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French luxury group Kering has hired a senior Estée Lauder executive to lead the creation of its beauty unit from scratch, Miss Tweed has learned. The new venture, about which Kering has said little until now, represents a sizeable source of potential growth for the group and would boost its valuation in the medium-to-long term if successful, analysts forecast.

Kering’s poaching from Estée Lauder Companies comes as the French group is trying to reach an agreement with the U.S. cosmetics company on how long it is prepared to let it exploit the Tom Ford beauty license if it wins the bid for the luxury brand. Kering is only really interested in the eyewear business, while Estee Lauder Companies, also in the race, just wants the cosmetics license.

However, it is the whole company that is for sale and that includes the lossmaking ready-to-wear business and the watch license as well. Goldman Sachs, which is advising Tom Ford, will not allow buyers to snap up just one division, industry sources said. As Miss Tweed reported last week, the two rival groups want the world to believe they are competing for the U.S. brand.

Behind the scenes they are trying to reach a deal for the Tom Ford beauty license, according to those sources. With Tom Ford, Estée Lauder Companies has built a significant perfume and make-up business, generating some $500 million to $600 million in annual turnover for the U.S. company at wholesale prices, industry sources say.

Kering has hired Raffaella Cornaggia who has worked 14 years for Estée Lauder Companies. Her last position, which she left before the summer, was senior VP and general manager of the international business of the Estée Lauder and Aerin brands, according to her LinkedIn profile. Previously she worked for Chanel, L’Oréal and Danone. Because of a non-competition clause in her contract, she cannot start working for Kering before early January, several sources with first-hand of knowledge of the matter said. For this reason, Kering cannot announce anything for now, they said. Cornaggia and the French group declined to comment for this report.

Kering has been thinking of entering the beauty business for several years, industry sources say. “Kering has been talking about it to dozens of consultants,” one industry source said. “I know, I am one of them.” The French group said at its half-year results in July “beauty is definitely an area where we could contemplate some initiatives in the future and all options are open”. It would not provide a concrete timeline or plan of action.

Kering would only say that the success of its eyewear division demonstrated that it could “create a lot of value” for its brands and beauty was a natural extension of its “brands’ territory”. Launched in 2015, the group’s eyewear business generates more than €1 billion in annual sales and it is aiming to increase that to €2 billion in the medium term. The division was built mainly through acquisition and investment in existing eyewear production facilities. The same is likely to happen for beauty.

However, unlike for eyewear and fashion, it is not critical to own production facilities. “Beauty is mainly a marketing, innovation and texture game – it is not like fashion or eyewear,” the former CEO of a major beauty group told Miss Tweed.

Many major beauty companies including L’Oréal, Coty and Estée Lauder Companies have their own production plants but also rely on third-party producers. One of them is Italian leader Intercos, which works with all three groups and others. There are many other high-quality and competitive suppliers in South Korea, Italy, France and eastern Europe. Intercos produces Gucci’s make-up on behalf of Coty.

Kering will likely want to work with them first before investing in its own plant, insiders forecast. The beauty business may be a natural evolution of fashion, just like eyewear, but it has little in common with these two sectors actually. The creative profiles, the business dynamics and the distribution networks and channels for beauty brands are radically different from those for fashion and eyewear. However, as in fashion and eyewear, size is also of the essence.

Some industry insiders believe Kering has no choice. It will need to acquire a well-established beauty company if it is serious about creating a new division. “It would give them an existing structure and professionals in the business but more importantly, it would help them win time and grow in size quickly,” another former beauty CEO said. The group has a strong balance sheet with a significant cash pile it could spend on making acquisitions.

Targets include Paris-listed Interparfums, which already works for the jeweler Boucheron, one of Kering’s brands, on top of Moncler, Ferragamo and Karl Lagerfeld among others. In 2021, Interparfums made a net profit of €71.1 million on turnover of €561 million. By last Friday, the company has a market capitalization of €2.84 billion. Its shares were down 25 percent since January.

Kering may also consider other targets to acquire expertise and know-how quickly. For now, the French group does not have that many brands with which it can build a sizeable fragrance and cosmetics division. It has Bottega Veneta, Alexander McQueen and Balenciaga which are free to be exploited since it did not renew the license with Coty for these brands. “But that is not enough to get that business going,” the former beauty executive said. “You need to have many brands and big ones too to be able negotiate with distributors such as Sephora, Douglas, etc.”

Balenciaga represents a huge missed opportunity for Kering, industry observers say. It has been one of the group’s fastest growing brands and a social media sensation. Had Kering sold its fragrance and beauty license to a major player like L’Oréal or Estée Lauder Companies, it would have generated at least €200 million in revenues in the past two to three years and paid handsome royalties to Kering, they say.

