Why Procter & Gamble Company Is Shedding Its Cosmetics Business

By Markets Fool.com

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It would take some heroic efforts to make Procter & Gamble's personal care business worth hanging onto. Image: Procter & Gamble

The personal care industry is getting an extreme makeover. Procter & Gamble (NYSE: PG)is looking to shed its beauty care business as it pares down operations to its largest and most profitable brands. If that wasn't enough,Avon Products (NYSE: AVP) is now searching out "strategic alternatives" that may include hiving off its North American division. If anything, these moves indicate that this isn't your mom's cosmetics market any more.

Jettisoning Beauty
Procter & Gamble's beauty, hair, and personal care division, featuring brands like CoverGirl, Olay, and Max Factor, saw net sales dip 6% last quarter as volumes dropped 2% year over year. It suffered a 2% decline in sales across all of 2014, continuing to make it the worst performing division in the sprawling company.

Last August CEO A.G. Lafley said P&G would calve off over 100 brands to focus instead on a core group of 70 to 80 brands that drove 90% of its revenues and 95% of its profits. It has since sold its Duracell battery business to Warren Buffett's Berkshire Hathaway for $4.7 billion and unloaded its Camay and Zest soaps to Unilever for an undisclosed sum.

Now the under performing beauty care business is on the line and a host of potential buyers are said to be preparing bids to carve out particular brands rather than take on the whole division.

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Procter & Gamble has been unable to pull its cosmetic business up by its bootstraps. Image: Max Factor

Industry undergoing cosmetic surgery
According to a recent Reuters report, Revlon (NYSE: REV) is interested in P&G's cosmetics business while Coty (NYSE: COTY) wants its fragrance brands, but because it also owns Sally Hansen nail polish and Rimmel lipstick and eyeshadow, a bid for cosmetics is not out of the question either.

Whether the consumer products giant could get more by selling the parts individually or as a whole is still unknown. It also remains possible Procter & Gamble might just spinoff the whole thing instead. Although no dollar amounts have been assigned to any potential bid, it's clear that such valuable brands would be worth a chunk of change to any potential acquirer. Reuters noted that the cosmetics unit alone has annual earnings before interest, taxes, depreciation, and amortization of around $350 million.

Despite the obvious value of Procter and Gamble's beauty business, competition in personal care has grown particularly intense with specialty outlets like Ulta Salon and Sephora taking on established leaders like Coty, Estee Lauder , and Revlon. Which of course means that nothing is guaranteed, especially Avon's strategic alternatives initiative.

No one's calling on Avon
Competition has had an especially harsh impact on Avon where net sales fell 11% to $8.6 billion last year as its North American business plunged 17%. Competitors like Ulta, meanwhile, saw a 21% jump in net sales to $3.2 billion and Sephora is being credited with helping to engineer the turnaround at troubled department store operator J.C. Penney (NYSE: JCP), which has come to rely upon the store traffic the beauty outlet's store-in-store business generates to boost sales in other departments.

Not the color of money: Avon Products' sales have fallen steadily for the past few years. Photo: Nirvana Melo via Flickr

As J.C. Penney's retiring CEO Mike Ullman has noted, Sephora "continues to deliver double-digit growth, drive traffic, and generate significant customer loyalty."

Macy's apparently concurs as it made its first acquisition in more than a decade of upscale beauty shop and spa operator Bluemercury for $210 million. It will begin selling its proprietary M-61 skincare products nationally while adding boutiques to select stores.

Selling the top
Arguably, it's a good time for Procter & Gamble to get out of the beauty business. While Avon has been unable to shore up sales for years -- they peaked in 2011 at $11.3 billion and have fallen each year thereafter -- Revlon has been experiencing steady growth with sales increasing at a compounded annual rate of 8.4% over the last five years. Coty, which stumbled last year as sales fell almost 1% due to increased competitiveness in its North American market, has still enjoyed a 6% compounded growth rate over that same time frame.

But it is its most recent performance that speaks to the difficulty that even Procter & Gamble is facing.

The beauty care segment represented 24% of the consumer products company's net sales and 23% of its net earnings last year. With brands like Head & Shoulders, Olay, Pantene, SK-II, and Wella in P&G's billion-dollar brand club, it's possible not all of them will be part of any eventual sale as Lafley noted that he wants to keep his biggest brands.

A billion reasons to sell
According to the plans announced at the time, 23 of the brands Procter & Gamble intends to focus on have sales exceeding $1, while 14 of them are between $500 million and $1 billion. Several dozen more have sales of $100 million to $500 million. Still, Duracell was a billion-sales club member and it got the heave-ho.

Yet this isn't just Procter & Gamble trying to cover over an ugly scar. The beauty care business is transforming as specialty retailers like Sephora and Ulta Salon command a greater percentage of the market in response to changing consumer preferences. Getting out while the getting is still good is a smart move, though investors might do better looking at the insurgents for opportunity rather than to the old guard that may acquire these established brands.

The article Why Procter & Gamble Company Is Shedding Its Cosmetics Business originally appeared on Fool.com.

Follow Rich Duprey's coverage of all the most important news and developments in the leading brand name products you use. Heowns shares of J.C. Penney Company,. The Motley Fool recommends Berkshire Hathaway, Procter & Gamble, Ulta Salon, Cosmetics & Fragrance, and Unilever. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.