Beauty firms put money into tech M&A to fuel sales

Hong Kong

SHISEIDO Co, the Japanese firm that sells Laura Mercier cosmetics and Dolce & Gabbana fragrances, sold one trillion yen (S$12.2 billion) worth of beauty products last year, mostly in traditional stores where customers can sample brands in person.

That's a problem for Masahiko Uotani, Shiseido's chief executive officer. Consumers in their teens and twenties often prefer to shop online, beyond the reach of in-store salespeople. Mr Uotani's solution? To partner with - and even buy up - small startups in Silicon Valley and other tech hubs to gain expertise in artificial intelligence, augmented reality and other technologies.

His ambition is to help shoppers replicate online the experience of trying on cosmetics in a store, and use data from smart devices to create personalised makeup for customers.

"Particularly with the younger generation, often they don't go into the stores," Mr Uotani said in an interview. "The way they buy, the way they share their excitement with their friends, is completely different from older generations."

Technology is upending the US$440 billion global beauty industry. While only about 6.9 per cent of sales were online in 2016, according to market research provider Euromonitor International, e-commerce is becoming more important as online sales soar in China and other markets. In 2013, less than 5 per cent of the industry's sales were online.

China will likely cross US$1 trillion in online retail sales in 2018, according to Forrester Research. Such sharp changes in shopping habits in Asia's biggest economy and across the globe have big brands scrambling to keep up.

France's L'Oreal SA said on March 16 it would acquire for an undisclosed sum a Canadian tech company, ModiFace, which has more than 70 employees. ModiFace develops software that allows consumers to use augmented reality to see how they would look with different types of blushes and eyeshadows. L'Oreal has also partnered with French telecommunications entrepreneur Xavier Niel to create an accelerator for beauty-tech firms.

French luxury giant LVMH is working with Niel, too. The company announced on April 10 a programme, La Maison des Startups, to support entrepreneurs at Niel's Paris-based campus for new companies developing technologies and services for perfumes and cosmetics as well as wine, fashion and other LVMH businesses.

In China, e-commerce already accounts for 25 per cent of Shiseido's business, said Mr Uotani, and in three years will rise to almost 40 per cent. For Shiseido worldwide, 15 per cent of sales will happen online by 2020, up from 8 per cent last year, he said.

Shiseido on Jan 11 disclosed the acquisition for an undisclosed sum of the R&D team and other assets of Olivo Laboratories, a startup specializing in artificial skin technology that's based in Watertown, close to Harvard and MIT. The artificial skin hasn't been commercialised as yet, although the company says it can be used in various ways, including as a base layer under makeup.

Other Shiseido acquisitions include MatchCo, a California startup purchased for an undisclosed sum in 2017. MatchCo develops software customers can use with their smartphones to create customised foundation products that match their skin tones.

"The first generation of e-commerce was really about replicating the store experience but with cosmetics there's an extra layer of uncertainty for the customer," said Dave Gross, MatchCo co-founder and general manager. "So in that sense there's a big problem to solve related to helping the customer find the right products."

To help address that problem, Shiseido in November bought Giaran, a startup which develops AI technology, for an undisclosed sum. With its simulation technology, Giaran wants to enable consumers on their phones or computers to remove and apply makeup virtually so they can see how they look before making purchases.

Analysts predict that more beauty companies will be on the prowl for technology. "We will definitely see more," said Deborah Aitken, an analyst with Bloomberg Intelligence in London, who said companies need to respond to the shift of customers, especially in Asia, to shopping for cosmetics and other beauty products online.

L'Oreal added more than 1,700 staff to work on digital issues over four years, CEO Jean-Paul Agon said in 2017. In December, Estee Lauder Cos announced a partnership with beauty technology startup Perfect Corp to introduce an augmented reality program for the cosmetics company's 17,000 beauty consultants.

Shiseido intends to boost its R&D staff to 1,500 by 2020, up from 1,000 in 2014. It expects to see a payoff on its investments from its existing technology investments soon, said Marc Rey, CEO of Shiseido Americas.

"It's not 10 years from now," Mr Rey said. "It's really happening." BLOOMBERG