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Mirror, mirror, on the wall, who is the most valuable of them all?

By David Rogers

The world of retail is changing. The $500 billion global cosmetic industry is not just following this trend, but it’s at the forefront of this change, particularly with some of the new entrants such as Kylie Jenner. Forbes published an article last week deeming that Jenner was worth $900 million and was soon to become the world’s youngest ever self-made billionaire largely on the back of Kylie Cosmetics. This attracted global interest, with many in awe and others asking was she really worth $1 billion?

The cosmetics industry traditionally worked through companies producing their goods and selling them through third party shops, such as department stores. The internet changed the game as it became easier for the cosmetic companies to interact directly with customers. But even with the dawn of the internet, sales were still largely through third party retailers, either online or bricks-and-mortar shops. Cosmetic brands spent huge amounts on branding and advertising in magazines, on television and online, to persuade consumers to choose their brand and product range.

The rise of social media has changed the game again. It’s not only reduced the barriers to entry that advertising costs previously represented, but it’s introduced the world to a whole new cast of social media influencers who sell beauty products – either their own or someone else’s. This has pitched the traditional beauty brands, with their loyal customers, against the new brands with their potentially more transient audience.

Jenner’s approach to selling make-up differs greatly from the traditional model, in that her brand and her advertising is focused on herself and her online presence. She has 111 million Instagram followers and 25 million Twitter followers. She has such an influence over social media that when she tweeted that she was “sooo over Snapchat” the value of Snapchat reportedly fell by over $1billion. Her tweets and instagrams about Kylie Cosmetics make-up and upcoming launches drive fans into a frenzy and creates such demand that the limited product runs, sold through the Shopify platform, always sell out. In 2016 Jenner reportedly made sales of $19million in one day with the launch of her whole Holiday collection.

The Forbes valuation is based on revenue of $330million “a conservative multiple” and their standard 20% discount. When explaining the multiple used Forbes said “celebrity lines cannot command valuations anywhere near the six times revenue that other beauty brands demand because of the volatility of relying on one name to sell a product. Kylie Cosmetics could certainly sell for half that, or three times sales, which is where Forbes places its valuation.”

So Forbes’ calculation is: $330million x 3 x 80% = $792million.

Whatever the multiple used, there needs to be a large discount applied for the risk involved with being intrinsically tied into the branding of one individual. While the Kylie Cosmetics brand has become established, it is still subject to high volatility of future cash flows for two principal reasons: there are no big or long-term contracts with suppliers and if Jenner’s personal brand was negatively impacted or she was to remove herself from the business, there are serious questions as to how the business would continue to prosper. It may not even be at the level of 50% of the valuation suggested by Forbes. 

In the age of social media, traditional valuation considerations may go out of the window, and it may be that the company is worth the estimated $800m. As such, the billion dollar title is a sensational headline and draws intrigue from the reader, however, scepticism should be applied with regards the basis of valuation and assumptions used particularly if there was a requirement to turn this valuation into an actual cash amount to buy/sell the business.