Premium Skin Care Market As an Area for Private Equity Investment

Home , Biotherm, Clarins, Origins (cosmetics), Sephora, SkinCeuticals, Ulta Beauty

Premium skin care market as an area for private equity investment

Andres Saenz | Managing Director, Co-head of Private Equity, EY-Parthenon Enoch Minn | Managing Director, EY-Parthenon

December 2015 Agenda

► Summary ► Market summary ► Growth drivers ► Bios

EY-Parthenon | Page 2 Summary Why do we like the premium skin care market as an area for PE investment?

A large category ($10b+) with strong growth Market dynamics (5%+) and underlying trends

Highly involved consumer enables willingness Customer to pay, trial and loyalty

Various product positionings, innovation, price Product tranches and channel choices allow for a diverse $ “playbook” by which brands can grow

Large international markets provide Geography additional runway

Major strategies exist and are acquisitive — Strategy good to be willing to play “early”

EY-Parthenon | Page 3 Key findings for the premium skin care market in the US

Summary of premium skin care in the US

Market overview Competitive landscape Win themes

► Premium skin care represents ~30% of ► L'Oréal, Shiseido and Estée Lauder ► New product innovations — specifically, the skin care market; “masstige,” prestige comprise over 60% of the premium market cosmeceuticals, and those with clinical and ultra-prestige premium segments are across their portfolios of brands evidence supporting their claims, and at- defined by price, availability, customer home electronic devices — will satisfy ► Large skin care companies have used a service and marketing consumer demand for professional-quality combination of acquisition and internal treatment at home ► Premium skin care has grown 5.5% brand development to play across skin annually (compared with mass market care retailers and segments ► Effective marketing to (i) increase decline by of -0.5%), with prestige and consumer recognition of key active ► Premium skin care companies are focused masstige segments showing the strongest ingredients and delivery mechanisms, and on scientific efficacy and growth (ii) target consumers for up-selling is “cosmeceuticals” to drive growth, as important for success in a market with so ► Premium skin care is heavily focused on increasingly savvy consumers seek key many players and options facial treatments and anti-aging ingredients and scientific support for products, whereas the majority of mass marketing claims ► Dermatologist support of products will sales are body care and cleansers continue to be an important source of ► Few ultra-prestige brands have endorsement and sales for brands ► Long-term growth is expected to continue established a reputation for “clinical emphasizing scientific efficacy to be driven primarily by sales of anti-agers luxury,” presenting opportunities for new and facial moisturizers; however, a more entrants or emerging players ► Securing distribution channels into clinical focus and scientific efficacy will international markets, particularly in Asia, be increasingly important will enable US companies to capitalize on the large skin care market (~$50b) and the more comprehensive Asian beauty regimen

EY-Parthenon | Page 4 Agenda

► Summary ► Market summary ► Growth drivers ► Bios

EY-Parthenon | Page 5 Premium skin care represents ~30% of the market; masstige, prestige and ultra- prestige segments are defined by price, retail availability and marketing

Total US skin care market Representative Representative Relative Customer Segment by segment, 2015E brands channels price service description

$12.4b 100% Ultra-prestige ► La Mer ► Bluemercury ► 10x+ ► Ultra-prestige and prestige ► Chanel Beauté ► Neiman Marcus segments are expensive and exclusive. In particular, the ► Saks Fifth Avenue ultra-prestige segment has low accessibility Prestige 80

► Shiseido ► Sephora ► 5x–10x ► Prestige brands are less exclusive than ultra-prestige Masstige ► Estée Lauder ► Macy’s brands; prestige brands can be ► Ulta Beauty found at places like Sephora and 60 Ulta and many department stores

► La Roche-Posay ► CVS ► 2x–5x ► Masstige brands include dermatologist brands, which are 40 ► Vichy ► Duane Reade usually offered in pharmacies, ► Walgreens and other “less exclusive” Mass brands

