Strategy is Hard: Coty’s Acquisition of Kylie Jenner’s Cosmetics Brand Example

“It’s too early to say if Coty’s acquisition of Kylie Jenner’s cosmetics brand was a good decision or a bad decision. We’ll only know if the acquisition was a good or a bad decision if it works relative to what Coty planned to do in the first place.”

If we read about what a company is doing, understand the drivers of value, the levers of profits and apply a few frameworks, it’s common to think we could easily understand why they’ve chosen a certain path. We’d also think it’s easy to understand what a company is doing and why by listening to what the CEO says and looking at their press releases and investor statements. When companies communicate, they want to say enough to please their stakeholders while keeping important pieces to themselves so they don’t share too much with competitors. There’s more to deducing strategy than just the public information a company releases.

Coty’s acquisition of Kylie Jenner’s cosmetics brand example

A good example of this is Coty’s acquisition of Kylie Jenner’s cosmetics brand, which was one of the biggest acquisitions for a private, new label. Over the last few years, big brands that have relied on large advertising campaigns have been pushed aside by brands driven by social media campaigns, like Kylie Jenner’s cosmetics brand.

When Coty made the acquisition, Kylie Jenner’s cosmetics sales dropped from about $375 million to about $125 million a year—about two-thirds. The media raised the question: Why was this brand acquired when sales were clearly slowing down? Part of the criticism is that maybe Coty didn’t do proper due diligence. I think that’s unfair criticism toward Coty because we don’t know why they made the acquisition. In another space or time, we could say good things about Coty because they bought a brand for a good price when sales were dropping, and they know it will grow.

The price paid relative to the volume and revenue acquired

Whether or not the volume or the sales have been dropping, we should consider the price paid relative to the volume and revenue acquired. But even if we look at the numbers, we still don’t know why Coty acquired the Kylie Jenner’s cosmetics brand. Maybe Coty and Kylie made a deal that she would help them understand how to leverage social media to drive their other properties. Maybe Coty made a strategic bet to block another competitor from making an agreement with Kylie, which is something Coty couldn’t say publicly.

Why companies undertake certain strategies

We don’t know why companies undertake certain strategies. A lot of big M&A decisions take place after two CEOs get together—usually at an event like Davos in Switzerland—find some common ground, and agree that it makes sense for them to work together. But we don’t know the thinking behind it; we only know the thinking companies choose to publicly reveal.

3 things that drive individuals

Individuals are driven by three things.

First, they are driven by emotional decisions. They’re worried about their legacy. They’re worried that they’ll be thought of as someone who wasn’t strategic and who didn’t make a difference in the industry, someone who didn’t consolidate or raise profits. They feel they need to act to change that perception.

Second, they are driven by politics. Every CEO’s career is on the line, even though they never talk about it. Every CEO is being watched by the board, executive committee, employees and a variety of stakeholders. They make every decision to help the company, but they want to preserve their job as well. Few CEOs will hurt their own careers to do something that they know is good for the company.

Third, they are driven by rational decisions—if the numbers stack up, if it’s logical and if value can be created. We have to distinguish between the rational elements that are communicated to us and the rational elements that a CEO chooses not to communicate.

Reality exists in the middle

Whenever you read about an acquisition, a sale or a change in strategy, you need to distinguish between what the company is saying, how the business press is interpreting it, and what the company is actually trying to do. So what is said, the interpretation, and the general reader’s interpretation, you have got some reality that exists in the middle. And a good strategist figures out what that reality is. If you don’t, you will react and make decisions based on what you think is happening—when the reality is much different.

Companies make decisions internally for reasons that make sense to them. Press releases go through several layers of filtering, PR teams and lawyers. Each group changes what is being communicated to ensure it meets certain guidelines and legal requirements. The end product is the sanitized version the company chose to communicate, but it’s not the real reason something happened.

Was Coty’s acquisition of Kylie Jenner’s cosmetics brand a good decision or a bad decision?

Maybe it’s too early to say if Coty’s acquisition of Kylie Jenner’s cosmetics brand was a good decision or a bad decision. We’ll only know if the acquisition was a good or a bad decision if it works relative to what Coty planned to do in the first place. If their plan was to infuse some of the Kardashian and Jenner family’s social media magic into Coty’s other brands and they do well, but the Kylie Jenner brand doesn’t, is that a failure or success?

You have to assess companies based on their intent and whether they succeeded at doing it—not what the reader or business press think they wanted to do. Strategy is always hard to understand because we don’t know the “why” or “how” behind the company’s original intent.

This is an excerpt from Monday Morning 8 a.m. newsletter, issue #11.