Portfolio: MSPEA and Korres

Morgan Stanley Private Equity Asia (MSPEA) seems to know instinctively that a lot of the sweat can be taken out of value-add work when the matchmaking is just right. Good alignment between founders and financial partners certainly helps in execution, but when companies are complementary to their target markets, things fall into place all the better.

This idea has been playing out for Greece-based beauty brand Korres since late 2017, when MSPEA and Chinese skincare company Profex backed a plan to take the company global. One can imagine the lightbulb moment: Korres was an all-natural makeup manufacturer incubated in an independent pharmacy and stuck in its shallow home market, while China’s young cosmetics consumers were increasingly demanding exotic, ethical products with a personal founder story.

MSPEA and Profex initially invested a combined EUR48.3 million ($58.7 million), taking 56% and 14% stakes, respectively. The first order of business was part of the deal itself, which delisted Korres from the stiflingly illiquid Athens Stock Exchange. This was followed by a realignment of the capital structure, a restructuring of the distribution network, an introduction of new management incentive plans, a recruitment drive, and establishment of new affiliates in Europe, the US, and Latin America.

“When I was alone, I had a lot of difficulties in operations, from cashflows to being in the small Greek market, and not being able to see the big picture because I had to struggle with everyday issues,” says Giorgos Korres, founder and chairman of Korres. “I was extremely surprised how Morgan Stanley could see the big picture without knowing the everyday situation. The first thing they addressed was being able to really see the value of the brand.”

Meeting of minds

The notion that understanding a brand is crucial to a business build-out is an unspoken consumer investor mantra. But acknowledgement of this wisdom becomes foundational when the target is a boutique entrepreneur-led operation that prides itself on doing everything in-house and sustainably with pure ingredients. “It was a big question mark for me working with such a huge organization. Are they going to be supportive or not care?” says Korres. “The way they help me personally and trust and respect me is phenomenal.”

This thinking also came into the choice of strategic partner, when Profex was brought on board. The Shanghai-based company had a history of bringing niche products with unique characteristics into China with players such as Mustela, Uriage, and Bio-Oil. Importantly, as a Greek-American, Profex co-founder and shareholder Paul Contomichalos proved instrumental in creating confidence that the combined effort would have the necessary understanding of Greek aesthetics.

“There were a lot of strategic investors of larger scale that approached Korres directly, but Mr. Korres wanted to work with a team that could help him maintain the philosophy of focusing on natural, organic products and social contributions,” says Kingsley Chan, a managing director at MSPEA who sits on the Korres board. “Profex helped position us collectively as a good working partner from a cultural perspective. With this kind of business, you need someone who appreciates the background and brand value.”

Korres’ first product in 1996 was an aromatic herbal syrup with honey and aniseed, based on a recipe devised by Giorgos Korres’ grandfather. The company now has around 400 herbal products across makeup, skincare, body care, haircare, and fragrances. Core ingredients, including Greek yogurt, “Olympus tea” and the flower extract “golden krocus,” are marketed as much for their local flair as their natural chemical properties.

MSPEA and Profex earmarked EUR10 million for expansion efforts at the time of the acquisition, with the first major push targeting a fledgling footprint in the US. The US business has grown almost 2.5x in the past two years and tracked a 50% hike in sales during 2020 despite the impacts of COVID-19. About 80% of sales in the country were via TV shopping channels. MSPEA also helped Korres consolidate its brand ownership by ending a licensing agreement in Latin America with Avon and bringing management of operations in the region back in-house.

In 2017, global sales were around EUR50 million. By 2020, the Latin America business alone was generating $50 million a year. Europe continues to represent about 55% of sales, while the US and Latin America are a combined 39% and Asia is 6%. China has been the fastest-growing market, up 80% year-on-year starting from a negligible base and it is expected to match the US in sales by the end of 2021 or early 2022. “If it hasn’t, we haven’t done our job properly,” Korres says.

China in person

In many ways, doing this job right was about cultural immersion. Chan and Yu Gao, MSPEA’s co-CIO and head of China, started by bringing Korres to Shanghai, where he met with executives at Tmall and witnessed the country’s consumer boom at point-blank range, including the November 11 Singles Day shopping festival. This has helped inform cross-border brainstorming for a new line of China-targeted products to be launched either this year or next. The local breakthrough so far is a facemask made from Greek yogurt. 

“Everybody knows about the China opportunity, and it’s easy to talk about it over the phone, but for management teams and entrepreneurs who are less experienced with the region, they need to just come and feel the beat of the consumer market or they have no idea how big it is,” says Gao, who has been nominated vice chairman of Korres. “That impact is really how our Greek team, especially the development and strategy professionals, were able to better communicate with our Chinese partners.”