► Olay ► CVS ► 1x ► Mass brands are readily available across mass retailers 20 ► ► Neutrogena Target and have no sense of exclusivity; ► Walmart marketing is primarily focused on low prices but occasionally on the scientific effects

0 2015E

Full service No service Note: Premium skin care relative price ranges are based on analysis of average $/oz. for eye creams and moisturizers EY-Parthenon | Page 6 Source: Euromonitor, EY-Parthenon interviews, company websites, EY-Parthenon analysis Premium skin care has grown ~5.5% annually since 2003, with prestige and masstige segments showing the strongest growth

Total skin care market segmented by ultra-prestige, prestige, masstige and mass, 2003–2015E Commentary

$15.0b Ultra-prestige H F CAGR ► Consumers returned to premium Prestige ('03–'15E) products during the economic recovery Masstige 1.1% and continue to do so after trading $12.4 down for more affordable mass Mass $12.2 $11.7 $11.9 6.5% products during the recession; long- $11.5 $11.4 $11.3 $11.5 $11.0 $11.2 $11.2 $11.3 term growth will be continue to be $10.9 Premium driven primarily by sales of anti-agers 5.1% skin care and facial moisturizers 10.0 5.5% ► A larger pool of customers willing to invest more money into skin care and 7.2% expanding skin care regimes is the primary driver of growth in the ultra- prestige and prestige segments

► Increased efforts from drugstores such 5.0 as CVS and Walgreens to offer and promote dermatologist brands at higher -0.5% price points, and consumer willingness to trade up from mass, are driving the growth of masstige segment

► The mass segment, compared to all premium segments, is expected to experience negative growth as 0.0 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13E '14E '15E premium segments capture customers from the mass segment

Note: Subsegments under premium skin care are based on analysis of average $/oz. for eye creams and moisturizers EY-Parthenon | Page 7 Source: Euromonitor, EY-Parthenon interviews, EY-Parthenon analysis Agenda

► Summary ► Market summary ► Growth drivers ► Bios

EY-Parthenon | Page 8 Growth drivers have positively impacted premium skin care segments and have been generally neutral to negative in the mass segment

Impact on segment growth Driver Description Commentary Ultra- Mass Masstige Prestige prestige

► Premium brands have been marketing ► “Asia has always had a lengthy and complex toward expanded skin care regimes; for skin care regimen — it is much shorter in the Expanded example, serums and retinol creams have US. So I think we are trying to make that shift 1 expanded typical skin care regimes from — how do we get people to buy more? regime three to five steps – Current director of product development, leading cosmetics company

► New product introductions have fueled skin ► “Clarisonic has been ahead in this space. care sales, such as at-home electronic Born out of the dermatologist’s office, Product devices; such innovations are expected to Clarisonic sold its cleansing device for $120– 2 impact the market in the long term $150, which has contributed a lot to their innovations sales growth” – Former SVP of merchandising, US cosmetics chain Relative impact

► Specialty stores, such as Ulta and Sephora, ► “‘Skin Care Sets’ are available all year have increased masstige/prestige/ultra- ‘round. This is a great way to discount the Greater prestige skin care availability; big pharmacies premium end of the market without really 3 channel are committing more shelf space discounting — this eventually brings more customers – Former SVP of merchandising, availability US cosmetics chain

► Customers are willing to pay a premium for ► “‘Customers are quite savvy — they know products containing ingredients proven to what [ingredients] to look out for and they Increased work and with claims backed by scientific know new ingredients are coming through. 4 evidence The science side is where we can offer more” efficacy – Former SVP of merchandising, US cosmetics chain

► Brands have identified white space in existing ► “We regularly evaluate opportunities in our portfolios and aggressively addressed product line to innovate and develop new Brand product gaps either through new product product. As you know, we have also not 5 development or strategic acquisitions been shy about acquiring new technology portfolios when we see promise” – Current director of product development, leading cosmetics company

► Brands have realized growth from ► “Some of the more expensive brands are international expansions; also, tourists to the dramatically cheaper in the US than in China. International US have increased purchases due to large Macy’s has dedicated tour operators for 6 price gaps of prestige and ultra-prestige tourists on shopping tours” – Current director growth brands across different geographies of business development, global cosmetics chain

