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Coty chief vows this time it is different

Sue Y Nabi, the fifth chief executive of Coty since 2015, is betting the solution to finally fix the problem-plagued, heavily indebted cosmetics maker can be found in a tube of Gucci lipstick sold online in China.

After a year in the job, the beauty industry veteran has set out a growth plan built on expanding in “prestige” cosmetics made under licence for luxury brands, while also boosting sales in China and in skincare, two booming markets where Coty has long trailed larger rivals L’Oréal and Estée Lauder.

The company’s previous chief executives “were not from the beauty industry so they missed things and made many execution mistakes”, Nabi told the Financial Times. “My job is to set priorities on where we need to put our money and energy.” 

Despite repeated turnrounds and expansion trough acquisitions, Coty has not posted a net profit for five years. In contrast, sector leaders L’Oréal and Estée Lauder have enjoyed years of strong sales and earnings growth driven by colour cosmetics, skincare, and China until Covid-19 hit. Both are on track to exceed pre-crisis revenue this year despite changes to consumer habits brought on by lockdowns and mask-wearing.

Coty’s controlling shareholder JAB, the deal-hungry company that invests the wealth of Germany’s billionaire Reimann family, has a lot riding on Nabi. Although Coty is one of its oldest investments, it has been the weak spot in its roughly $34bn portfolio, which includes beverage group Keurig Dr Pepper, coffee specialist JDE Peets, and eateries Panera Bread and Pret A Manger.

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Fixing Coty is more than a question of pride for JAB. The company headed by chair Peter Harf needs to burnish its reputation since it no longer relies solely on the Reimanns’ fortune to fuel its acquisitions that have totalled more than $50bn in the past decade. It is now seeking to raise $5bn to expand in petcare after securing almost $18bn from wealthy institutions, family offices, and universities since 2014.

The task will not be easy. Wendy Nicholson, an analyst at Citi who has long followed Coty, said that some investors remained “very sceptical” given that the company had not delivered on several promised turnrounds.

“They have been burnt in the past so do not have faith that management or the owners will make the right decisions,” she said. “Critics see Coty as too highly levered, not well positioned strategically, and lacking financial discipline to improve cash flow and margins. But those who are buying into the shares are very bullish since there is so much room to improve.” 

A priority for the Coty chief has been to expand licensing deals with luxury brands Gucci and Burberry to help them launch new make-up lines ©  Heorshe/Alamy 

Coty’s woes stem chiefly from JAB’s strategy of expanding via debt-backed acquisitions so as to turn the group, which was originally focused on perfume, into a miniature version of L’Oréal present globally across all beauty categories. In 2015, JAB backed Coty to buy Procter & Gamble’s beauty brands for $12.5bn so as to diversify into haircare and colour cosmetics and double its revenues to $9bn. 

But the deal proved simply too much to handle. Not only was Coty saddled with more than $7bn in debt, the integration process was slow and complicated just as P&G’s best known brands like CoverGirl and Max Factor began to haemorrhage market share to trendier start-ups.

Coty took $4bn in writedowns on the P&G business in 2019, yet continued to spend on acquisitions such as roughly $800m to buy stakes in two make-up brands founded by American celebrity sisters Kylie Jenner and Kim Kardashian.

Choked by its high debt, Coty in effect unwound a big part of the deal in 2020 by selling a 60 per cent stake of the professional haircare business, including the Wella and Clairol brands, to private equity fund KKR for $2.5bn. 

The divestment, coupled with the hit from the Covid-19 pandemic, has meant that Coty’s $4.6bn in annual revenue in its last financial year to end June was basically the same as before the P&G deal.

Nabi’s generous pay package indicates JAB’s eagerness for new blood. In addition to a base salary of €3m a year, the chief executive was granted 30m company shares that vest over three years and were not linked to any performance-related targets. Those shares are worth about $280m today up from $108m when she joined.

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Analysts welcomed Nabi’s appointment as previous CEOs had experience in consumer packaged goods, but not beauty.

The 53-year-old executive spent more than a decade climbing the ranks at sector leader L’Oréal, starting out as a sales representative promoting aftershave in the south of France before heading major brands like Lancôme and L’Oréal Paris. She quit in 2014 to start her own vegan, premium skincare brand Orveda.

Not only can Nabi speak with authority on subjects from product formulations to brand positioning, she also has an uncommon personal story. Born in Algiers as Youcef Nabi, she transitioned to being called Sue and identifying as a woman while at L’Oréal roughly 15 years ago.

Although it remains rare to see transgender CEOs of major listed companies, Nabi does not see herself as an advocate and wants to be judged solely by her actions. “It’s very important that people do not mistakenly think that I’m just here to tick a box. I’m here because I’m a very successful executive in this industry and nothing else.” 

Raised in a prominent family in Algeria where her father served as energy minister, Nabi moved to France at 16 to study for an engineering degree. “I used to call my father to beg to let me come home, but he kept telling me to stay one more day, one more year,” she recalls. It left her with a sense of determination and independence.

“I do everything people ask of me but I do it my way.”

Coty spent roughly $800m to buy stakes in two make-up brands founded by US celebrity Kylie Jenner and her sister Kim Kardashian © Startraks/Shutterstock

When she arrived at Coty, Nabi began going through every brand in the portfolio from the low to mid-priced names sold in Walmart to the luxury perfumes sold in Harrods to analyse their positioning, strengths and weaknesses. Jefferies analyst Stephanie Wissink likened the process to an “emergency room doctor doing triage” to figure out what should be saved and what should be abandoned.

She paid special attention to CoverGirl, which had been through numerous failed reboots that Nabi felt had led the brand astray from its mass-market affordable roots. She also unearthed neglected gems such as Lancaster, a high-end sun cream brand with a marketable back-story of having been used by Princess Grace of Monaco, and has put it at the centre of a push into luxury skincare in China.

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Another key priority was expanding the work Coty did under licence with luxury brands Gucci and Burberry to go from simply making and marketing fragrances for them to helping them launch new make-up lines. Given their brands’ strength in China, Nabi is banking on using them to finally build Coty’s presence in the world’s second-biggest beauty market.

“Just by being on T-Mall, some 700m people have access to our products for the first time in China, making the sky the limit in terms of growth,” she said.

While Nabi has worked on the product side, the management team has been strengthened by appointing former KKR partner Gordon von Bretten as chief transformation officer and Laurent Mercier as chief financial officer.

The company, which reports quarterly numbers on Monday, is due to hold an investor day later this month. It is too early to judge whether this turnround will be the final one at Coty, said Citi’s Nicholson, but she expects the group to turn a net profit this year and thinks Nabi’s growth plan is smart.

But the shares are still languishing 25 per cent below the $11.65 per share that JAB paid in 2019 to take back majority control, and roughly half their 2013 initial offering price.

“It’s really the small victories that help you to transform people’s mindset internally and externally, while you work towards big victories that take more time,” said Nabi.

 

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