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.

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.

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?

I think that the Douglas group already had the same problems at home without the acquisitions. They really needed to change the product offer in order to conquer a new customer base. They were not being able to touch Gen X or the Millennial customer. They had a very old customer base and it was more or less the same story with Limoni La Gardenia. They were very much involved with mass market; not enough involved with niche brands. They were not enough developed from a private level point of view. Actually, both Douglas and Limoni La Gardenia were obsolete, in terms of store concept, in terms of product offering. They needed to restructure and that’s what they’re doing right now. They’re coming up with a new offering in order to convince the public that they are the coolest beauty retailer in the area. Actually, they were already an old-style retailer without anything new to bring into the pot. That’s my point of criticism, is the fact that when you make an acquisition, you are requiring also a differentiator, you are acquiring something new that is bringing you something in addition to what you have at home already. This wasn’t the case with Douglas, this wasn’t the case at all.

Did you find unprofitable stores at Limoni?

A lot. A lot of old stores, a lot of stores needed to be closed. A lot of stores with sizes that don’t allow the expression of the Douglas concept, etc. That’s why the investment becomes very high with acquisitions, because not only did they pay a very high acquisition price, but then they had to do a lot of investment to transform all the network.

I know that the sales per square meter for Sephora is pretty high. Is it high in Italy too or is it different due to Italy market dynamics?

No, Sephora has an average sale per square meter that is high everywhere because of the concept. The concept was innovative with brands that you only find in Sephora. They have a lot of differentiators that allow Sephora to attract a lot of consumers. This is really the point. The point is, what are you able to do as a retailer to be more performant than your competitor? This is why Douglas still has a long way to go. They’re very strong with fragrances, they are not strong with makeup. The category that is driving the growth today is makeup and that is where Sephora is very strong. All the niche brands and cool brands on the makeup side today are completely being flagged by Sephora. The consumer knows, if I want to buy the coolest new brands, I need to go to Sephora, I’m not going to go to Douglas. Sephora has a high sale per square meter because they are an innovative retailer, because they have brands that nobody else carries, because they have new and trendy brands which drives brand awareness and sales per square foot across the market.

Roughly half the SKUs in Sephora are exclusive and mostly own brand. Is Sephora’s procurement or merchandising strategy very different to Douglas’ or is it more a culture difference?

You have both things, you have a cultural difference, but mainly, Sephora have brands that nobody else has. All the cool brands being talked about by bloggers, beauty advisors, experts are all launched by Sephora. This is a real point of attraction that Sephora carries versus Douglas. This will be something that will make the difference at the end of the day. Douglas understood that they needed to come up with a different offer. They needed to come up with something innovative, if they wanted to conquer a younger customer base. This is a big problem. Douglas is not being able to talk with generations that will represent the customer bases tomorrow.

How would you go about this if you were working at Douglas?

You really need to make a very strong statement in terms of new store content. Even though they may change it, I don’t believe they are there yet. You need to be more innovative with the brands you are bringing into your stores. You have to come up with an innovative brand, new cool brands that are in style.

You mean internally integrate or procure new brands?

Both. You need to incubate new exclusive brands. You procure them, as well. Don’t forget that through LVMH, Sephora have one company called Kendo that doesn’t do anything else but incubate and procure new beauty brands for Sephora. This is a huge competitive advantage that Douglas doesn’t have. Douglas really need to change their approach and bring something really new into the party.
Today, they have a very old customer base because they are traditionally strong in fragrances. They didn’t make the step on the makeup arena. They are still very involved with mass market brands. This didn’t allow them to develop a strong private label. A strong private label will be a brand itself; it will be a brand that will be an innovative point of differentiation to attract customers. This is the success of Sephora. Sephora make more than 20 percent of their global sales through private label at very high margin levels. Douglas doesn’t have that. Private label is one point that changes the EBITDA margins because the margins are so much higher than that you are able to get with the selective premium boutique brands.

What synergies would you look to achieve in an acquisition like Limoni?

The most important synergy is in purchasing. Douglas became a very strong platform, and a very strong client for every brand. They effectively became the most important beauty customer in Italy for all of the brands. This is the most important synergy. After that, it’s the fact that you buy a presence across the country and a market position across Italy. But the purchasing synergy in terms of power of negotiation with the beauty brands is key.

Do you really have power over L’Oréal, Estée Lauder, these big powerful brands? Can you squeeze them then at the margin?

Yes, you do. Absolutely. Today, the brands cannot live without Douglas. It became far too important in the European market, so they cannot do anything to lead without Douglas because they represent a very high market share for any brand, especially in Italy. In Italy, since Douglas bought Limoni La Gardenia they became very important with the brands, in terms of negotiation.

Have you seen a material change in the consumer’s perception of Douglas now after they acquired Limoni in Italy?

They changed the logo and the state of the stores. They also tried to change the merchandising inside. Nevertheless, I still don’t see the level of innovation that they need to bring into the market, in order to create this very new perception from the consumer side. There is something new, but from my standpoint, not enough.

You’re saying they’ve acquired the full market share, they’ve restructured the network, closed some doors, and changed their store front, but they haven’t innovated enough for the customer?

This gets back to more of a cultural challenge that Douglas faces, in that you have to have innovation at the core where it’s incubating new products and keeping up with the customer demand, similar to Sephora.

Is there not a space for Douglas with a scale and mass market offering? Maybe at lower EBITDA margins than Sephora, but it’s pretty tough to play Sephora at their own game.

You have to consider the fact that Sephora makes 50% of their sales with brands that are 60-65% margin. Douglas doesn’t have that level of profit margin in any of their brands. Even though today they have very strong power of negotiation, they will never find brands that will offer them this level of margins. This creates a big difference at the end of the day with the EBITDA, with the result, and with the final results of the company.

If Douglas is for sale tomorrow, who would be a potential buyer? This is a big challenge. Who will be interested in buying Douglas tomorrow? Only another equity fund, because they don’t have anything to offer to Sephora or any of the competitors out there. When you make an acquisition, there are two possibilities. You’re buying a concept, a recipe, and something new that you can bring into your business model and innovate. Or you buy EBITDA and turnover. It’s going to be very difficult tomorrow if Douglas will be for sale again. A real question is, who can be interested in buying Douglas again?

Douglas Holding: Beauty Retail M&A Challenges

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?

Douglas Holding: Beauty Retail M&A Challenges

Former Managing Director and Board Member, LVMH Italy.

inpractise.com/articles/douglas-limoni

Why is this interview interesting?

Executive Bio

Antonio Ferreira de Almeida

Former Managing Director and Board Member, LVMH Italy.

Interview Transcript

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Douglas Holding: Beauty Retail M&A Challenges(October 31, 2019)

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