Private equity firms unpack China's beauty supply chain

Packaging suppliers are turning to private equity to help them keep up with consumer trends by consolidating supply chains. Bain Capital’s Jonathan Zhu explains why China's cosmetics business needs a makeover.

Packaging suppliers are keen to crack the burgeoning Chinese cosmetics market but are struggling to manage the transition from bricks and mortar outlets to digital sales channels in the world's second-largest economy. Private equity firms see an attractive opportunity. 

The cosmetic packaging market in China will expand to $7.75 billion in sales by 2022 at one of the fastest annual growth rates in the world — 4.8% — according to market research firm Zion. This is being driven, in part, by the explosion in ecommerce; Alibaba said its Singles’ Day promotion in November 2017 generated a record $25 billion in sales, mostly via smartphone transactions. 

Volatile sales patterns mean cosmetics manufacturers must adapt faster to changing customer needs and concerns, and their packaging suppliers must also be quick to react. Supply-chain issues such as time-to-market and stock level management are more crucial than ever.

A backlash against the use of plastic and demand for traceability in the supply chain are also  growing concerns for cosmetics companies. 

In recent years the Chinese government has become far more serious about environmental protection. In the State Council restructuring earlier this year, environmental protection supervision was consolidated into a more powerful ministry with more staff: the Ministry of Ecology and Environment

More packaging suppliers are bringing manufacturing in house to ensure compliance with more robust environmental surveillance. However, bringing too much in house can impinge on suppliers’ agility to respond to new trends. They must strike a careful balance.

Backing from private equity firms is supporting the necessary investments. As a result there has been a flurry of dealmaking in the sector. 

Blackstone is buying cosmetics packaging maker Shyahsin in Taiwan, according to a person familiar with the matter. French private equity firm PAI Partners completed its purchase of Albéa in April and Citic Industrial Investment finalised its acquisition of Axilone from Oaktree Capital in January. China Jianyin Investment (JIC) bought SGD Pharma in 2016.

Baring Private Equity Asia bought packaging company HCP from TPG Capital in January 2016. In 2017 HCP bought Rusi in Germany.

In the latest deal in the sector, Bain Capital said in a statement on April 3 it had bought cosmetic packaging firm World Wide Packaging (WWP). It acquired the firm, whose clients include Estee Lauder, L’Oreal and Dermalogica, from another private equity firm, Minneapolis-based ShoreView Industries.

At the same time as Bain Capital's acquisition of WPP, WPP is buying a Chinese company. Two people familiar with the matter said the company is Suzhou-based Gerpman

WWP — which makes packaging from plastic mass-market containers to metal cases for lipstick, lip gloss, mascara, and eyeliner — made above $20 million of ebitda (earning before interest, tax, depreciation and amortisation) in 2017 and the Chinese company racked up an ebitda of about $15 million the same year, the second person told FinanceAsia.

Bain Capital has already invested in the beauty industry in Asia including current portfolio companies, Korean brands Carver Korea and Huegel. The Boston-headquartered fund has also backed a Chinese packaging company before, called Greatview Aseptic Packaging.

Established in 1980, WWP has offices on the east and west coasts of the United States. It already has a small factory in Suzhou, China, which it opened in 2015.

The following interview has been edited for brevity and clarity: 

Q Why did Bain Capital buy WWP?

A Bain Capital has done a number of packaging deals including in Asia and we have looked at a lot more. We think packaging is an interesting sub-sector that is very much correlated to the growth of consumer spending.

I like to use this analogy. There are a lot of gold prospectors but it is unclear which one will strike gold. However, if we know there is gold, then we can become a supplier of picks and shovels to the gold prospectors, which is a stronger position.

WWP has a broad customer base, around 200 to 300 customers in the beauty industry. They range from large companies to small indie brands that develop quickly on the back of a sales and marketing campaign.

Q What value add will Bain Capital bring to the transaction?

A We have signed a contract to buy a company based in China that has the capabilities to make components as well as direct customer relationships in the China market.

We’re trying to create a global player that has integrated capabilities from customer management, design, supply chain management to manufacturing.

In terms of value-add, it is [primarily] about trying to create a combined entity that is stronger than the sum of its parts.

Q How is WWP responding to changes in the beauty industry?

A WWP owns a small plastic tube manufacturing operation in Suzhou. So they primarily outsource to larger component manufacturing companies around the world.

However between the manufacturer and the broker there is only a contractual relationship so the client's order might not be prioritised. Also the end customer does not know who is making their products.

In house manufacturing gives customers greater confidence. The big beauty companies might have large volume requirements and very high quality standards – they want to be able to audit their supply chain.

Q Are growing environmental concerns a risk to this investment?

A In China the issue historically is not that there are no standards, there are. The issue has been compliance.

The company that we’re buying has an entirely new state-of-the-art facility. For us to be compliant is easy because we were built to be compliant. For a number of the smaller manufacturers they will have a tough time, because bringing everything up to standard costs money and effort and some factories will have to close.

So going forward we think the competitive environment is going to become more favourable.

Q Is there potential for any cooperation between WWP and your existing portfolio companies such as Carver?

A At the moment the possibilities are limited as Carver does all their manufacturing in Korea.

However I am hopeful that during our ownership, WWP will break through into the Korea market.

Q Are fluctuations in raw material prices a risk to this investment?

A Raw materials are an important component of cost, but it is not overwhelming. The company uses plastic resin and aluminium. Most of the value add comes from the manufacturing process.

Q What does the growth in ecommerce mean for WWP?

A This company sells to cosmetics and personal care companies who sell either through regular bricks-and-mortar outlets or through ecommerce channels. From a manufacturing point of view it does not generally matter.

There is one important consideration though. Bricks-and-mortar distribution has a longer lead-time whereas in ecommerce the volume can happen very quickly.

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