EY-Parthenon | Page 9 1 Premium skin care has a heavy focus on facial treatments and anti-aging products, whereas the majority of mass sales are body care and cleansers

Skin care subcategories breakdown by segment, 2015E

$8.0b $0.9b $3.1b $0.5b Total = $12.4b 100% Premium toners Premium lip care P r emi um t oner s Premium hand care P r emi um gener al pur pose body car e Premiumtoners Premiumfac e masks P remium liquid/ Premium lip care Premium acne Premium toners cream/gel/bar treatments cleansers

Premium facial Premium liquid/cream/ s r e

moisturizers z i

Premium facial moisturizers r u gel/bar cleansers t s i o m l a 80 Premium i c a generalpurpose f m

bodycare u i m

Premium acne treatments e r P Premium liquid/ cream/gel/bar cleansers Premium facial moisturizers 60 Premium liquid/cream/gel/bar cleansers r s e r s g e - a g i

40 t - a Premium anti-agers n i t a n a m u i m u m i Premium anti-agers r e m

20 P

Premium general purpose body care P r e

0 Mass Masstige Prestige Ultra-prestige

Facial care Cleansing products Premium skin care: $4.5b Body care Lip care

EY-Parthenon | Page 10 Source: Euromonitor, EY-Parthenon analysis 2 The success of many premium brands is predicated on a “hero” product or line, which can drive brand equity and sales

Crème de la Mer C E Ferulic Serum La Mer (Estée Lauder) SkinCeuticals (L'Oréal )

As the company’s first offering, Crème de la C E Ferulic Serum has helped cement the Mer is an essential component of the scientific and clinical image that company’s brand identity and its highest SkinCeuticals attempts to convey selling product ► SkinCeuticals launched C E Ferulic Serum in ► La Mer draws extensively upon the history of 2005, the same year that the company was developing Crème de la Mer in its marketing acquired by L'Oréal. The product was materials — when aerospace physicist Dr. Max supported by Duke University research Huber sustained burns from an accident, he indicating a doubling in photoprotection from developed the product from sea kelp use of C E Ferulic Serum only

► Based on the popularity and brand equity of its ► In 2008, the Journal of the American Academy hallmark product, La Mer has been able to of Dermatology published a double-blind, expand into new beauty categories, including peer-reviewed study that upheld the product’s tonics, sun, skin color, masks and body claims

► Because of the reputation it enjoys, the product is able to sell for a premium of three to five times the price of other comparable ferulic acid-based beauty products

EY-Parthenon | Page 11 Source: Euromonitor, EY-Parthenon analysis, company websites 3 Skincare brands are expanding across retail channels, blurring price and distribution boundaries to fuel growth, but creating potential channel conflict

Average $/oz. for eye creams Ulta Neiman Marcus Walgreens Sephora High

Lancôme

Clé de Peau Beauté Chanel Précision Dior Guerlain La Mer e

c Giorgio Armani i r P Estée Lauder Darphin Yves Saint Laurent Tom Ford Beauty SK-II Fresh Elizabeth Arden Bobbi Laura Prescriptives Brown Mercier Clinique Shiseido Philosophy Artistry Biotherm Origins La Roche-Posay bareMinerals MAC Kiehl's Jo Malone The Body Shop Aveeno RoC Benefit Olay Neutrogena Nu Skin Low Mass Ultra-prestige Positioning

This dynamic has mixed impacts for premium brands: on one hand, there is greater freedom for brands at various price points under the same ownership to penetrate the same retail channels without diluting brand name; however, channel conflict could cause confusion among less savvy consumers

Note: Price per ounce for eye creams were calculated based on online searches and are represented as above. Dotted boxes represent retail channels where certain products are available EY-Parthenon | Page 12 Source: Euromonitor, company websites, retail websites, EY-Parthenon analysis Premium skin care companies are increasingly focused on scientifically 4 proven efficacy and cosmeceuticals, but white space exists in clinical ultra-prestige

