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You’re not the only one with a lip balm languishing at the back of a drawer. Haleon, the consumer products business spun out of UK pharma group GSK, is clearing its cache. It will offload ChapStick to private equity for $430mn.
Such clear-outs are not uncommon: consumer product companies frequently flip branded products they’ve fallen out of love with, both among themselves and with private equity. Some names are on an almost constant merry-go-round. Dessert maker Ministry of Cake went through three owners, trade and private equity, in a decade.
At first blush these may seem unlikely deals. Foodstuffs and skincare potions benefit from economies of scale (think big vats of chemicals brewing away). Big consumer companies such as the US’s Procter & Gamble and Europe’s Unilever also bring to bear excellent distribution networks along with substantial procurement and marketing clout.
Still, products with growth lagging behind the big “power brands” drag down earnings. Bosses keener to reduce debts than increase investment can earn a healthy premium — reckoned at 30 per cent in the case of ChapStick — by selling. Incoming chief executives have a penchant for clearing the decks.
The same products tick boxes for private equity and more specialised trade buyers. Branded names generate steady cash flows and boast a loyal customer base. They usually have pedigree. ChapStick has been going for over 100 years; confectioner Lees — bought last year by Finsbury Food — is just shy of the century mark.
That can attract foreign buyers’ overseas ambitions too. Japan’s Mizkan and Kao picked up Sarson’s vinegars and Molton Brown respectively.
Private equity buyers such as Yellow Wood, acquirer of ChapStick, employ leverage and cost cutting to juice profits. Any disruption brought about by social media and ecommerce makes marketing and distribution more accessible.
The fly in the ointment is value seepage. Unilever, buying Dollar Shave Club during the height of excitement over direct-to-consumer (D2C) models, opted not to disclose the price it received when selling it off late last year. Chances are Unilever took a shave itself, spending $1bn on the acquisition in 2016 and booking a €192mn impairment charge five years later.
Nestlé, the Swiss food giant, acknowledges duds. Last year it shed the peanut allergy business acquired as part of its $2.6bn purchase of biopharmaceutical company Aimmune in 2020 — but only after taking a $2.1bn impairment two years later. Overall it claimed a net annual return on acquisitions from 2018-22 of between 11 and 13 per cent.
A more graphic illustration comes courtesy of The Body Shop, an early winner purveying fair trade body creams and other lotions. French cosmetics giant L’Oréal swooped when the UK retailer went on the block, paying £652.3mn in 2006, and flipping it to Brazil’s Natura for €1bn 11 years later.
Hardly a big win, especially after taking into account inflation and exchange rates. Still, that was infinitely less ugly than the enterprise value of £207mn achieved by Natura when it came to sell the skincare business to PE firm Aurelius last November.
Sure, current valuations are subdued by higher funding costs. But legacy owners appear to have faith in the new private equity owners. Unilever is holding on to a minority stake in Dollar Shave Club; Haleon retains some exposure to ChapStick’s new home, Suave Brands. Both are thus keeping some skin in the game — chapped or otherwise.
Stanley’s viral success will not leave yeti in the cold
As noted, some smaller brands can attain huge popularity. The US is currently being gripped by Stanley Cup fever. But the brouhaha has nothing to do with the National Hockey League championship trophy. Instead it is over a 40oz (1.18 litre) water tumbler.
The Stanley Quencher — with its hefty handle and removable straw — has become a viral sensation. The $45 supersized receptacle has set off fights, a heist, schoolyard bullying and a buying frenzy more typically associated with exclusive sneaker drops. Videos show consumers stampeding through stores to get limited-edition versions of the cup and owners flaunting their collections.
For Seattle-based Stanley, owned by the privately held HAVI, the thirst for the Quencher has been a boon for sales. The brand is reportedly projected to make $750mn in revenues in 2023, a 10-fold increase from the $73mn it generated in 2019.
But its success has left shareholders of Texas-based Yeti in the cold. Shares in the maker of high-end coolers and insulated mugs are down 15 per cent since late December to trade at $45 apiece. At its peak in 2021, the stock was worth nearly $108 per share and the company boasted a market capitalisation of $9.4bn.
During the pandemic sales received a big boost as people sought to adopt more outdoor lifestyles. But the company struggled to hang on to its momentum once the post-pandemic return to the office kicked in. A recent voluntary recall on some of its products also proved to be costly. Valuations have taken a dive, with the shares now on 17 times forward earnings compared to its five-year average of around 25.
The worries are understandable. Drinkware accounted for about 60 per cent of Yeti’s sales in the first nine months of 2023. Yet an argument can be made that Stanley’s rise has not come at the expense of Yeti’s growth.
Thanks to social media, the Quencher was able to break into a demographic that was previously untapped — non-outdoorsy women and teen girls. While both Yeti and Stanley’s trademark insulated water bottles have long been a mainstay for camping trips, the Quencher is seen as an everyday, all-day item. Its devotees treat it as an accessory and buy different colours to go with their outfits.
Tellingly, drinkware sales at Yeti rose 6 per cent year on year in its most recent quarter. The market for insulated water cups is big enough to be filled by both Yeti and Stanley.
