Better Before Bigger: Beauty's New Portfolio Rules

The beauty industry’s portfolio reshuffling has reached a tipping point. Major conglomerates are exploring and orchestrating strategic divestitures while retreating from “big bets” on China and travel retail - two channels that once promised limitless growth. This fundamental reset creates a rare window for private equity and specialist venture investors to acquire and grow quality assets and reshape the industry’s future.

From China “Big Bet” to Dynamic Portfolio Management

The numbers paint a stark picture. Estée Lauder’s travel retail business contracted 28% year-over-year in Q3 2025, with the channel shrinking to the “low teens” percentage of total business from a peak of 28%. L’Oréal has reduced China exposure to 17% of sales. Korean giants face the steepest declines—Amorepacific’s Greater China revenue shrank 27%, while Innisfree shuttered 80% of its China stores, contracting from 800 to just 140 locations.

This isn’t a cyclical downturn. It’s a structural shift that demands new growth strategies and a new approach to diversification and portfolio growth management. Companies are pivoting (back) toward North America, Europe, and emerging markets in the Middle East, India, APAC ex-China and key cities in Africa, where Euromonitor and McKinsey project the most promising beauty growth opportunities through 2030. Each geography will have its own distinct ecosystem. Within geographies, brands will likely look leaner, more digitally integrated and increasingly targeted to specific demographic and psychographic targets. Portfolio management will therefore be much more dynamic.

Portfolio Surgery in Progress

The divestiture wave extends beyond geographic rebalancing. Shiseido’s sale of 10 personal care brands to CVC Capital for 160 billion yen was an early indication of the industry-wide focus on portfolio optimization. Kenvue is exploring the sale of Clean & Clear, Maui Moisture, and other brands generating over $500 million in revenue. Unilever closed Ren and is rumored still to be exploring a sale of Kate Somerville. Most dramatically, Coty is reportedly considering a split into separate fragrance/prestige and consumer divisions, and exploring a sale of consumer. Its stock jumped 13% on speculation of a breakup after being down 30% year-to-date, and investors seemed disappointed with the formal announcement of a strategic review of only the consumer division in late September.

Estée Lauder, amid its “Beauty Reimagined” turnaround involving up to 7,000 job cuts, is reviewing its portfolio with particular scrutiny on its makeup division. L’Oréal’s quiet discontinuation of Decléor after a decade of ownership shows that even patient strategics are making tough choices. Shiseido is in the midst of another radical reengineering of its North American operations, after divesting 3 brands in 2021, although what that means for its brand portfolio is less clear.

Why Traditional Models Are Breaking

The industry’s consolidation playbook (acquire, integrate, scale globally leveraging fixed costs of existing affiliates) no longer guarantees success. The intense need for local relevance in channel and marketing activation is putting unprecedented strain on global models relying primarily on scale.

This isn’t just the case for “sleepy strategics.” PE firms, confident that they are smarter than traditional conglomerates, have been trying to build “next generation beauty platforms” for years. Their track record is miserable. Some of you might remember Glansaol. Advent International’s Orveon Global, launched in 2021 with bareMinerals, Laura Mercier, and Buxom, but saddled with a complicated technical transfer and an impractical timeline, has failed to achieve meaningful synergies and even operational stability despite initial ambitions to create “the future of the face.” Other large and splashy “lifestyle” PE theses in beauty have struggled to deliver on their ambitions of global and category expansion that justified high valuations in investment committee.

E.L.F. Beauty may be the closest to building something new, which is ironic given their start focusing on dupes. Their $1 billion headline acquisition of Rhode and $355 million purchase of Naturium demonstrates a new model: maintain brand autonomy while leveraging operational capabilities and - most important - a cultural mindset. This more hands-off integration preserves brand identity while capturing select operational synergies more focused on unique brand growth drivers than scale - a balance traditional conglomerates struggle to achieve. Whether this works in the long-term as the momentum behind the core brand succumbs to the law of large numbers and distribution saturation remains to be seen. Unilever pursued a similar approach in its Prestige portfolio, but as growth at Dermalogica and Paula’s Choice has turned negative, it has been doing some portfolio surgery and internal reorganization of its own to try to find the right balance.

