Douglas Holding: Beauty Retail M&A Challenges | In Practise

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Douglas Holding: Beauty Retail M&A Challenges

Former Managing Director and Board Member, LVMH Italy.

Why is this interview interesting?

  • What are the considerations to make when purchasing a retailer following a roll-up strategy?
  • What are some of the key integration challenges to consider when acquiring and integrating retail operations?
  • What drives Sephora’s higher sales per square foot versus Douglas?
  • What is the key synergy from rolling up beauty retailers?
  • What are the exit opportunities for CVC with Douglas?

Executive Bio

Antonio Ferreira de Almeida

Former Managing Director and Board Member, LVMH Italy.

Antonio has over 12 years experience in beauty retail after joining LVMH as General Manager of Sephora Portugal in 2008 where he had full P&L responsibility of 25 stores in the country. In 2011, he was then promoted to the board of LVMH Italy and was responsible for Sephora’s Italian division which was over 180 stores and 280m EUR turnover. During his time running Sephora Italy, Antonio carried out due diligence on Limoni which Douglas eventually purchased in 2015. Antonio left Sephora in 2015 and has worked for other leading beauty retailers in Switzerland and Alshaya in the Middle East and is now an independent consultant in the industry. Read more

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Interview Transcript

If we wind back to 2015, CVC purchased Douglas with a strategy of rolling up retailers across Europe. What was your view on this strategy? Do you think this broadly makes sense, given the fragmented nature of Europe and the different customer bases?

Sephora Italy initially started with three acquisitions, acquisitions of local/regional chains in Italy. The starting point of Sephora Italy was putting together these three beauty chains and transform them into the Sephora beauty retailer with a very specific concept. I saw all the limitations and difficulties of launching an operation through acquisition of other smaller beauty retailers. In the case of CVC and Douglas, it’s different. We’re talking about an investment fund that decides to buy a beauty retailer that has a very strong position in Europe. Where they want to make a financial operation and decide to buy Douglas to make a bunch of acquisitions in order to create Europe’s strongest beauty retailer.

The beauty industry has always attracted a lot of investors because it’s normally not cyclical. It goes against the tide. Very often, you have strong crisis that you don’t really feel on the consumer side in the beauty area. It’s a very particular and a very attractive business area. I understand why all of these investment funds decide to work and invest in this area. Today, there are two main principle areas where the investment funds are digging. One is beauty and the other one is food. These are the two retail areas where the margins are quite high. Definitely higher than in other areas such as textile or furniture. You have this situation where on traditional retail operations, the two most demanded areas are these ones, food and beauty. I understand that these investment funds looked at Douglas, but the situation was much more complex than what they thought. Later on, they got into an even more complicated scenario, when they started making further acquisition such as Limoni and La Gardenia in Italy, or Bodybell in Spain and so on. Nevertheless, we’re talking about a very strong beauty retailer, definitely the most important beauty retailer in Europe, if you consider only the European territory. Douglas is being totally relaunched. They’re developing their online activity. The online combined with the offline, a total 360-degrees omni channel approach, is something that is totally necessary, and the customer is definitely expecting to get that from the market.

The problem with Douglas since they were acquired by these investment funds was that they concentrated very much on external growth, instead of concentrating on their own core business. They forgot they needed to concentrate on the consumer. In the beauty retail world, the most important thing you have to do on a daily basis is concentrate on what the customer is looking for. You need to create innovation on the point of sale, you need to create this wow effect that you bring into your channels, both physical channel with the stores or the online channel. This is something that for quite a while, Douglas has left behind. I would say that between 2015-2018 Douglas was very much concentrated on acquiring market share across Europe, instead of concentrating on their core businesses.

Nevertheless, they’ve made a lot of progress this year in 2019. They are integrating their acquisitions, which is very good news. They are changing the store concepts. More importantly, they are innovating the product offer based on what the consumer is looking for. This is something that is extremely important for the future, it’s definitely something that is happening right now. I truly believe that they are on the right way. I believe it will be something that comes to a positive result. There’s still a long way to go. There’s still a lot to be worked on. They are still very far away from a perfect situation. They still have to do a lot of investment. They have done good work on the online channel, which is good. It’s there. I believe the company will come to a good success story.

Can we just take a step back on what you mentioned about Sephora when they entered Italy. They had to make a couple of small acquisitions. In your view, what’s the difference between the way Sephora approached entering Italy versus Douglas?

When Sephora started, they made the acquisition of three retail chains in the northern territory of Italy. Nevertheless, they were chains with stores completely unappropriated to the store concept of Sephora. It’s the way when you make these kinds of acquisitions. You’re buying a structure. Market share. From my point of view, when you make these acquisitions, you pay a very high price for market share.

