Item 1. Business
Item 1. Business.
Overview
Founded in 1904, Coty Inc. is one of the world’s largest beauty companies with an iconic portfolio of brands across fragrance, color cosmetics, and skin and body care. Through targeted strategic transactions, the Company has strengthened and diversified its presence across the countries, categories and channels in which we compete, building a strong beauty platform.
Over the past few years we have been implementing a comprehensive transformation agenda (the “Transformation Plan”), focusing on our core go-to-market competencies, simplifying our capital structure and deleveraging our balance sheet.
As we transform the Company, we continue to make progress on our strategic priorities, including stabilizing our consumer beauty brands through leading innovation and improved execution, accelerating our prestige fragrance brands and ongoing expansion into prestige cosmetics, building a comprehensive skincare portfolio leveraging existing brands, enhancing our e-commerce and direct-to-consumer (“DTC”) capabilities, expanding our presence in China through prestige products and select consumer beauty brands, and establishing Coty as an industry leader in sustainability.
In fiscal 2021, we completed the sale of a majority stake in Coty’s Professional and Retail Hair business, including the Wella, Clairol, OPI and ghd brands, (together, the “Wella Business”). As of June 30, 2022, Coty owns a 25.9% stake in Rainbow JVCO LTD and subsidiaries (together, “Wella” or the “Wella Company”).
All dollar amounts in the following discussion are in millions of United States (“U.S.”) dollars, unless otherwise indicated.
Segments
Operating and reportable segments (referred to as “segments”) reflect the way the Company is managed and for which separate financial information is available and evaluated regularly by the Company’s chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company has designated its Chief Executive Officer as the CODM.
During the first quarter of fiscal 2022, the CODM finalized the Company's organizational structure and how performance will be assessed, and the Company realigned its reportable segments to a principally product category-based structure, comprised of a Prestige business segment and a Consumer Beauty business segment beginning in the first quarter of fiscal 2022. The Company recast its results for fiscal years 2021 and 2020 to reflect the changes in its segments.
For segment financial information and information about our long-lived assets, see Note 5— Segment Reporting in the notes to our Consolidated Financial Statements, and for information about recent acquisitions or dispositions, see Note 4—Business Combinations, Asset Acquisitions and Divestitures in the notes to our Consolidated Financial Statements.
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Brands
The following chart reflects our iconic brand portfolio:
Consumer Beauty Prestige
Adidas Burberry
Beckham Bottega Veneta
Biocolor* Calvin Klein
Bozzano* Cavalli
Bourjois* Chloe
Bruno Banani Davidoff
CoverGirl* Escada*
Jovan* Gucci
Max Factor* Hugo Boss
Mexx Jil Sander
Monange* Joop!*
Nautica Kylie Jenner
Paixao* Lacoste
Rimmel* Lancaster*
Risque* Marc Jacobs
Sally Hansen* Miu Miu
007 James Bond Orveda
philosophy*
SKKN BY KIM
Tiffany & Co.
* Indicates an owned beauty brand.
Marketing
We have a diverse portfolio of brands, some owned and some licensed, and we employ different models to create a distinct image and personality suited to each brand’s equity, distribution, product focus and consumer. For our licensed brands, we work with licensors to promote brand image. Each of our brands is promoted with logos, packaging and advertising designed to enhance its image and the uniqueness of each brand. We manage our creative marketing work through a combination of our in-house teams and external agencies that design and produce the sales materials, social media strategies, advertisements and packaging for products in each brand.
We promote our brands through various channels to reach and engage beauty consumers, through traditional media, through in-store displays, on digital and social media, and through collaborations, product placements and events. In addition, we seek editorial coverage for products and brands in both traditional media and digital and social media to drive influencer amplification and to build brand equity. We also leverage our relationships with celebrities and on-line influencers to endorse certain of our products. Our marketing efforts benefit from cooperative advertising programs with retailers, often in connection with in-store marketing activities designed to engage consumers so that they try, or purchase, our products, including sampling and “gift-with-purchase” programs designed to stimulate product trials.
We have dedicated marketing and sales forces in most of our significant markets. These teams leverage local insights to strategically promote our brands and product offerings and tailor our creative marketing to fit local tastes and resonate with consumers most effectively.
We utilize in-depth brand and market data analytics to develop branding, merchandising and marketing execution strategies to maximize the consumer experience and build a better business. We continue to concentrate working media resources on
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select products, channels and markets, which we believe represents a significant opportunity for revenue and gross margin improvement, and to implement a tactical, in-store strategy for the others.
