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Feeling Pretty, L’Oreal Goes On A MidMarket Brand Shopping Spree

There’s something to be said for watching another company succeed, then swoop in and buy it up to enhance a growth strategy.

Why would the biggest company in its industry be shopping for mid-market brands? The answer is simple: original ideas, and the resources needed to develop them, don’t always guarantee success. That’s according to macroeconomists’ study of innovation vs. imitation.

Though the research suggests that the practice works best for small to mid-sized businesses, French cosmetics juggernaut L’Oreal has been taking a related strategy. It’s not spending to copycat success, instead it’s using resources to scope out and scoop up its smaller counterparts to make gains in marketshare.

Most recently, the world’s largest cosmetics maker (with sales north of 22 billion euros in 2013) made two key acquisitions to extend its reach to African American shoppers and in North America’s mass market retailer. L’Oreal purchased NYX, the Los Angeles-based midmarket brand in June, Brazil’s Niely Cosmeticos Group hair color company in September, and followed up last week with the purchase of Carol’s Daughter. These acquisitions represent more than $5 billion in deals this year.

The acquisitions “keep things ticking in an environment where growth is hard to come by,” said Alex Howson, an analyst at Jefferies in London, Businessweek reported, while Jean-Paul Agon, L’Oreal’s chairman and CEO, said in particular of NYX, “We are pretty good at seizing brands that are at the early stage of development and making them huge.”

For L’Oreal which currently holds 35,000 patents and spends nearly twice what others in the industry do on research and development, buying NYX might seem a bit counterintuitive. The company, which was founded in 1999 and is expected to surpass $100 million in sales this year, primarily sells makeup priced below $10 at chains such as Target and Ulta.

Though not a “prestige” brand, NYX represents a slice of the market that takes direct aim at one of its competitors, MAC. A department store fixture, MAC is known for its high voltage colors and celebrity spokespeople, as well as an annual campaign for its AIDS fund. Over the past 20 years, MAC has earned cult status among a segment eager to try the latest bold trends as well as devotees to iconic products such as the hyper-pigmented lipstick “Russian Red.”

Under L’Oreal’s wing, NYX can grow into even more mass market outlets, similar to the way Maybelline (acquired by L’Oreal 18 years ago) has ballooned to sales of $2.7 billion, up from $300 million in 1996, all while wrestling a piece of market share away from MAC.

Carol’s Daughter represents a similar coup in a desirable and growing market segment. The company, which was started by African American entrepreneur Lisa Price in her Brooklyn apartment in 1993, had grown to net sales of $27 million this year. Though the makeup and natural haircare brand had backing from black luminaries such as Will Smith and Jay-Z and distribution in Sephora and Target, recently filed for Chapter 11 bankruptcy protection for its proprietary retail division and closed 5 stores.

Once the retail arm exited Chapter 11, L’Oreal was ready to buy the brand for an undisclosed sum. According to a statement by L‘Oreal USA president Frederic Roze, Carol’s Daughter will allow its parent company to make a bold move into a consumer group it hasn’t been able to grow in. “This acquisition will enable L’Oreal USA to build a new dedicated multicultural beauty division as part of our Consumer Products business.” I’m sure it didn’t hurt that Oprah was already a dedicated user of Carol’s Daughter.

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