P&G’s Frederic Fekkai Hair Care Brand Becomes the Latest Victim of the Brand Consolidation Program

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Procter & Gamble

Global consumer processed goods behemoth Procter & Gamble (NYSE: PG) continues to take small steps forward in its ambitious brand consolidation program. Frederic Fekkai, a luxury hair care brand and salon chain, has become the latest brand to fall prey to P&G’s brand-shedding strategy. The maker of renowned hair care brands like Pantene and Heads & Shoulders announced on May 21st that it will sell the Frederic Fekkai brand to a joint venture formed by Designer Parfums and Luxe Brands. The terms of the deal were not disclosed. [1] P&G had reportedly purchased the brand for slightly over $400 million in 2008. [2]

The latest sale indicates P&G’s growing detachment with the beauty business, which includes skin care and makeup, hair care, and fragrances segments. The company is reportedly in the process of divesting several other components of its beauty business, including the Wella hair care unit, the fragrance business and certain unnamed cosmetic brands (Read: P&G Just Made Its Biggest Move So Far Under The Brand Consolidation Program). Rumors of the potential sale of the Wella Hair Care unit have been floating around since last November, [3] but have not been substantiated by the company. Nevertheless, P&G’s disinterest in the beauty business is clear from recent events. The company sold the Rochas fashion and fragrances brand in March this year, and was reportedly mulling the sale or IPO of some of its other beauty brands.

Besides Wella, currently P&G is also said to be exploring divestment options for Clairol salon hair care products and several designer fragrances. These brands collectively account for over a third of P&G’s revenues of $20 billion from the beauty division. [1]

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We have a price estimate of $78 for Procter & Gamble, which is nearly the same as its current market price.

See our complete analysis for Procter & Gamble here

P&G’s Beauty Division: Declining Revenues, Relatively Poor Margins

Procter & Gamble’s Beauty division accounted for a quarter of the company’s total revenues of $80 billion in 2014. Although the company’s total revenues have been declining over  the last three years, revenues from the beauty division declined at a faster rate in 2013 and 2014. Revenues from the Hair Care sub-segment, which accounts for nearly half of the Beauty division’s revenues, have fallen continuously for the last three years. According to our estimates, P&G’s market share in the global hair care market has also fallen from a peak of 28% in 2011 to 22% in 2014.

Looking at the bottom-line, matters appear even worse for P&G’s beauty business. The EBITDA margin of the Beauty division was 20.4% in 2015, which was the lowest of all divisions of the company. It is also considerably lower than that of P&G’s rivals L’Oreal (OTC: LRLCY) and Estee Lauder (NYSE: EL), making the beauty business an unsustainable proposition over the long term. These facts indicate that the Hair Care segment as well as the broader Beauty division satisfy P&G’s criteria of underperforming businesses, making the responsible brands subject to divestment.

As a result, analysts have long considered P&G’s beauty business as ripe for downsizing. [4] Given P&G’s focus on growth potential and profitability (Read: Are P&G And Unilever Headed In Opposite Directions?), the company is not likely to hesitate  selling off even multi-billion dollar brands like Wella and Covergirl. This lends further credence to the persistent ongoing rumors.

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Notes:
  1. P&G to Sell Frédéric Fekkai Brand and Salons, The Wall Street Journal, May 21, 2015 [] []
  2. P&G Buys Luxury Hair-Care Brand, The Wall Street Journal, March 26, 2008 []
  3. P&G exploring sale of $7 billion Wella hair care unit, Reuters, November 28, 2014 []
  4. How much will P&G cut its beauty business?, Cincinnati.com, March 23, 2015 []