China expansion has also played an important role in the digitization of the broader business, which previously had a relatively minimal online presence. Activity in China is currently 100% online pending the resolution of regulatory issues to the satisfaction of Korres’ policy against animal testing. As a result, an expansion program in a developing market representing only a small fraction of overall sales has counterintuitively fostered the company’s most modern operations. 

“I could not have been more surprised,” Korres says, describing his impressions of China’s internet-connected and brand-savvy youth culture. “My feeling today is that the heart of the global community is China. Just walk around Shanghai, not just the biggest malls, but anywhere, the kind of energy you see and how people are dressed, how they behave, how they know every brand around the world – the Chinese consumer is far ahead of the European or American consumer.”

MSPEA’s analysis of the situation on the ground has borne out these instincts. The private equity firm estimates that the total China beauty market could grow by around 15% during the next three years, adding $34 billion of sales. China beauty grew 18% in 2019, with the premium segment up 32%. This made it the largest beauty market globally with a 20% share of the $130 billion pie. That figure is expected to hit 25% by 2022.

Following fashion

At the same time, no market is digitizing faster, with the local e-commerce boom splintering into new categories driven by mobile, social media, livestreaming, and interactive technologies. This is perhaps especially true in fashion and beauty, which are considered an ideal fit for strategies leveraging online influencers. According to MSPEA’s annual cosmetics industry survey, 92% of consumers said they used online channels in 2020, up from 84% the prior year and only 31% in 2014. Korres’ flagship stores are on Tmall and JD.com.

“Despite all the excitement about domestic brands for the younger generations in China, nine of the top-10 cosmetics product sales during Singles Day are foreign brands,” says Chan. “There’s still a lot of trust and belief in foreign brands among China’s aspiring consumers. The key, for smaller players in particular, is to have your own niche and your own story. This is exactly where Korres comes in.”

In some of the new channels, the fan base is exceeding or seeing faster growth than those of some of the more established brands. For example, the company has already accumulated 25,000 followers on Little Red Book a social commerce platform where even the likes of Louis Vuitton top out at around 130,000 followers.

Korres attributes the success to date to communication of the company’s ethos and clean image: “When you have an authentic brand and what you do is authentic, the consumer can feel it,” he says. “You can’t pressure them. They have to feel it.” 

This point of differentiation has continued to evolve under MSPEA. In recent months, the company has launched a recycling operation that collects empty packaging and transforms it into art and everyday objects such as toothbrushes. It is part a no-waste policy where company packaging is 99% recyclable and all remaining ingredients from the production process are returned to the farmers and fields from which they came to support the next harvest.

The recycling program is the latest so-called lab in a comprehensively in-house manufacturing, raw materials handling, and marketing machine, including an all-female R&D team. There are five other labs focusing on soil and herb sourcing, organic ingredient extraction, molecular research, packaging design and materials. More than 500 clinical trials are conducted before anything is released to market.

“Learning from the China textbook to transform digitally is one of the things we believe we can do well, and that’s what’s happening with Korres. But founders of natural and organic businesses are highly focused on best practices and want to have a concerted approach when they go into sizable markets,” Gao says. “We appreciate that and continue to work with the company to help them stick to their principles.” 

Content creators

The next big project will borrow from the digital learnings in China to establish a loyalty app and community platform, where users can educate themselves on brand-relevant lifestyle topics, as well as share ideas and stories about healthy living.  The plan is to launch the service in the next four months in Greece, where brand awareness is highest and up to one million users are expected to sign up. This would be implemented in other markets as the kinks are worked out.

“A lot of cosmetics retailers do this kind of personalized content creation and data analytics, but for a company like us to speak to the consumer this way is unique, and I believe it is our future,” Korres says. “We can do this because we express our brand through the full circle, from seed to skin and back again. That gives us the knowledge, where whatever the consumer asks us, we will be able to answer. That’s pretty rare in our industry.”

For MSPEA, Korres’ rare nature doesn’t preclude the possibility of recreating its story, at least in terms of an inbound China consumer play. The idea will be to target high gross margin and fast-expanding companies, where sales can be multiplied through expansion of branding and the distribution network. In time, synergies between portfolio companies could come into focus.

“After this deal, we were approached by a number of Chinese players keen to work with us on other opportunities, as well as a number of Greek consumer companies trying to find an experienced investor that could help them venture into China,” Gao says. “So, this has been an interesting cross-border brand acquisition for us – and we do look forward to replicating the experience in other sectors and with other brands.”

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• Topics
• Greater China
• Europe
• Expansion
• Consumer
• China
• Asia
• Morgan Stanley Private Equity Asia