Prestige skin care market segmentation

Ultra– Increasingly savvy consumers are looking for key prestige Estée Lauder La Mer ingredients and scientific support for marketing claims in premium skin care

Dior Chanel Précision ► For example, La Roche-Posay’s sustained double-digit growth relies on recommendations from health professionals and little on advertising; the brand is Lancôme reputed for robust clinical testing

► Both scientific efficacy and consumer recognition and Clarins demand for key ingredients are critical to product success Prestige Shiseido ► Key ingredients with high consumer recognition include retinoids, hydroquinone, antioxidants (e.g., ALA, vitamin C, CoQ10, green tea), alpha hydroxy acids (e.g., Artistry glycolic acid), hyaluronic acid and neuropeptides Clinique Murad Kiehl's La Roche- ► The success of marketing cosmeceuticals is dependent Posay upon avoiding claims requiring FDA approval but Philosophy promoting consumer awareness of key ingredients and evidence of efficacy Origins Biotherm RoC ► Few ultra-prestige brands have established a reputation Masstige StriVectin for “clinical luxury,” such as SK-II and Orlane, but consumers are demanding more robust trials to justify Pampering/ Natural/ Claims based/ high price points and claims, presenting opportunities luxury brands organic science brands for new entrants or emerging players brands

Note: *Natural/organic brands highlight natural ingredients, but may not be completely organic or all natural EY-Parthenon | Page 13 Source: EY-Parthenon interviews, company websites, retail websites, EY-Parthenon analysis 4 L'Oréal, Shiseido and Estée Lauder comprise over 60% of the premium market across brands; growth is driven through creating and acquiring brands

Prestige skin care brands Parent ownership of by market shares, 2003-2015E premium brands, 2015E

H F CAGR $2.3b $2.4b $2.5b $2.6b $2.7b $2.7b $2.6b $2.8b $3.1b $3.4b $3.7b $4.1b $4.5b $4.5B 2003-2015E 100%

Others

80 LV MH Moët Hennessy Louis V uitton SA Nu Skin E nterprises Inc E lizabeth A rden Inc Johnson & Johnson Inc Amway Corp Coty Inc ChanelSA 6.5% Klein-Becker USA 20.2% Clarins SA 5.4% 60 Shiseido Co Ltd 3.5%

L'Oréal Groupe 5.5%

Estée Lauder 4.9% 20 Cos Inc

0 8 9 0 1 2 7 5 6 3 4 E E E 0 0 1 1 1 0 0 0 0 0 2015E 4 5 3 0 0 0 0 0 0 0 0 0 0 1 1 1 2 2 2 2 2 2 2 2 2 2 0 0 0 2 2 2

Note: CAGR represents total for skin care brands owned by parent (excludes non-skin care revenue) EY-Parthenon | Page 14 Source: Euromonitor, EY-Parthenon analysis 5 Large skin care companies have used a combination of acquisition and internal brand development to play across skin care retailers and segments

Johnson & Procter & Estée Unilever L'Oréal Shiseido LVMH COTY Amway Johnson Gamble Lauder

Most mass Least mass

▌ Pond’s (1986) ▌ Clean & Clear ▌ Olay (1985) ▌ The Body Shop (1991) (2006) ▌ Vaseline (1987) ▌ Noxzema (1989) ▌ Company created ▌ Neutrogena ▌ Acquisition ▌ St. Ives (2010) (1994)

Mass ▌ License agreement ▌ Aveeno (1999)

▌ RoC (1993) ▌ La Roche- ▌ MAC (1994) ▌ NARS (2000) ▌ Benefit (1999) ▌ Philosophy Posay (1989) (2010) ▌ Origins (1990) ▌ bareMinerals ▌ Biotherm (1970) (2010) ▌ Kiehl’s (2000) Masstige

