Brazilian beauty giant Natura & Co has released its financial report for the second quarter and first half of 2023. In the second quarter, excluding Aesop, the net revenue amounted to BRL 7.774 billion (USD 1.566 billion), representing a year-on-year decrease of 4.1%. For the first half of the year, the net revenue reached BRL 15.094 billion (USD 3.041 billion), a decline of 4% compared to the same period last year. The company incurred a loss of BRL 732 million (USD 147 million) in the second quarter and a total loss of BRL 1.384 billion (USD 279 million) in the first half of the year. This marks Natura’s sixth consecutive quarter of losses.
Natura &Co posted six consecutive quarters of losses
On August 14th, Brazilian beauty giant Natura &Co, the parent company of Avon, released its financial report for the second quarter and first half of 2023. The report revealed that excluding Aesop, the net revenue for the second quarter was BRL 7.774 billion (USD 1.566 billion), representing a year-on-year decrease of 4.1% or a 1.9% increase in constant currency terms. The gross profit for the second quarter reached BRL 5.086 billion (USD 1.025 billion), showing a year-on-year growth of 2.7%. However, the company still incurred a loss of BRL 732 million (USD 147 million) in the second quarter, narrowing the loss by 4.6% compared to the previous year.
Looking at the specific business segments, Natura &Co Latam recorded a net revenue of BRL 5.463 billion (USD 1.101 billion) for the second quarter, experiencing a 1.7% decline in reported currency. Avon International’s net revenue for the second quarter was BRL 1.51 billion (USD 304 million), representing an 8.1% decrease in reported currency. The Body Shop reported net revenue of BRL 800 million (USD 161 million) for the second quarter, indicating a 12% decline in reported currency.
Meanwhile, Aesop, which is being sold to L’Oréal, achieved a net revenue of BRL 759 million (USD 153 million) in the second quarter, marking a 14.2% year-on-year growth in reported currency. Aesop was the only brand that experienced growth, with double-digit year-on-year growth in all regions except for the Americas. In Asia, revenue grew by 18% in the second quarter and 14% in the first quarter. Aesop remains the most stable brand in terms of performance for Natura &Co.
In terms of regional performance, Brazil continues to be Natura &Co’s largest market, with its revenue share increasing from 35% in the second quarter of 2022 to 40% in the second quarter of 2023. Latin America is the second-largest market, with its revenue share decreasing from 31% to 29%. The EMEA region accounts for 19% of the revenue, while the Asia-Pacific region increased its share from 8% in 2022 to 9%. The North American region remained unchanged, accounting for 4% of the revenue. Overall, Natura &Co’s market center remains primarily in the Latin American region, with the revenue share from regions outside Latin America decreasing from 34% to 31%.
Starting from the first quarter of 2022, Natura &Co has experienced six consecutive quarters of losses. In the first half of this year, the company faced increased costs due to supply chain issues caused by the Russia-Ukraine conflict, leading to a rise in short-term liquidity pressure. Additionally, part of the debt issue can be attributed to the acquisition of Avon in 2019.
In 2019, Natura &Co acquired all the shares of Avon Group at a ratio of 0.3 Natura &Co shares for every 1 Avon share. Based on the transaction price, Avon Group’s current market value is approximately USD 2 billion, a 28% premium compared to the closing price on May 21st. Additionally, Natura &Co will pay a total of approximately USD 530 million to holders of Avon Group’s Class C preferred shares. Including Avon Group’s debt, the total value of the transaction amounts to USD 3.7 billion.
However, the acquisition of Avon has not brought significant improvement to Natura &Co’s performance. In 2020, Avon’s net revenue only grew by 2.9% year-on-year or declined by 18% in constant currency terms. In 2021, Avon’s net revenue decreased by 6.09% to BRL 3.4 billion. In 2022, Avon’s revenue continued to decline, with a decrease of 9.9% in constant currency terms or 22.9% in BRL. The three years since acquiring Avon have not resulted in a transformation of Natura &Co’s performance.
Natura &Co stated that Avon’s performance decline, particularly in 2022, was attributed to the deteriorating global economic conditions and the Russia-Ukraine conflict. These factors had a negative impact on Avon’s operations and overall financial performance.
