Digital due diligence becomes increasingly important when buying digitally native beauty brands.

By Deborah J. Kirk, Linzi Thomas, Camilla J. Dutton, Laura Kichenside, Catherine Campbell, Tom Evans, and David Walker

Recent high-profile beauty M&A deals, coupled with current economic uncertainty, have brought renewed interest in the “lipstick effect”. Much cited in the aftermath of the 2008/09 downturn, it describes how consumer demand for relatively affordable luxuries, such as lipstick, continues or even increases during challenging economic times. There are signs that the global beauty industry may once again prove resilient, with nail care being coined the “COVID-19 lipstick effect”, following double digit growth.

Attractive Opportunities

The global beauty industry, worth around US$532 billion prior to the COVID-19 outbreak, is expected to be worth US$805 billion by the end of 2024, according to Euromonitor data. The industry has demonstrated recession-resilience with continued growth (including during 2008/09), driven by digitalisation, social media and increasing demand from emerging economies. Investors are taking note — beauty deals offer attractive opportunities in growing companies with potential to generate significant margins at scale. PE accounted for 47% of 2019 beauty M&A deals.

However, the beauty market has changed rapidly in recent years and the key deal issues have evolved. Brand and other intellectual property rights are still important, but in an era of digitalisation, premiumisation and product authenticity, celebrity and social media endorsements and more direct customer engagement, deal teams must take a fresh approach to the drivers of value in beauty deals.

Recent Deals Highlight Importance of Celebrity and Social Media

Many M&A deals have targeted the next generation of beauty success stories, such as Coty’s 2019 purchase of a controlling stake in Kylie Jenner’s cosmetics company, for US$600 million. That deal highlights the rapidly changing face of the beauty industry, where the impact of social media has exploded and the power of YouTube and Instagram influencers has proved transformative. Others including Instagram makeup artist Huda Kattan have secured significant valuations for their businesses.


Investing in an industry that has always been underpinned by brand value now requires an even more sophisticated strategy towards protecting market share. Many beauty brands do not own the often generic or unprotectable formulae used in their products, but instead rely on exclusive manufacturing agreements to prohibit the manufacturer from making a competitive product or formulae for anyone else. The robustness of these agreements can be critical to protecting innovative products, and also safeguarding brand reputation, particularly amidst growing demand for ethical production and sustainable ingredient sourcing.

Companies are now digitally native. It is not uncommon for a beauty brand’s marketing strategy to be solely online, using celebrity and blogger endorsements, so whilst conducting traditional diligence is still important — e.g., ensuring that intellectual property rights, including trademarks and in some cases, patents, are appropriately protected — firms should conduct digital due diligence on marketing communications, confirm transferability of control of key names and social media accounts and confirm the role of any individual influencer in driving value. This should include a deep dive into social media and any previous incidents that could impact consumer opinion.

On many deals, maintaining a strong working relationship with the individual behind the brand is critical, so a solid legal backdrop around restrictive covenants as well as name and image licensing rights is vital.

Scientific and Technological Developments                                 

Beauty brands are also leveraging scientific developments and using emerging technologies including artificial intelligence and augmented reality as well as existing digital communication technologies to create personalised and customised services and products. L’Oréal’s recent launch of augmented reality lenses for Snapʼs desktop app allows customers to virtually try on looks from its brands. Shiseido’s “Optune” is employing the Internet of Things and science to connect devices and apps to analyse skin condition, temperature, humidity, and sleep data etc. to choose the best product mix. These developments mean that data protection and software ownership, issues not typically associated with beauty deals, are now increasingly relevant.

Beyond Lipstick

In our view, deal teams must remain alert to developments — maximising new beauty opportunities will require more than just lipstick to engage customers and remain appealing in this competitive market.