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Gucci owner Kering confirmed on Friday Miss Tweed’s November report that the French group was planning to create a beauty division from scratch and had recruited former senior Estée Lauder executive Raffaella Cornaggia to spearhead its growth. The question for investors now is: how will Kering build scale in beauty? Should it make a bid for Aesop, which has come onto the market and is expected to fetch around €2 billion?

Natura, which is selling Aesop, is said to be keen to retain a minority stake – depending on the price. But the Brazilian beauty company may have more faith to grow the business in giants such as LVMH, Estée Lauder, Shiseido or L’Oréal than Kering, which has no experience in the field, industry banking sources say.

“I think Kering buying Aesop is a long shot,” one former senior beauty executive told Miss Tweed on condition of anonymity. “Aside from Kering’s knowledge of retail, they have little with which to leverage the business and add value.” At the same time, if Kering wants to become a major player in beauty, it will need to make an acquisition to build scale quickly, he said.

Aesop may not be the ideal target for Kering in any case. Founded in Australia in 1987, the brand specializes in plant-based products for hair, skin and body. Its products are sold in its trademark black-and-white packaging in well-located boutiques around the world. Aesop is estimated to make around €500 million in annual sales and some 100 million in earnings before interest, tax, depreciation and amortization (Ebitda), bankers have said.

Big players such as L’Oréal, Puig, LVMH and Estée Lauder will be able to offer more money for Aesop than private equity firms because they can build synergies in terms of distribution, media buying and other costs, insiders say. Initial bids were submitted this week, with L’Oréal, Shiseido and LVMH assumed to be among them, one London-based M&A banker said. “The thing is: Aesop is not a must-own brand for these groups,” he added.

LVMH was the under-bidder to Natura when the Brazilian company acquired a majority stake in Aesop in 2012 for $71 million. Aesop has more than 200 stores around the world, many in prime retail locations with expensive leases. LVMH has more experience driving sales growth from mono-brand boutiques than L’Oréal, which depends more on third-party wholesalers, industry sources say.

Last year, Kering lost a bid to acquire the Tom Ford brand, which has a huge eyewear and beauty business. It also failed to snap up Byredo, acquired instead by Spain’s Puig in May.

Regarding its own beauty plans, Kering said it would start by developing the fragrance businesses of its fashion brands Bottega Veneta, Alexander McQueen and Balenciaga. In preparation for this move, Kering has let their license with U.S. beauty company Coty expire.

Some in the industry regret that Kering could not find a way to get Balenciaga perfumes off the ground while the brand was strong. They think Balenciaga could have generated hundreds of millions of euros in perfume sales. Today, its appeal is not so great after controversial ad campaigns that critics said sexualized children.

Kering said on Friday it also wanted to develop the fragrance of its jewelry brands Qeelin of China and Pomellato of Italy. The group also owns French jewelry brand Boucheron. In 2022, Boucheron fragrances generated €17.7 million in sales, up 15 percent year on year, according to results from Interparfums with which it has a licence valid for another three years. Since Boucheron’s perfume business is small, and it has good relations with Interparfums, Kering may be able to take it in-house relatively smoothly, a senior source close to the French perfume company said.

So Kering will kick-start its new beauty venture with a handful of fashion and jewelry brands and add more along the way. Another possible license acquisition is for Brioni, which also belongs to Kering.

The perfume license for the Italian tailor – with crystal maker Lalique – ends in 2024. Add Boucheron and Brioni and Kering will have a total of seven perfume brands. None is a megabrand, though, with the power to drive fast growth and push into the fierce jungle that is the fragmented global retail landscape of beauty products.

Concerning the top job, Kering said Raffaella Cornaggia would be CEO of the newly created Kering Beauté division and join the group’s executive committee. Cornaggia has more than 25 years’ experience in the beauty sector, having worked for L’Oréal, Chanel and Estée Lauder.

Announcing the new beauty venture now is part of Kering’s carefully calibrated strategy to get investors to focus on its growth potential instead of lost revenue due to the Balenciaga scandal, management changes and uncertainty about Gucci’s turnaround. A spokeswoman promised more concrete details about the beauty plan at the annual results on Feb. 15.