According to a recent note from S&P Global Ratings, Natura &Co has experienced a decline in profits from its ownership of Avon over time. S&P Global Rating’s analysts Flavia M Bedran and Luciano D Gremone wrote: “Avon continues to underperform in the third year of the turnaround since its acquisition. The benefits of commercial, administrative, and systems synergies have been weaker than expected, which raise some concerns about the long-term viability of Avon’s brands and business model.”
The debt issues stemming from Avon’s acquisition have impacted Natura &Co since 2022. As of the end of the first quarter of 2022, Natura &Co’s current assets amounted to BRL 14.749 billion (USD 2.971 billion), while its current liabilities stood at BRL 14.286 billion (USD 2.878 billion), resulting in a current ratio of just 1.03. This indicated significant short-term liquidity pressure. By June of this year, Natura &Co’s current ratio improved to 1.36, alleviating some of the short-term debt pressures but still posing considerable challenges.
As of June, Natura &Co’s total liabilities reached BRL 30 billion (USD 6.044 billion), while its total assets amounted to BRL 50.594 billion (USD 10.193 billion), resulting in a debt-to-asset ratio of over 60%. Such a high debt-to-asset ratio leads to increased financing costs, and high annual interest expenses, and affects the company’s profitability, resulting in Natura &Co reporting consecutive losses for six quarters.
In April of this year, the international rating agency Moody downgraded Natura &Co & Co Holding S.A’s overall bond rating to Ba3 and revised the outlook from stable to negative.
Divesting Aesop to strengthen and deleverage its balance sheet
To address its debt issues, Natura &Co was forced to sell Aesop to French beauty giant L’Oréal this year. Earlier, Natura &Co had considered taking Aesop public to improve its financial situation through financing, but the plan was put on hold due to the unfavorable capital market conditions caused by the pandemic.
In April of this year, Natura &Co signed an agreement with L’Oréal to sell its Australian luxury skincare brand. The transaction valued Aesop at $2.525 billion, and the deal is expected to be completed in the third quarter of 2023.
Fábio Barbosa, Chief Executive Officer of Natura &Co &Co, said: “The divestment of Aēsop marks a new development cycle for Natura &Co &Co. With a strengthened financial structure and a deleveraged balance sheet, Natura &Co &Co, exercising strict financial discipline, will be able to sharpen its focus on its strategic priorities, notably our investment plan in Latin America. We will also be able to concentrate on continuing to improve The Body Shop’s business and refocusing Avon International’s footprint.”
From the statement made by Natura &Co’s CEO, it appears that the sale of Aesop was a reluctant move for Natura &Co, considering that Aesop has been one of their most outstanding brands in recent years. In 2022, Aesop’s net revenue increased by 21% year-on-year, reaching BRL 2.72 billion (USD 548 million) at a fixed exchange rate. In the second quarter of 2023, Aesop achieved a net revenue of BRL 759 million (USD 153 million), representing a 14.2% year-on-year growth in reported currency. It was the only brand that experienced growth. If the transaction is successfully completed, the nearly $2.5 billion in revenue could repay a significant portion of Natura &Co’s short-term liabilities of $2.878 billion. This is one of the reasons why Natura &Co reluctantly decided to sell Aesop.
Apart from the underperformance of Avon and the debt issues, another contributing factor to Natura &Co’s consecutive weak performance is its lack of proactive digital transformation.
Since its foundation, Natura &Co has primarily operated through the direct selling model, and the acquired Avon also operates primarily through direct selling. Even in 2023, direct selling remains Natura &Co’s main sales method. The company employs sales representatives directly to sell its products, allowing for direct contact with consumers to promptly understand their needs and produce better products or provide more personalized services based on those needs.
According to its latest half-year report, Natura &Co relies heavily on traditional direct selling, which accounts for a significant 83% of its revenue. Retail (own stores + franchise) contributes 11% of the revenue, while digital sales only make up 6%. In terms of its brands, Natura &Co’s direct selling represents 90% of its revenue, with digital sales accounting for just 6% in 2023 Q3. For Avon, direct selling is even higher at 93%, with online sales comprising only 1%. The Body Shop follows a similar pattern, with 81% of revenue coming from direct selling and digital sales representing only 6%. Compared to the second quarter of 2022, offline sales have even decreased by 5%.
