-term licensee for fashion, as, unlike Kering, Estée Lauder “significantly lacks in apparel expertise”​.

Under the agreement, Tom Ford, founder and CEO of Tom Ford International, committed to staying with the business as creative visionary to the end of 2023. Domenico De Sole, chairman of Tom Ford International, will stay on as a consultant for the same period.

GlobalData said that it was vital Estée Lauder continued to offer the strong brand handwriting that Tom Ford has developed, led by its founder. 

“Creative founders of other strong brands Estée Lauder has acquired in the past, including Jo Malone and Bobbi Brown, have stayed with the company many years after their brands were acquired, so there is a risk of losing some of the heritage and prestige once the owner departs,” ​warned Willmott.

The acquisition was expected to close in the first half of 2023.