Three Strategic Opportunities

1. Strategic Reset Toward Dynamic Management of Diversified Pockets of Growth

For strategics, this reshuffling could be an opportunity, enabling more fundamental portfolio optimization. Companies can evolve coherent brand architectures focused primarily on profitable growth, geographic coverage and scale where it makes sense. The pivot from China-centric strategies to diversified global growth - particularly in India and the Middle East - allows for more balanced risk profiles, albeit with much more dynamism and complexity in resource allocation, and less easy scale synergies. This will require managing an agile and dynamic portfolio of regional brand, distribution and functional models rather than the traditional global 3-part matrix.

Amorepacific’s Americas business surpassing China for the first time, driven by Laneige’s lip treatment success, shows how focused execution in the right markets can beat a “one size” global presence and model. A similar approach will be required by western strategics to continue to win with the Chinese consumer outside the highest levels of luxury.

2. Private Equity’s Moment to Acquire Systematically Underfunded Assets

This reshuffle presents private equity with access to strong brands that may have been systematically underfunded and underexecuted within larger global portfolios. As conglomerates focus resources on “fewer, better” brands, quality assets in the $200-500 million revenue range are becoming available. These brands often possess strong fundamentals - loyal consumers, differentiated positioning, proven products, secure retail distribution - but lacked investment priority within large and complex portfolios, or had investment spread too thinly globally across too many markets in which they could not win.

PE firms with operational expertise in carve outs, digital transformation, direct-to-consumer capabilities, and influencer marketing can unlock value that traditional conglomerates couldn’t or wouldn’t pursue. The key is avoiding the Orveon trap of forced synergies and hubris, or the diversification-without-scale of Waldencast. Instead, successful acquirers will provide infrastructure and capital while preserving and enhancing brand DNA and bringing insurgent marketing and innovation approaches to tired old playbooks.

3. Reinventing the Early-Stage Brand Pipeline Through Strategic Partnerships

The most critical challenge - and opportunity - lies in capturing next-generation brand disruption and growth before valuations become prohibitive and ever more risky given shortening brand lifecycles and more challenging “globalization” of acquisition.

The solution isn’t more corporate venture arms writing inflated checks. It’s strategic partnerships with specialist investors who understand early-stage brand building. Firms like XRC, with deep expertise in seed and Series A beauty investments, can identify and nurture breakthrough brands that strategics can later acquire at rational valuations and when their capabilities are relevant.

This partnership model offers multiple advantages:

• Risk sharing: Strategics avoid the full downside of early-stage investing

• Expertise leverage: Specialist VCs bring pattern recognition from scouting thousands of potential beauty investments and understanding of what it takes to operate and scale brands that are “sub-scale” for strategics

• Operational support: Portfolio brands benefit from both VC guidance and targeted “pull” strategic resources

• Option value: Strategics maintain preferential access to proven winners

Corporate participation as LPs in specialized funds is one route, but the industry needs to go further: creating formal innovation partnerships where strategics provide targeted support in both capital and capabilities in exchange for specific future rights in a founder-friendly framework.

The Path Forward

Beauty’s great reshuffle isn’t just portfolio optimization - it’s an industry transformation. Winners will emerge from three groups:

1. PE firms that can acquire and revitalize underfunded brands

2. Strategics that achieve a new model of dynamic portfolio focus and management, and

3. VCs and Growth Equity funds that deliver innovative partnerships that crack the code on early-stage investment.

The venture partnership model represents the highest-leverage opportunity. As traditional M&A returns become increasingly challenging and corporate venture struggles to compete, strategic partnerships with specialist investors like XRC Brand Capital Fund offer a sustainable path to feed the new dynamic portfolios that both strategics and PEs need to win. These partnerships can identify tomorrow’s billion-dollar brands at seed stage, nurture them through growth, and create a bigger pie of value for all stakeholders.

The next 12-24 months will determine which companies successfully navigate this transition. Those clinging to old models - whether unfocused portfolios, solo corporate venture, or forced consolidation - will struggle. The future belongs to those embracing new partnership models that combine strategic resources with venture expertise.

At XRC Brand Capital Fund, we believe this great reshuffle creates an unprecedented opportunity. As strategics seek innovation partners and PE firms need deal flow, our position at the intersection of early-stage beauty innovation, our network of tech optimizations and distribution partners, and strategic capital becomes increasingly valuable. The question isn’t whether the industry will embrace new models—it’s which strategics will move first to secure the best partnerships.