Amore’s French deal receives snub

Amore Pacific’s recent acquisition of French perfumery Annick Goutal has been met with skepticism, with experts challenging both the price and strategy ― and investors reacting correspondingly.

Industry insiders say that not only did Amore pay too much ― the deal is rumored to be around 30 billion won ― but also “very little synergy” is expected.

Amore Pacific announced Aug. 3 that it reached an agreement with the U.S. private investment firm Starwood Capital to purchase 100 percent of Annick Goutal. Created in 1981, the luxury perfume manufacturer offers a range of exclusive fragrances and products such as candles and sprays for the home.

The market reacted negatively, with the stock price falling 5 percent afterwards. Since then, it continues to be a victim of short selling. 

“The objective ... is to build a pool of brands,” said a global cosmetics expert and industry insider familiar with the purchase. “But you can’t reach a proper economy of scale with only two brands,” referring to Annick Goutal and Amore’s first perfume license Lolita Lempicka. 

In the last decade, the perfume industry has undergone massive consolidation. A handful of multinational producers like Coty of France, P&G, and L’Oreal produce and sell the majority of the world’s fragrances, like those licensed from fashion houses and increasingly, celebrities. 

The edge for these market leaders lies in their worldwide distribution networks. Amore, which has had success in France with Lolita Lempicka, cannot compete with these global players without a comparable infrastructure.

“The perfume business needs big numbers to reach a proper economy of scale,” said the insider. “Fragrance is a mass-market industry.” 

He suggested buying a license of a better-known brand would have been smarter, noting that Amore Pacific had been absent from perfume deals in recent years.

Company spokespeople said actually Amore has been looking for M&A opportunities. As a niche upscale perfume brand Annick Goutal caters to a tiny population of the highest-end customers and thus has consistently made underwhelming returns or losses since Starwood’s 2005 acquisition. It posted a net loss of 282,000 euros (423.5 million won) for the calendar year 2010, despite its revenue rising modestly to 12.2 million from 10.4 million the year before.

It has created a respectable following in key niche markets, namely in France, the U.S., the U.K. and Japan. But distribution problems remain an obstacle and Amore should expect to run into such trouble soon with its rival Shiseido, which currently distributes the French perfumery’s products in America.

Amore Pacific spokespeople claimed that Annick Goutal’s main point of expansion will be in Asia, and Kim Hye-rim, analyst at Hyundai Securities, agreed this made sense.

“Amore is sitting on a pile of cash,” said Kim, implying this deal is not transformative. “I doubt they bought (Annick Goutal) expecting a huge return but in order to attain a strong brand to launch in Asia.”

The industry insider thought this acquisition could build credibility for the Korean company to prepare for other takeovers later but predicted a grim future for Amore’s double-branded niche portfolio ― especially on this continent.

According to Kim, Amore’s Asian ambition is misguided because the Chinese market is growing but still “tiny” by industry standards.

“There is absolutely no market for niche brands.”