Distribution Channels and Retail Sales
We market, sell and distribute our products in approximately 125 countries and territories, with dedicated local sales forces in most of our significant markets. We have a balanced multi-channel distribution strategy which complements our product categories. Our mass beauty brands are primarily sold through hypermarkets, supermarkets, drug stores and pharmacies, mid-tier department stores, traditional food and drug retailers, and dedicated e-commerce retailers. The prestige products are primarily sold through prestige retailers, including perfumeries, department stores, e-retailers, direct-to-consumer websites and duty-free shops. Due to the impact of COVID-19 and as part of our strategic initiatives, we have focused on expanding our e-commerce and direct-to-consumer channels. We also sell our products through third-party distributors. In fiscal 2022, no retailer accounted for more than 10% of our global net revenues; however, certain retailers accounted for more than 10% of net revenues within certain geographic markets and segments. In fiscal 2022, Walmart, our top retailer, accounted for approximately 6% of total Coty Inc. net revenues from continuing operations.
Innovation
Innovation is a pillar of our business. We innovate through brand-building and new product lines, as well as through new technology. Our research and development teams work with our marketing and operations teams to identify recent trends and consumer needs and to bring products quickly to market.
We are continuously innovating to increase our sales by elevating our digital presence, including e-commerce and digital, social media and influencer marketing designed to build brand equity and consumer engagement. We have also focused our efforts on meeting evolving consumer shopping preferences and behaviors, both on-line and in-store. We have introduced new ways to customize the consumer experience, including using artificial intelligence-powered tools to provide personalized advice on selecting and using products, and augmented reality tools that invite customers to virtually try products with curated looks, tutorials and product recommendations.
In addition, we continuously seek to improve our products through research and development. Our basic and applied research groups, which conduct longer-term and “blue sky” research, seek to develop proprietary new technologies for first-to-market products and for improving existing products. This research and development is done both internally and through affiliations with various universities, technical centers, supply partners, industry associations and technical associations. A number of our products incorporate patented, patent-pending or proprietary technology. In addition, several of our products and/or packaging for our products are covered by design rights protections.
Our principal research and development centers are located in the U.S. and Europe. See “Item 2. Properties.”
We do not perform, nor do we commission any third parties on our behalf to perform, testing of our products or ingredients on animals except where required by law.
Supply Chain
During fiscal year 2022, we continued to manufacture and package approximately 80% of our products, primarily in facilities located in the United States, Brazil, China and various countries in Europe. We recognize the importance of our employees at our manufacturing facilities and have in place programs designed to ensure operating safety. In addition, we implement programs designed to ensure that our manufacturing and distribution facilities comply with applicable environmental rules and regulations. To capitalize on innovation and other supply chain benefits, we continue to utilize a network of third-party manufacturers on a global basis who produce approximately 20% of our finished products. As part of our ongoing transformation, we continue to explore options to further optimize our supply chain operations.
The principal raw materials used in the manufacture of our products are primarily essential oils, alcohols and specialty chemicals. The essential oils in our fragrance products are generally sourced from fragrance houses. As a result, we realize material cost savings and benefits from the technology, innovation and resources provided by these fragrance houses.
We purchase the raw materials for all our products from various third parties. We also purchase packaging components that are manufactured to our design specifications. We collaborate with our suppliers to meet our stringent design and creative criteria. We believe that we currently have adequate sources of supply for all our products.
We have experienced disruptions in our supply chain from time to time, including in connection with our past restructuring efforts and, more recently due to global supply disruptions, and we work to anticipate and respond to actual and potential disruptions.
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Competition
There is significant competition within each market where our products are sold. We compete against manufacturers and marketers of beauty products, salon professional nail products and personal care products. In addition to the established multinational brands against which we compete, small targeted niche brands continue to enter the beauty market. We also have competition from private label products sold by retailers.
We believe that we compete primarily on the basis of perceived value, including pricing and innovation, product efficacy, service to the consumer, promotional activities, advertising, special events, new product introductions, e-commerce initiatives, direct sales and other activities (including influencers). It is difficult for us to predict the timing, scale and effectiveness of our competitors’ actions in these areas or the timing and impact of new entrants into the marketplace. For additional risks associated with our competitive position, see “Risk Factors— The beauty industry is highly competitive, and if we are unable to compete effectively, our business, prospects, financial condition and results of operation could suffer ”.
Intellectual Property
We generally own or license the trademark rights in key sales countries in Trademark International Class 3 (covering cosmetics and perfumery) for use in connection with our brands. When we license trademark rights we generally enter into long-term licenses, and we are generally the exclusive trademark licensee for all Class 3 trademarks as used in connection with our products. We or our licensors, as the case may be, actively protect the trademarks used in our principal products in the U.S. and significant markets worldwide. We consider the protection of our trademarks to be essential to our business.
