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Dolce & Gabbana is taking beauty back in-house in a bold strategic move that runs counter to the approach of many luxury fashion brands.
The Italian house is in the process of establishing a new business, Dolce & Gabbana Beauty, which by January 2023 will assume 100 per cent control of the manufacturing, sales and distribution of its fragrance and makeup products — a €1 billion business, according to the company. Dolce & Gabbana Beauty will be based in Milan under the leadership of Alfonso Dolce, brother of Domenico Dolce and president and CEO of Dolce & Gabbana, and Gianluca Toniolo, who joins Dolce & Gabbana Beauty as operating CEO.
The announcement marks a transition for Dolce & Gabbana’s beauty business from licensed to direct operations. It goes against the grain of luxury peers like Burberry, Valentino, Salvatore Ferragamo, Prada, Christian Louboutin, Chloé and newest entrant Moncler, which have struck beauty licensing agreements with groups like L'Oréal, Coty, Puig and Interparfums in recent years, ceding much control to them in return for a percentage of annual sales.
Experts say Dolce & Gabbana’s move could pave a new route for brands as they take closer control of their retail and distribution channels, leading to strong relationships with customers and higher margins.
Alfonso Dolce, president and CEO of Dolce & Gabbana.
The launch of new company Dolce & Gabbana Beauty follows the conclusion of its licensing deal with Shiseido in December 2021. Since the release of its first fragrance in 1992, Dolce & Gabbana has created over 100 fragrances, including its bestselling Light Blue and The One scents. In 2009 the brand expanded into makeup, selling £30 lipsticks and £48 blushes at department stores. Shiseido has manufactured and sold Dolce & Gabbana branded perfume and cosmetics since 2016.
The two companies agreed to bring a partial end to their licensing agreement in April 2021 as part of Shiseido’s cost-cutting measures following the Covid-19 pandemic. The Japanese group has unveiled a three-year strategic plan that refocuses on the skincare segment, forecast to account for 80 per cent of Shiseido’s sales within the next two years. Shiseido will continue to produce Dolce & Gabbana beauty products worldwide until the end of 2022.
For Dolce & Gabbana, the move is an “important step” in the ongoing development of the brand’s “assets, skills and responsibilities”, Alfonso Dolce tells Vogue Business. “Dolce & Gabbana is a reflection of the cultural richness and beauty of Italy itself. Today we are pleased to announce this new phase in our growth as a proudly independent Italian house.”
“Dolce & Gabbana has a sizable business in the beauty sector because they started many years ago and some of their products have had evergreen success,” says Mario Ortelli, managing director of Ortelli & Co. While there isn’t a one-size-fits-all recipe for success in the beauty business, Orelli notes that Dolce & Gabbana’s strategy “goes in the different direction of most luxury brands [with beauty offerings], which have chosen to externalise rather than internalise”.
It’s a big challenge. Few fashion companies have successfully managed their beauty businesses internally, says Ortelli. But for those who can make it work the rewards are significant. Ortelli points to Chanel and the LVMH group, which owns 15 brands including Christian Dior, Givenchy and Guerlain as well as younger brands such as Benefit, Fresh and Rihanna’s Fenty beauty line.
Both Chanel and LVMH handle their own product development, manufacturing and marketing. While Chanel does not disclose figures for its beauty and fragrance business, LVMH’s performance over the past decade has been promising. In 2010, it generated about €3 billion in sales from beauty and perfume on an operating profit of €332 million. By 2021, that had grown to €6.6 billion in sales with an operating profit of €684 million.
However, other brands that have tried to take this route have stumbled. Burberry brought its fragrance and beauty business back in-house in April 2013, following the termination of its licensing deal with Inter Parfums, but ended up struggling with cost and complexity. Switching the beauty unit to direct control from a licensing agreement more than doubled the group’s marketing spend and operating profit margins showed only a “modest increase”, according to Burberry’s financial results for the six months ended 30 September 2013. In April 2017, it rethought again, opting for a strategic partnership with Coty “to help drive a new phase of development and growth" for its beauty division.