As consumers increasingly embrace digital shopping, the rise of new retail has created challenges for traditional retail businesses. Additionally, direct selling giants like Avon and Natura &Co face competition from international brands such as L’Oréal, Estée Lauder, and Shiseido. The substantial increase in rental and labor costs for physical stores has further exacerbated their difficulties. These factors have made adapting to the current market environment increasingly challenging for Avon, Natura &Co, and others. Traditional direct selling has suffered significant setbacks, particularly during global pandemics like the one we have faced.
Natura &Co’s development has diverged from the market trends. Its lack of proactive digital transformation, reliance on traditional direct selling, and limited international market expansion have made it increasingly difficult for Natura &Co to thrive in recent years.
Falling behind other beauty giants gradually
It is evident that Natura &Co has gradually fallen behind other international beauty giants in recent years, and the most tangible manifestation of this is the decline in its performance.
In the first half of this year, Natura &Co’s revenue was BRL 15.094 billion (USD 3.041 billion), a 3.8% year-on-year decrease. Moreover, Natura &Co incurred a loss of BRL 1.384 billion (USD 279 million) in the first half of this year, marking six consecutive quarters of losses since 2022. When compared to other beauty giants, Natura &Co’s declining revenue puts it at a disadvantage.
In the WWD ranking of the top 100 global beauty companies in 2022, Natura &Co ranked eighth. Ahead of Natura &Co were L’Oréal, Unilever, Estée Lauder, Procter & Gamble, Shiseido, LVMH, and Beiersdorf.
Except for Estée Lauder and Chanel, the remaining six companies have already released their financial reports for the first half of 2023.
L’Oréal maintained its first position, with the French giant achieving revenue of EUR 20.57 billion (USD 22.468 billion) in the first half of 2023, representing a comparable growth of 13.3%. Unilever, holding the second position, achieved revenue of EUR 13.1 billion (USD 14.31 billion) in the first half of 2023, a year-on-year growth of 7.38%. Procter & Gamble’s beauty business generated revenue of USD 7.24 billion in the first half of 2023, ranking fourth.
There have been some changes among the companies ranked 5th, 6th, and 7th in the first half of this year. Shiseido, the Japanese beauty giant that was ranked fifth last year, achieved revenue of JPY 494.189 billion (USD 3.391 billion) in the first half of 2023. Luxury powerhouse LVMH’s beauty business also demonstrated strong momentum in the first half of 2023, with a beauty revenue of EUR 4.028 billion (USD 4.4 billion). In terms of revenue, LVMH has surpassed Shiseido. Beiersdorf’s beauty business recorded revenue of EUR 4.108 billion (USD 4.487 billion) in the first half of the year, surpassing both LVMH and Shiseido, securing the fifth position, while LVMH and Shiseido ranked sixth and seventh, respectively.
For other giants, their revenue has generally increased in the first half of this year as the impact of the pandemic gradually subsided, while Natura &Co experienced a decline. However, looking at the data, Natura &Co’s revenue has remained relatively stable compared to the previous year. Nevertheless, if Aesop is successfully sold, it will have a significant impact on Natura &Co’s performance.
The decline in performance reflects the irrationality of Natura &Co’s brand portfolio and market positioning.
In terms of brand portfolio, Natura &Co has four main brands, including The Body Shop, which develops, distributes, and sells beauty, cosmetics, and care products such as body wash, lipstick, conditioner, and accessories; Avon, a manufacturer and retailer of beauty and similar products, including mascara, sunscreen, and perfume; Natura &Co, a retailer of personal care cosmetics and makeup products, such as eyeshadow, blush, and primer; and Aesop, an Australian skincare and haircare brand.
Except for Aesop, which is being sold to L’Oréal, the other three brands experienced a decline in performance in the second quarter of this year. Natura &Co &Co Latam reported a 1.7% year-on-year decline in net revenue, amounting to BRL 5.463 billion (USD 1.101 billion) in the second quarter. Avon’s net revenue in the second quarter was BRL 1.51 billion (USD 304 million), representing an 8.1% decline in reported currency. The Body Shop’s net revenue in the second quarter was BRL 800 million (USD 161 million), indicating a 12% decline in reported currency. Meanwhile, Aesop, which has seen steady growth in recent years, had to be sold by Natura &Co due to debt issues. The downturn of the other three brands has contributed to Natura &Co’s lackluster performance in recent years.
