• by Christine Bittar , December 18, 2006

Consumer products giant Procter & Gamble--still best known for staples like diapers, detergent and toothpaste--may soon be the driving force behind glamorous beauty products from Estee Lauder or Clarins through an acquisition, suggests Citigroup analyst Wendy Nicholson in a research report.

P&G already manufactures color cosmetics, but its Cover Girl and Max Factor brands are mass, not luxury. P&G would benefit by branching into prestige beauty because of the high gross margins within the category, says Nicholson.

"It might make sense for [P&G] to buy a major player outright as a means of acquiring scale more rapidly than growing this business organically," wrote Nicholson last week. "The high-end color cosmetics category has become increasingly fragmented in recent years ... there's a scarcity of sizable players in the industry ... and Estee Lauder and Clarins [are] two noteworthy pure plays in prestige cosmetics we believe P&G would be interested in acquiring."

The Cincinnati packaged goods marketer has recently--very quietly--been making some inroads into the prestige cosmetics arena through its Prestige Products unit. P&G distributes Dolce & Gabbana fragrances--via a license it won in July over L'Oreal--and will be introducing a Dolce & Gabbana branded line of color cosmetics.

Within Prestige Products, P&G has more than 20 prestige beauty lines, with the key investments in Hugo Boss, Lacoste, Dolce & Gabbana, Gucci and Valentino brands. While SK-II, P&G's prestige skin care brand, is mostly sold in Japan, it has been expanding in the U.S., and was recently introduced in Bloomingdale's New York City flagship store.

Nicholson is not alone in her theory. "P&G will make another big acquisition and it'll be sooner rather than later," said former P&G executive Gary Stibel, founder and managing partner of Westport, Conn.-based consultancy New England Consulting Group. "The nice thing about a strategic company [like Procter & Gamble] is that you always know what it'll do because it's predictable and unstoppable," he said. "Look at Gillette," he added. "Everyone thought it was too big and too soon, but it wasn't"--referring to P&G's $57 billion acquisition of the razor maker in 2005. For its part, P&G has been open about its intention on growing, both organically and through acquisition.

Stibel confirmed that P&G is most interested in beauty--and is quite sure its next acquisition will be in the beauty sector, however, not necessarily prestige. Beauty is definitely one of the strategic areas of interest to Procter, he said, and more licenses are also a possibility.

"One thing I am certain about is that Procter is looking for quality, and a business which already has a strong presence, like Gillette," he said.

Whether or not the Lauder family--which still operates the family business founded by Estee--would ever consider selling is another question, but it does seem to be a good fit for P&G.

"In our view, [Lauder] would represent a great target for P&G, given its terrific brand lineup and increasingly global footprint," Nicholson wrote.

Although ultimately Nicholson doesn't think a major acquisition is in the cards in the next 12 months, Stibel indicated otherwise. While he couldn't comment on specific target companies, he did say that any acquisition under consideration would be a large one--at a cost of more than $1 billion--and one with a strong business already, rather than a turnaround situation or a niche brand.

That would make a stronger case for the $6.5 billion Estee Lauder, but eliminate smaller or weaker brands, such as Revlon.