The road to making beauty work in-house is full of potential pitfalls. “The risk for taking the operations in-house is that you have to manage your fixed cost and that's why scale is important,” says Ortelli. “The other risk with managing the business internally is that it can be complex – you have to build up an organisation of experienced people and suppliers.”
If the switch succeeds, the rewards are very significant. “There’s a risk reward. If they 100 per cent own and control the business, then they’re going to benefit much more financially,” says Steven Ekstract, managing director of Global Licensing Advisors. “With a license, brands only get paid a royalty – on the higher end that’s 18 to 20 per cent of wholesale, which is about 50 per cent of retail. If a Dolce & Gabbana lipstick sells, the brand would receive only 9 per cent of profits while its license partner would get 91 per cent,” he explains. “That’s a big difference.”
Right now may be a clever time to act. The global luxury beauty industry is showing strong growth and will be worth $69 billion by 2025, according to the Bain Altagamma 2021 luxury study. “The beauty market is booming and Dolce & Gabbana recognises this,” says Ekstract. Traditional distribution channels are also evolving as consumers buy more beauty products online, he adds. “The retail model has changed. Brands are not as dependent on brick-and-mortar or high-end department stores where most of the sales took place in the last decade.”
Dolce & Gabbana beauty products are currently sold via the brand’s physical stores and e-commerce site as well as in luxury department stores and pure-play beauty e-tailers such as THG-owned Look Fantastic. Looking ahead, digital channels will evolve into a key area of focus, says Alfonso Dolce. “Dolce & Gabbana will approach the market in compliance with the traditional operational model, but considering the dynamic moment we are living in, we are working on the evolution of our methods of distribution in line with the expectations of both loyal consumers and the new generation who are increasingly interested in new shopping experiences,” he says.
Luxury brand licensing first gathered momentum in the 1980s. The industry was much smaller and relatively fragmented, with little presence beyond traditional product categories and a handful of stores in major capitals.
French designer Pierre Cardin led the way for a licensing boom. As new aspirational consumers emerged globally, brands turned to licensing as an efficient means to increase the scale and reach of their businesses. This came at a price for those who overextended their licensing activities, says Ekstract.
Over time, many luxury houses expanded into cosmetics as they sought to attract new, often younger, consumers who could not necessarily afford a €2,000 handbag. “It’s an entry product category that can not only lead to more frequent purchases, but consumers might also then trade up to higher value product categories,” says Ortelli.
A Dolce & Gabbana Beauty store.
Beauty — as well as eyewear — became favourite product categories for licensing deals. But there is a hint of change in the air. Last December, LVMH bought back the remaining stake in its eyewear production joint venture. Kering has its own vertically integrated business, Kering Eyewear, launched earlier in 2014, which drove sales of €487.1 million last year.
The Dolce & Gabbana move will make it possible to “evolve” the brand experience in a unified language that combines fashion and beauty, Dolce tells Vogue Business. “This decision will allow us to approach, in the most direct way possible, the experience that our beauty customers can have, not only in relation to the product category, but also as a lifestyle and a sense of belonging to the brand itself,” he says.
Dolce & Gabbana Beauty operating CEO Gianluca Toniolo comes from LVMH, where he was most recently country general manager of LVMH Perfumes & Cosmetics in Italy. He joined LVMH in 2009 from Guerlain and was appointed licenses and joint ventures director for Fendi in 2013 and chief operating officer for Acqua di Parma in 2015. “Toniolo has an international and very specialised profile; he has the suitable expertise for the path we want to implement,” says Dolce.
Toniolo’s appointment is one of many upcoming hires. Dolce & Gabbana Beauty plans to fill 130 to 150 new roles in Milan by March 2023, and another 100 to 120 overseas.
Product development and brand positioning are also key areas of investment, with new launches in the pipeline for 2023, says Dolce. To date, the brand has signed third party deals with Intercos, Cosmint, ICR and other specialist manufacturers in Italy and globally to produce its fragrances and makeup products from 2023.
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