Sephora Italy was losing money for many, many years because of these acquisitions, because you didn’t have the right locations, you didn’t have the right store configuration or the right teams. You need to rebuild everything; you need to transform old things into new things. From my point of view this is often more expensive and more difficult than starting from scratch. When I was invited to come to Sephora Italy, the scope was, okay, “we have integrated these three retail chains, now we need to develop the brand awareness, now we need to open serious flagships, now we need to open serious good location stores, now we need to make a serious successful beauty retailer.” That was my job between 2010-15. That’s exactly the problem that Douglas is facing today. Limoni was an old giant with a lot of old stores. In fact, they had too many stores across Italy, many in bad locations, many of a very small size, and many that you cannot even transform into a successful store. I’m more a believer of a retailer that builds from scratch.

You look for the locations, you open, you hire the new people, you educate, you train, everything. Douglas face a situation where they have an old structure and even though Limoni was already being worked on, they still have a lot of stores that don’t work. They still have a lot of situations where they need to be performing more, where they need to develop their business, where they totally need to transform the approach because they are not in the position they need to be, in order to seduce the consumer. The biggest challenge today is, how will I be able to attract the consumer into my store? My online store, my offline store, whatever. This is the problem with the acquisition, because normally you buy something that is not working anymore. If Limoni was working very well, why would it be for sale? For example, if you want to buy Sephora, you cannot buy Sephora, because Sephora is working fine.

Douglas bought 500 stores for 240 million EUR. It’s pretty expensive, as well.

Yes. It was a lot of stores, a lot of wrong stores for a very expensive price.

500,000 EUR per door seems expensive.

Yes, exactly. It was something that I think it was really a move from CVC not Douglas. Now, they have to deal with it. They definitely bought market share to become the leader in the beauty retail in Italy. Nevertheless, it was pricey. When you make acquisitions of this type, I think you have to make a very deep analysis. You really have to measure and to weigh the pros and cons that come along with this acquisition. When you make an acquisition, I like to say that you are paying three times the price because you’re paying the buying price, you pay the transforming price, you pay the closing price, and you pay the new structure price. The investments behind the acquisition are so important that very often, these acquisitions are a complicated asset to integrate into the structure. This is the case for Douglas, I’m not saying that they will not be successful, but to what extent? At what price? What is the price to pay?

What are the key factors you were considering while looking at Limoni?

When I look at the asset, the main point you need to be careful with is the shop profit of each door. You need to analyze what is the global EBITDA of the company and then go into the details. When we’re talking details, it means let’s go door by door, and let’s check how much the doors are performing, how good these doors are, and what is the situation? Shop profits door-by-door, global EBITDA, the quality of the network. You need to look at whether it’s a new network, if it’s an old network, if it’s a well-positioned network, or if it’s a network that needs to be transformed or renovated.

How would you look at that? By vision, in terms of the quality of the stores?

You need to go and check store-by-store. I did that job when LVMH asked me to look into the Limoni organization and make a statement whether it would be something interesting for LVMH to buy. Firstly, there was a duplication of many stores. A lot of the stores they have were in duplication to the network Sephora already had. This was the same for Douglas Italy as they already had a network of 140 stores. When they bought Limoni La Gardenia, they found themselves with 140 stores of Limoni La Gardenia next door to their existing physical network. So there was a cannibalization of stores that were next door within the Douglas company which didn’t make any sense. This is another problem because you need to rationalize, you need to reduce fixed costs, it doesn’t make sense to be competing inside of your own house. That’s why Douglas find themselves, in some cases, in shopping malls where they have three performing stores. One Douglas, one Limoni, and one La Gardenia. What is the sense of this? They have to close stores and transform everything. This is the point you need to watch when you make an acquisition. Then you need to see what the differentiation is. You’re making an acquisition because you want to bring added value to your company. What was really the differentiator that Limoni La Gardenia was bringing to Douglas in Italy? They bought market share in Italy at a very strong price, but they didn’t buy any innovation because they got rid of the Limoni La Gardenia brand, and now they have rebranded all stores to Douglas. This makes sense from my point of view but what was the winning factors that they brought home from this acquisition? They just brought home a number of stores.

Yes, stores and leases.

Leases and a lot of fixed costs. A lot of personnel that they need to take care of. They need to train, they need to change the culture, etc. It’s a very complicated exercise. It’s not an exercise that you make in one, two, or even three years. Sometimes it can take a long time to absorb, restructure and integrate. Coming back to your original question, the main points to watch out is EBITDA, shop profit, and quality of the locations. These are the three points that you really need to be very careful and very analytic with.

Was it a big challenge for Douglas to rebrand all Limoni stores and change the assortment to the existing Douglas offering?

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Douglas Holding: Beauty Retail M&A Challenges

October 31, 2019

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