Coty relies heavily on mass market beauty products such as Covergirl, but the category is shrinking as consumer habits change © FT montage / Bloomberg

A new flagship store in New York’s Times Square is the latest attempt to revive Covergirl, a 60-year-old make-up label that is struggling to compete in a market where social media influencers mint new beauty brands overnight.

The success or failure will help determine the future of the cosmetics group that owns Covergirl — Coty — and affect the reputation of its controlling shareholder, JAB Holdings, the voracious group that manages the wealth of Germany’s Reimann family.

Led by Bart Becht, the well-respected former chief executive of Reckitt Benckiser, JAB has gone on a roughly $50bn deal spree across the consumer sector in the past five years. Its biggest bets are now on the coffee market, where it recently combined Keurig Green Mountain with Dr Pepper Snapple, and in casual dining with Panera Bread Company and Pret A Manger.

But it is Coty, a much older deal, which JAB acquired in 1992, that is causing doubts. The group’s shares are down more than 50 per cent this year, below their 2013 IPO price. On Monday, Coty replaced its CEO unexpectedly, naming its fourth boss in five years.

Covergirl was just one of a portfolio of 43 beauty products that Coty acquired two years ago from Procter & Gamble for $12.5bn. The performance since has raised questions about JAB’s model of combining companies via often pricey acquisitions and then seeking to improve performance by stripping out cost.

The value of JAB’s 39 per cent stake in Coty has fallen by 60 per cent to $2.5bn since the P&G deal closed in October 2016 — a notable decline even given JAB’s decades-long investment horizons.

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“The shine has come off the JAB story,” said Rosie Edwards, an analyst at Berenberg who covers Coty. “When they bought the P&G brands, investors had faith they would work their magic. Now, no one really thinks JAB has all the answers.”

Nobody questions that the scale of the job at Coty is considerable. The company doubled in size with the P&G deal, bringing together 20,000 employees in 41 countries, working across 70 brands, and 16 manufacturing sites. The integration has proven time-consuming and difficult.

Bart Becht, chief executive officer of Reckitt Benckiser Group Plc, poses for a photograph at the company's headquarters in Slough, U.K., on Wednesday, June 30, 2010. Reckitt Benckiser Group Plc, the world's biggest maker of household cleaners, said Becht had a 90 million-pound ($137 million) gain on share options last year. Photographer: Chris Ratcliffe/Bloomberg
JAB chairman Bart Becht has urged for patience as Coty integrates the P&G brands © Bloomberg

In an interview with the Financial Times, Mr Becht hit back against the critique that the P&G deal had gone wrong. “As this is one of the most complex transactions JAB has done, we said from the very beginning this would be a five-year project,” he said.

“The integration is largely complete but the business transformation is not,” he said, acknowledging that Coty’s consumer beauty division still needed to be fixed. “But the other two divisions, professional [salons] and luxury, are doing actually very well.”

JAB has long cast itself as a better manager and steward of capital than its big consumer packaged goods rivals. But it is now competing in categories such as coffee and make-up, where powerful incumbents such as Coca-Cola and L’Oréal are trying to seize and protect market share.

Chart showing facial cosmetics market  share by sales, Q3 (%) 2018, highlighting Coty

Some of the problems now plaguing Coty stem from the extraordinarily long 15 months it took to close the P&G deal. The deal was structured as a so-called Reverse Morris Trust, which allowed P&G to spin out and sell the assets to Coty without paying capital gains tax. During the transition, the brands were stuck in limbo, and Covergirl, Rimmel and Wella lost market share.

“P&G put them in a tough spot by cutting marketing spend and losing shelf space in stores,” said Mark Astrachan, analyst at Stifel. “But Coty bit off more than they can chew in the mass-market: the category has slowed, competition from new, niche brands is intense, and they do not have the marketing knowhow their larger rivals do.”

All the blame cannot be laid at P&G’s feet. Critics argue that Coty overpaid for a series of legacy brands that do not really appeal to young people. Growth slowed in the mass market just as Coty was increasing its exposure: its largest division, consumer beauty, which accounts for 45 per cent of sales, had like-for-like revenues decline by 10 per cent in the year ended June 2017, and 4 per cent in the year to June 2018.