A number of our products also incorporate patented, patent-pending or proprietary technology in their respective formulations and/or packaging, and in some cases our product packaging is subject to copyright, trade dress or design protection. While we consider our patents and copyrights, and the protection thereof, to be important, no single patent or copyright, or group of related patents or copyrights, is material to the conduct of our business.
Products representing 63% of our fiscal 2022 net revenues from continuing operations are manufactured and marketed under exclusive license agreements granted to us for use on a worldwide and/or regional basis. As of June 30, 2022, we maintained 23 brand licenses. In addition, approximately 53% of our fiscal 2022 net revenues from continuing operations were attributable to prestige fragrance, of which approximately 82% was from our top six prestige fragrance brands.
Our licenses impose obligations and restrictions on us that we believe are common to many licensing relationships in the beauty industry, such as paying annual royalties on net sales of the licensed products, maintaining the quality of the licensed products and the image of the applicable trademarks, achievement of minimum sales levels, promotion of sales and qualifications and behavior of our suppliers, distributors and retailers. We believe that we are currently in material compliance with the terms of our material brand license agreements.
Most brand licenses have renewal options for one or more terms, which can range from two to ten years. Certain brand licenses provide for automatic extensions, so long as minimum annual royalty payments are made, while renewal of others is contingent upon attaining specified sales levels or upon agreement of the licensor. None of our brand licenses are up for renewal during fiscal 2023. None of our top eight licenses is up for renewal before the end of calendar 2026, with the majority running longer than that and providing for renewal without licensor consent. For additional risks associated with our licensing arrangements, see “Risk Factors— Our brand licenses may be terminated if specified conditions are not met, and we may not be able to renew expiring licenses on favorable terms or at all ” and “Risk Factors— Our failure to protect our reputation, or the failure of our brand partners or licensors to protect their reputations, could have a material adverse effect on our brand images ”.
Human Capital
Workforce . As of June 30, 2022, we had approximately 11,012 full-time employees in over 36 countries. In addition, we typically employ a large number of seasonal contractors during our peak manufacturing and promotional season. W e expect our overall headcount, as well as the use of seasonal contractors, to decrease as we continue our efforts to restructure and rationalize our business in connection with our strategic priorities, including through outsourcing initiatives and strategic transactions.
Our employees in the U.S. are not covered by collective bargaining agreements. Our employees in certain countries in Europe are subject to works council arrangements and collective bargaining agreements. We have not experienced a material strike or work stoppage in the U.S. or any other country where we have a significant number of employees.
Our employees are a key source of competitive advantage and their actions, guided by our Code of Conduct and our global compliance program, Behave Beautifully , are critical to the long-term success of our business. We recognize the importance of our employees to our business and believe our relationship with our employees is satisfactory.
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Environmental, Social and Governance
Coty’s sustainability commitment, Beauty That Lasts, is a multi-pillared strategy which aims to contribute to a more sustainable and inclusive future. With a focus on products, planet and people we see sustainability as the ultimate driver of innovation.
We report annually on our progress towards our sustainability targets through a separate sustainability report. Our sustainability reports and other information on our sustainability initiatives and achievements are available on our website. Changing circumstances, including evolving expectations for sustainability, or changes in standards and the way progress is measured, may lead to adjustments in, or the discontinuation of, our pursuit of certain goals, commitments, or initiatives (see additional discussion in “Forward-looking Statements— Cautionary Note Regarding Sustainability Information ”). The content of our sustainability reports and information on our website are not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC.
On March 31, 2022, the SEC issued a proposed rule on climate-related disclosures by U.S. public companies. While the proposed rule is not yet final, it is expected to be effective for Coty starting with its fiscal year 2024 annual report based on the effective date as set forth in the proposed rule. Certain audit requirements are expected to phase in during fiscal year 2024. We are refining our controls to address the specific requirements of the proposed rule and reporting requirements.
The Beauty of Our Product
Our products have an important role to play in building a sustainable future for the beauty sector. To respond to evolving social and environmental challenges, sustainability is at the heart of our product creation, from design and development through to sourcing of materials.
We are changing the way we design, formulate and manufacture in order to minimize our environmental impact and create innovative products. Since 2020, we have an operational Beauty That Lasts Index in place, which is a qualitative tool for evaluating the social and environmental profile of new product developments.
We have ambition to reduce our packaging consumption with a focus on virgin plastic, glass and carton while sourcing from more sustainable sources. In addition, our Green Science program aims to minimize the pressure of our products on natural resources.
In fiscal 2022, we began production of our first globally distributed fragrances using carbon-captured ethanol and have plans to integrate this ethanol into our wider fragrance portfolio.
