Analysis: Kylie Cosmetics – has Coty paid $600m for 170 million Instagram followers?

It is a seismic deal for the beauty house and one that values Kylie Cosmetics at $1.2bn.

Kylie Cosmetics was founded in 2015 when Jenner, now 22, was still a teenager. It made waves with its perennially sold-out Kylie Lip Kits, inspired by the founder’s own pout.

Since then, the brand has had a stratospheric rise. It has expanded into other makeup categories as well as fragrance and most recently skincare, all of which cumulatively delivered $177m in sales over the last 12 months.

It is a brand built on social media and the 270 million followers (more than 170 million on Instagram alone) across both the brand and Jenner’s personal accounts ensures ranges continue to sell out.

A four-year-old brand helmed by a 22-year-old being bought by a 115-year-old beauty house, which owns heritage beauty brands such as Bourjois Paris, MaxFactor and Covergirl, encapsulates the rapidly shifting power dynamics in the beauty sector. The fact that Coty trumpeted about the number of social media followers Kylie has in its announcement before it went into the brand’s financials is telling.

Customer engagement machine

Global strategy and management consulting firm AT Kearney principal Andrea Szasz says: “With this acquisition, we’re seeing the shift from an M&A strategy where the value of the target company is in the product or IP, to one where the buyer is acquiring a massive and proven customer engagement machine.

“While Kylie has some smartly packaged and marketed products, her main power lies in her 270 million social media followers across her channels. She is enormously influential and that’s the capability Coty is tapping into through this acquisition.

“Kylie achieved this multiple in part by being at the intersection of tech and consumer with a phenomenal ability to draw eyeballs. This is happening now because the beauty market is levelling off and new customer acquisition is key to growth. Big influencers and customer engagement platforms are therefore where the trend is going.”

Coty has made no bones about this fact, and specifically pointed to three-quarters of Kylie and Kylie Cosmetics’ social followers being 18-34, an audience segment Coty chief financial officer Pierre-André Terisse says is “currently lacking in Coty’s portfolio”.

But is paying for a large social following worth it? 

Floral Street founder and former St Tropez chief executive Michelle Feeney has reservations.

“Coty is a big company and they know what they are doing but, to me, buying a customer rather than a brand is a short-term play,” she says.

However, Feeney says Coty has the opportunity to grow the Kylie Cosmetics brand, which is currently only available in the USA, internationally through its established distribution channels; though, she points out that conversely, this lack of international presence indicates that the brand’s longevity is untested.

“To me, it feels like a shortcut to a customer – and that customer is a fickle one,” she adds.

There is some indication that the Kylie Cosmetics customer has already started to move on.

According to a Rakuten Intelligence study of US online shopper receipts over the last three years, Kylie Cosmetics’ ecommerce sales have declined 62% through to the end of May from their peak in 2016, including a 14% fall since last year. What’s more, three-fifths of shoppers that have bought from the brand have only done so once, which the study says could indicate that “the brand has not engendered consumer loyalty”.

Getting into bed with influencer brands

Nevertheless, it is clear that celebrity direct-to-consumer health and beauty brands are de rigueur, from Unilever’s acquisition of Dollar Shave Club to LVMH snapping up Fenty Beauty in 2017, and the excitement that greeted Fenty Beauty’s debut in Boots earlier this year.

Should more brands and retailers consider snapping up an influencer-backed direct to consumer brand?

Edge by Ascential senior director of product and content Xian Wang says beauty retailers should tread carefully when considering the return on investment they would get from a Coty-Kylie style acquisition.

“Retailers and beauty conglomerates need to decide how DTC will play into their strategies and what purpose it would play in their portfolio. Will it be a sales driver or an insights and innovation engine focused on product discovery to capture more data about the shopper?” she asks.

“Building a fully fledged DTC offering isn’t a business model that always make senses for every brand, economically. There are huge costs and capabilities required by an organisation to doing so, especially in fulfilment.

“Brands could always choose to centre a DTC around another value such as providing expertise, or solutions such as personalisation. But return on investment should be evaluated fully – it may make sense to buy instead of build.”

For Szasz, Coty’s acquisition of Kylie Cosmetics represents a longer-term bet on how beauty shoppers are going to find and engage with brands going forward.

“With the beauty market getting saturated, having DTC capability is going to play an important role. Coty understood that to be successful today, you have to be an engagement machine with a strong customer engagement platform,” she says.

Whether $600m is too high a price to pay for access to that customer segment is debatable, as is the longevity of the Kylie Cosmetics brand.

However, there is no denying that this deal means more established beauty businesses need to focus on incorporating social media and DTC into their long-term strategies.

Individual brands may be a flash in the pan, but this new way of shopping and buying beauty is a trend that is here to stay.