The hot cosmetics brand no one wants
The U.S. cosmetics
business is so tough that a hot little brand with $100 million in sales and extraordinarily
fat profit margins can't find a buyer.
Summit Partners, the private-equity owner of Physicians
Formula, began looking for a buyer about a year ago, according to people familiar
with the matter. But strategic purchasers such as L'Oreal, Johnson & Johnson,
Alberto-Culver Co., Kao Brands and Henkel have balked at the asking price or not
been interested, and neither have other private-equity companies, they said.
As
a result, Summit could opt to take Physicians Formula public, though at sales
of around $100 million, it would be fairly small.
Executives at Physicians
Formula and Summit did not return calls for comment.
That a strategic buyer
wouldn't jump at the chance to buy Physicians Formula seems puzzling on the surface.
The brand has sales of $78 million, up 18.6%, in the 52 weeks ended June 18, according
to Information Resources Inc. Those figures don't include Wal-Mart Stores, which
likely push sales above $100 million and growth over 20%.
What's more, those
sales are extremely profitable. Physicians Formula has cash-flow margins of 25%-well
ahead of most mass cosmetics or personal-care brands-according to people familiar
with the company.
The profitability stems in large part from Physicians
Formula's ability to build a substantial brand in drug and discount chains, largely
avoiding food stores and their slotting fees.
It also has been able to build
a brand on very little advertising. The brand spent $6.1 million last year, mainly
in magazines. Independent Mandelbaum Mooney Ashley, San Francisco, handles Physicians
Formula.
Certainly Summit is likely to want a rich payday for a brand it
has nearly doubled since acquiring it from French beauty concern Pierre Fabre
three years ago. But Kao, Henkel and L'Oreal, among others, have been willing
to pay dearly for other brands of similar size in recent years.
One explanation
may lie in how brutal the mass-cosmetics business has become of late. Physicians
Formula this year likely will surpass Procter & Gamble Co.'s decades-old Max
Factor in U.S. sales, after the P&G brand lost distribution in Target and
the top three drug chains.