In comparison to other international beauty giants, L’Oréal has a brand portfolio divided into four major divisions: Professional Products, Consumer Products, L’Oréal Luxe, and Dermatological Beauty.
Under these four divisions, L’Oréal has over 40 brands. Top-tier brands include Helena Rubinstein and Giorgio Armani; first-tier brands include Lancôme; second-tier brands include Kiehl’s and Biotherm; other brands include Yuesai, L’Oréal Paris, Maybelline, Kérastase, La Roche-Posay, Vichy, Shu Uemura, and NYX; makeup brands include, Maybelline, Shu Uemura, and NYX; dermo-cosmetics brands include La Roche-Posay, CeraVe, and Vichy; fragrance brands include Viktor&Rolf, YSL Beauty, and Ralph Lauren; haircare brands include Kérastase, Redken, and Matrix; and skincare brands include Lancôme and Clarisonic.
With its diverse brand portfolio, L’Oréal covers a wide range of product categories, from high-end to mass market, enabling it to meet consumer needs more accurately and comprehensively.
In addition to L’Oréal, another beauty industry giant, Estée Lauder, has a well-rounded product portfolio.
In the fragrance category, Estée Lauder owns brands such as Jo Malone, Aramis, Donna Karan, and Tom Ford. In skincare, they have brands like La Mer, Estée Lauder, Clinique, Origins, Glamglow, Aveda, and Darphin. In the makeup segment, they include Tom Ford Beauty, Bobbi Brown, and MAC, among others.
By comparison, Natura &Co’s brand portfolio is significantly less robust and lags behind other beauty industry giants. In recent years, Natura &Co has operated with just four brands and has not made any significant acquisitions or launched distinctive brands and products. Dave Marcotte, Senior Vice President of Global Retail at Kantar, stated, “I think Avon is a brand that has lost momentum in the entire Latin American market, especially in the United States. They have a very strong offering, but they haven’t refreshed their products in a while.” Marcotte believes that the acquisition of Avon by Natura &Co was a relatively weak move.
Furthermore, Natura &Co’s lack of active expansion into international markets is another reason for its decline.
According to the latest financial reports, Brazil remains Natura &Co’s largest market, with its revenue share increasing from 35% in Q2 2022 to 40% in Q2 2023. Revenue from regions outside Latin America has decreased from 34% to 31%. Particularly in North America, the world’s largest cosmetics market, Natura &Co’s revenue share is only 4%. In the Asia-Pacific region, which includes China, the second-largest market globally, Natura &Co’s revenue share is merely 9%. After the sale of Aesop, Natura &Co’s business in Asia may further shrink.
In contrast, other beauty industry giants like L’Oréal and Estée Lauder have a more balanced global market presence.
L’Oréal’s latest half-year report for 2023 shows that its largest market is Europe, accounting for 31.55% of its revenue. The second-largest market is North Asia, with a revenue share of 27.47%, followed by North America at 25.92%.
In the first quarter of this year, Estée Lauder’s revenue share from the Americas reached 29%, the Asia-Pacific region accounted for 31.74%, and Europe, the Middle East, and Africa contributed 39.26% to its revenue. Their business is more evenly distributed globally.
On the other hand, Natura &Co’s revenue share from regions outside Latin America has decreased from 34% to 31%, indicating a further decline in international market operations.
Overall, a broader brand portfolio and a wider range of product categories allow companies to meet the diverse needs of consumers at different levels. It also enhances a company’s resilience by reducing the impact of underperforming products on overall performance. Similarly, a more balanced market presence enables companies to engage more deeply in global market cooperation and exhibit stronger performance in the face of regional conflicts and unexpected events such as pandemics.
Natura &Co’s brand portfolio and international market presence are diverging from those of international beauty industry giants. Following the sale of Aesop, Natura &Co may further fall behind its competitors.