“Overall, we view the decision to progress with Kering Beauty as positive on a mid-term timeframe,” Piral Dadhania, luxury goods analyst at RBC Capital Markets, wrote in a note on Friday. “It should provide Kering with sufficient time to build and develop its in-house capabilities with smaller brands in the category and, over time, offer an alternative in-house option for Gucci Beauty (fragrances and make-up) for when the Coty licence expires. Near-term revenue contribution is not likely to be meaningful, given the initial scope of brands within its remit.”

Kering believes it can replicate with beauty the success it has had with eyewear. Launched in 2014, Kering Eyewear now generates more than one billion in annual sales. It reached that size thanks to acquisitions and organic growth.

“We are building this new area of expertise within our group to ensure that our brands can fulfil their potential in this category,” Kering Managing Director Jean-François Palus said about Kering Beauté. Palus, Kering’s troubleshooter and operational head, will be overseeing the expansion into beauty, not Kering CEO François-Henri Pinault, industry sources have said.

Kering’s entry into the beauty business will not be easy, industry veterans warn. It will take at least two to three years for the French group to build a sizeable business and make recurring sales. “The barriers to entry are very high,” the CEO of a major perfume company told Miss Tweed privately. “Partly because the supply chain is already fully booked with orders. You have to fight to get ingredients, to get bottles. There are bottlenecks everywhere.”

With Kering struggling to get its perfume products produced quickly, it may take the group at least a year before it can launch its first fragrances. And since none of Kering’s perfume brands are strong, it will have a hard time getting decent terms from major retailers with regards to display and margins. These include LVMH’s Sephora, Douglas in Germany, L’Étoile in Russia, Chalhoub Group in the Middle East and department stores in the United States and Japan.

The beauty business is very different from fashion in terms of distribution, marketing and production cycles. To make it big in fragrance, you need a hard-hitting marketing campaign that is easy to understand and identify with. Kering has little experience in that domain. In the past, it made the mistake of letting Gucci designer Alessandro Michele influence the name, look and marketing campaigns of its new fragrances. That gave us Gucci’s “Mémoire d’une odeur,” a fragrance that flopped in 2019. You do not need to be a linguist to understand that the word “odor” has negative connotations!

Investors will be hoping that professional perfume creatives drive Kering’s new fragrance products, not designers who have a different mindset. They should get concrete assurances from the group that the influence of designers over fragrances at Balenciaga, Bottega Veneta and Alexander McQueen will remain limited.

Kering will also need to build a strong commercial team, made up of people who have good relations not only with all the major department stores and perfume chains but also with retailers at airports around the globe. We are talking here of thousands and thousands of points of sale. Such a team cannot be brought together overnight.

Kering will need to poach people from rival beauty companies such as Coty but many may be hesitant, given the group’s lack of track record in the field. With the easing of Covid-19 restrictions, travel retail has picked up and boutiques are struggling to recruit enough sales staff to keep up with the traffic.

Kering is entering the beauty and fragrance business without its star brand Gucci, the license being with Coty until the end of 2028, as Miss Tweed already revealed last year. Kering will probably want to wait for its own beauty business to grow and have the right teams in place before it starts discussing the possibility of buying the license back. “Since they are going to start without the locomotive that is Gucci, it’s going to be complicated for them,” the perfume CEO said.

Kering announced last week that it had hired Sabato de Sarno as Gucci’s new creative director, ending weeks of speculation around who would replace Michele, who left abruptly in November. Sarno, 39, was head of ready-to-wear for both men and women at Valentino. He is reputed to have talent but little experience designing handbags – Gucci’s bread and butter, industry sources say.

Valentino creative director Pierpaolo Piccioli wished Sarno “good luck” on Instagram with a photo of the two designers together. Gucci has been trying to fill the void left by Michele by publishing rather dull ads for its Jackie 1961 bag, featuring American actress Dakota Johnson. Such campaigns do more harm than good.Regarding Gucci and its ambitions in beauty, Kering will need to show it can live up to its motto “empowering imagination”.