Coty has also botched three recent integration projects, including a supply hub in the UK and a German warehouse, which were part of changes made to deliver on the promised $750m cost-savings from the P&G deal. The mistakes led to supply chain disruptions that left Coty unable to meet demand for its luxury, professional and consumer products in the US and Europe. It ended up having to pay fines to retailers for not meeting contractual obligations.

David Jones Second-Half Profit...An employee arranges Estee Lauder Cos. skin products inside a display counter at a David Jones Ltd. department store in Sydney, Australia, on Thursday, Sept. 24, 2009. David Jones Ltd., Australia's second-biggest department store chain, may return "excess" cash to shareholders after cutting debt and increasing earnings on sales of designer fashions and cosmetics. Photographer: Jack Atley/Bloomberg
Coty rivals such as Estee Lauder have been reluctant to make large acquisitions, instead focusing on smaller deals © Bloomberg

“The risk is that in its rush to cut costs and reorganise the group, Coty cut too fast, too far and is now paying the penalty,” said Société Générale analyst Mitul Girotra.

Coty’s troubles come as the cosmetics business has been in a period of rapid change as consumers increasingly shop online or via speciality stores such as Sephora or Ulta Beauty where buying make-up is more of an experience. New brands like e.l.f or pop star Rihanna’s Fenty Beauty can be built faster than ever with the help of online armies of influencers.

“The market has moved on, it’s not about selling mass-market brands better into retail channels like Walgreens or Boots,” said one industry consultant who has worked with cosmetics companies. “It’s more about developing fast make-up like fast fashion.”

To that end, cosmetics giants such as L’Oréal and Estee Lauder have eschewed mega-deals such as the one Coty is trying to pull off, and instead have bought small, founder-led brands just as they are starting to show traction.

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With chief executive Camillo Pane resigning this week, the task of turning round the company will now fall to Coty’s new chief executive Pierre Laubies, a coffee industry veteran chosen by JAB for his expertise at overseeing merger integrations. Mr Laubies has not worked in the beauty business before, however.

Shareholders may be hoping that JAB will come to their rescue by buying up shares in Coty. It has been restricted since the P&G deal in the amount of shares it could buy, but those limits expired in October.

Asked whether JAB would buy more shares, Mr Becht said: “We have been buying shares regularly in the past two years, so clearly we like the asset. We have been strong supporters of the company and will continue to be.”

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Origins of JAB

JAB traces its roots to the German businessman Johann Adam Benckiser, who in 1823 bought a chemicals factory in southwestern Germany. With the help of a chief scientist named Ludwig Reimann, who later married into the family, the Benckiser company grew into a major maker of industrial chemicals. Several generations of the Reimanns ran the business, which eventually made them into one of Germany’s richest families.

The last of the Reimanns to be actively involved in the day-to-day running of Benckiser was Albert junior, Ludwig’s great-grandson, who inherited the company in 1952 and pushed it in the direction of consumer goods. He died in 1984, leaving equal stakes to his nine adopted children. In 1997, the family took Benckiser public and two years later engineered a merger with the British consumer goods group, Reckitt and Colman, to form Reckitt Benckiser.

Four of the descendants eventually bought out the others, and they remain the owners of most of JAB today. Over time the family handed over JAB to professional managers, who began to turn it into the investment vehicle it is today.

Peter Harf, Bart Becht and Olivier Goudet are the trio at the helm. Mr Harf started at Benckiser in 1981, while Becht joined in 1988. Mr Goudet, a former Mars executive, joined in 2012.

The managers make suggestions to the family members on possible investments, which they then discuss, with the family having the ultimate say. The trio have also invested some of their own capital into JAB.

In recent years, JAB has been ploughing billions into the coffee sector and casual dining chains in the US and Europe. In coffee, it has real ambitions to unseat Nestlé as the market leader, and it wants to play a role in the global consolidation of what is a rapidly growing, yet fragmented sector.

At the same time, JAB has also unwound its luxury investments by selling shoemaker Jimmy Choo, clothing brand Belstaff, and Swiss brand Bally, in which it retains a minority stake. It has also steadily been selling down its stake in Reckitt Benckiser to reach 1.64 per cent currently.

JAB now sees itself as having three main areas of focus: coffee and beverage, beauty, and casual dining. It disclosed total assets of €23.3bn at the end of June 30 2018.

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