▌ Lancôme (1964) ▌ Estée Lauder ▌ Shiseido (1916) ▌ Fresh (2000) ▌ Artistry (1968) (1946) ▌ Laura Mercier ▌ Clinique (1968) (2006) ▌ Prescriptives (1979)

Prestige ▌ Bobbi Brown (1995)

▌ SK-II (1991) ▌ Giorgio Armani ▌ La Mer (1995) ▌ Clé de Peau ▌ Dior (1984) ▌ RéVive (2006) (1980s) Beauté (1982) ▌ Darphin (2003) ▌ Givenchy (1988) ▌ Yves Saint Laurent (2008) ▌ Tom Ford ▌ Guerlain (1994) prestige Beauty (2005) ultra -

EY-Parthenon | Page 15 Source: Company websites, EY-Parthenon analysis 6 Securing distribution in international markets, particularly in Asia and Latin America, will enable US companies to capitalize on large growing markets

Global skin care market size, 2013

The global skin care market reached $107.3b in sales in 2013 12.5% ► Growth in global skin care was driven primarily by the Asia-Pacific region, but Latin America and Brazil have also emerged as key growth engines and have more than 10.0 doubled skin care sales since 2006 ► Anti-agers remain the fastest growing category in global skin care and will add $6b Asia-Pacific in sales by 2017; the US, China, South 7.5 Korea and Japan are the primary countries

E ) Latin driving this trend 8

1 America R

0 ► Men’s skin care has emerged as a significant - 2

A G growth category, and major international skin 3 C 1 care providers have invested in the space 0 5.0 ( 2 North Indonesia, India and Thailand are the next America big skin care markets Western Europe ► Indonesia alone is expected to be the third 2.5 biggest contributor to skin care growth with sales of $1.2b by 2017 $20b The continued expansion of global beauty retailers has driven market growth in certain 0.0 Southeast Asian countries 0 10 20 30 40 50 60 70 $80b ► Sephora, through its 2014 partnership with Zalora, now has online distribution Skin care market size by region capabilities for Singaporean and Malaysian customers

EY-Parthenon | Page 16 Source: Euromonitor, EY-Parthenon analysis, company websites Agenda

► Summary ► Market summary ► Growth drivers ► Bios

EY-Parthenon | Page 17 Andres Saenz Managing Director, Co-head of Private Equity, EY-Parthenon

Profile

► Andres is a managing director and co-head of EY-Parthenon’s Private Equity practice

► Andres assists firms with due diligence, investment strategy and portfolio company projects

► Over the past thirteen years with Parthenon, he has worked in a wide variety of industries, including consumer products and services, retail and restaurants, business and financial services, industrial and health care

► His work has addressed a number of strategic issues including growth strategy, sales and marketing optimization, and operational improvement. Andres also leads the firm’s recruiting efforts.

Managing Director Education Co-head of Private Equity EY-Parthenon ► Andres received his undergraduate degree from Harvard University and his MBA from Harvard Business School Address: 50 Rowes Wharf Boston, MA 02110

Phone: +1 617 478 2550 [email protected]

EY-Parthenon | Page 18 Enoch Minn Managing Director, Private Equity practice (focused on consumer sector)

Profile

► Enoch helps lead EY-Parthenon’s Private Equity practice in Boston

► Enoch has over 12 years of experience and has led over 60 engagements in commercial due diligence, M&A advisory, growth strategy development, strategic brand assessments and brand strategy development

► Prior to joining EY-Parthenon, Enoch was a senior engagement manager with L.E.K. Consulting, focused on working with private equity firms in commercial due diligence and strategic growth opportunities

► In addition to extensive experience developing brand positioning and growth strategies, Enoch has also worked extensively in the retail and consumer products sectors, helping develop growth strategies and assessing brand strengths Managing Director EY-Parthenon Education Address: 155 North Wacker Drive ► Enoch received his JD and MBA from The University of Chicago, and his BA in Economics and Chicago, IL 60606 Mathematics with honors from Northwestern University ► Enoch is a member of the California Bar Association Phone: +1 312 879 2000 [email protected]

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