In 2019, the French group signed a license deal with France’s Lalique for its Brioni menswear brand which it has been trying to develop as best it can by stepping up investment in it, as Miss Tweed reported in April. Kering can get the license back in 2024. However, that fragrance business is tiny, industry sources say.

Earlier this year, Kering was among bidders alongside L’Oréal to acquire Byredo. In the end, Spain’s Puig won it, partly because it could justify paying a higher price due to the synergies it could create with its other beauty brands. “Thank God Kering did not win Byredo as it would have struggled to develop it on its own,” the former beauty CEO said.

Kering has made no secret of its frustration with the way Coty has been developing Gucci’s fragrance and make-up lines. Coty’s Gucci license, which it has been exploiting since 2016, still runs for another four-to-five years. It is estimated to generate around $450-$500 million in annual revenue, which is way below Kering’s expectations considering the brand has been one of the fashion industry’s biggest successes in the past seven years.

Gucci’s beauty business is a fraction of Dior’s, which generates in annual sales some $3.2 billion, analyst estimate. To be fair, Dior has been in the beauty business for decades and parent LVMH owns its own production facilities and many of the brand’s distribution channels.

There is no recent example of a fashion brand that has successfully brought its fragrance and perfume business in-house. Everyone remembers that when Burberry bought back its beauty business from Interparfums in 2012, it proved a disaster. It was too small to survive on its own and Burberry made the mistake of believing that it knew how to run a beauty company. Also, it had not hired enough experienced professionals from the sector to help run the new venture. Four years later, the British fashion brand sold the license to Coty.

Starting this year, Dolce & Gabbana has been working on bringing in-house its perfume and cosmetics business which it had previously licensed to Japan’s Shiseido. The privately owned Italian fashion house recruited Gianluca Toniolo, who used to work at LVMH’s travel retail division, as CEO of its beauty unit. It also hired other executives from LVMH and Coty. “At least these people know the beauty industry, so let’s see how D&G pulls it off,” one senior industry source said. Intercos is one of D&G’s manufacturers for make-up and fragrance.

If Kering wins Tom Ford’s eyewear license, which has been in the hands of Italy’s Marcolin since 2005, it will have three options. It can it let run its course until Dec. 31, 2029. It can buy it back before that deadline which would involve paying penalties to compensate Marcolin for lost business. Lastly, it could buy the company. Marcolin produces more than 2 million Tom Ford glasses and sunglasses. It is not clear if Kering’s existing production facilities in Italy, or those that it acquired in the United States thanks to the Hawaiian brand Maui Jim it took on this year, will be enough.

In 2022, Marcolin is expected to make annual sales of €530 million, of which some 52 percent, or around €280 million, will come from Tom Ford eyewear, a source close to the company told Miss Tweed on condition of anonymity. Marcolin pays Tom Ford royalties equal to 10 percent of the brand’s annual turnover. Last year, the designer’s two companies, his personal one and Tom Ford International, received €24 million in royalties from Marcolin and in 2022, that should be €28 million, the source said.

Marcolin’s controlling shareholder, the private equity firm PAI Partners has been trying to sell the company for some time. It has explored merger options with several players including Italian rival Safilo, industry sources said. Earlier this year, it came close to selling the business to U.S. eyewear producer Marchon but the deal was derailed by the news that Tom Ford was putting itself up for sale, as Miss Tweed reported in July.

Since Marcolin is expecting to make an Ebitda of around €60 million, if you apply a multiple of around 15, you get a valuation of some €900 million. It could make sense for Kering to acquire the company to ramp up its production capacity quickly. Marcolin produces eyewear for many other brands including Moncler, Adidas, Tod’s and Ermenegildo Zegna. No doubt PAI Partners is trying to persuade Kering CEO and controlling shareholder, François-Henri Pinault, the match makes sense.

Another party involved in the current discussions is the U.S. brand management firm Bedrock Manufacturing Company, which owns the license to produce Tom Ford watches in Switzerland.

It is the parent company of watch brand Shinola Detroit, founded by American Greek entrepreneur Tom Kartsotis, who started Fossil watches in the 1980s.

Tom Ford rose to fame by doing an excellent job revamping Gucci in the 1990s. He put the brand back on the fashion map. “If Kering bought Tom Ford, it would be like coming home,” one senior industry source said. The 61-year-old designer was chairman of the Council of Fashion Designers of America (CFDA) until March. Now he is now more into making films than designing clothes. However, he remains a marketing genius.

“Reveal your most glamorous and inspirational self,” Tom Ford says about his beauty line on the website of Estée Lauder Companies. “Amplify your individuality and show the world who you are, with maximum impact.” Kering would be better off having him on board than not. Buying Tom Ford opens up a whole new chapter for the French group.