We recognized that sustainability efforts require collaboration which goes beyond our own organization. To that end we are members of several industry initiatives, including the Responsible Beauty Initiative, focused on sustainable sourcing for the industry, or Sustainable Packaging Initiative for Cosmetics, focused on creating common guidelines and tool for eco-design packaging. We also joined the EcoBeautyScore Consortium – a breakthrough initiative which aims to develop an industry-wide environmental scoring system for cosmetics products, with the aim of empowering consumers to make sustainable beauty choices.
We continue to evaluate and modify our processes and activities to further limit our impact on the environment as we implement our sustainability strategy.
The Beauty of Our Planet
We recognize that conserving and protecting the natural environment is a vital part of our responsibility as a business. We are committed to minimizing the environmental impact of our operations and preserving resources for generations to come.
In fiscal 2022, we made considerable progress towards our environmental impact goals. All of our factories and distribution centers now use renewable electricity (including through buying of renewable energy certificates), and we have made strong progress on energy reduction. We continue to invest in additional energy optimization methods, including bringing two sites to carbon neutrality for scope 1 and 2 emissions. We have achieved this through optimization, use of renewable electricity, and where necessary, by offsetting any remaining Scope 1 and 2 emissions. In our efforts to reduce our impacts on the environment, none of the waste from our factories and distribution centers was sent to landfill, while most was reused, recycled, or composted. We have implemented several measures to reduce water consumption across our plants and distribution centers.
During fiscal year 2021, we conducted a footprint study assessing our impact on Climate, Water and Biodiversity. From this work, in fiscal year 2022 we have focused on our impact on climate and have identified key actions to reduce our carbon footprint and develop science-based climate targets for reducing greenhouse gases. We have submitted these proposed carbon targets to the Science Based Target initiative (“SBTi”) for validation and plan to communicate our targets by the end of fiscal 2023. Implementation of plans to operationalize our proposed targets are in progress. While certain projects are already in execution phase, other projects are in the early stages as we identify specific courses of action and validate the feasibility of
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such projects to achieve our proposed targets. We continue to evaluate and modify our processes and activities to further limit our impact on the environment and to enable the deployment of our climate-related initiatives to meet our proposed targets.
The Beauty of Our People
We are committed to playing our part in creating a more inclusive business and society. We want to create a culture in which our associates bring their true selves to work, in turn making Coty stronger for it. We are committed to creating opportunities for our associates to develop skills, advance their careers and nurture their long-term employability. We offer our employees a range of development activities, from learning formally through e-learning courses and trainings, to learning through special projects and assignments and on the job. In fiscal 2022, we have made steady progress on pay equity for similar roles and performance, regardless of gender.
We celebrate diversity in all its forms and continue to work towards building a more inclusive business. We recognize the importance of diversity at a leadership level and throughout our whole organization, including diversity of gender, ethnicity, ability, background, gender identity, and sexual orientation. Our Executive Committee is majority female and our Board of Directors was evenly gender-split during fiscal 2022. For all associates, we have launched a global diversity, equity, and inclusion (DE&I) training curricula and introduced employee resource groups to drive DE&I action by associates to enable employees to raise awareness and educate on DE&I topics they are passionate about.
We also strive to reflect the communities we serve through our brands, which champion the diversity of beauty and beauty of diversity.
Our global compliance program, “Behave Beautifully”, is designed to detect and prevent unlawful behavior and promote a culture of ethical business practice. “Behave Beautifully” sets out our standards across a number of areas, including, but not limited to, anti-bribery and corruption, competition law, data privacy, preventing workplace harassment and discrimination.
Our global Health and Safety Policy governs the management of work-related health and safety risks across all our manufacturing and distribution sites, including corporate offices. The policy, which is complemented by our Code of Conduct, sets out the principles that guide our approach to Health and Safety, as well as outlining responsibilities within the business.
Oversight . The Remuneration and Nomination Committee of our Board of Directors provides oversight on certain human capital matters including diversity and inclusion strategy, executive compensation, retention and succession planning and human resources strategies in connection with talent management. In addition, in connection with the Beauty that Lasts program, we established a Global Diversity, Equity and Inclusion project team responsible for developing and implementing a three-year roadmap with both global and local strategic objectives relating to our diversity, equity and inclusion initiatives.
Government Regulation
We and our products are subject to regulation by various U.S. federal regulatory agencies as well as by various state and local regulatory authorities and by the applicable regulatory authorities in the countries in which our products are produced or sold. Such regulations principally relate to the ingredients, labeling, manufacturing, packaging, advertising and marketing and sales and distribution of our products. Because we have commercial operations overseas, we are also subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”) as well as other countries’ anti-corruption and anti-bribery regimes, such as the U.K. Bribery Act.
We are subject to numerous foreign, federal, provincial, state, municipal and local environmental, health and safety laws and regulations relating to, among other matters, safe working conditions, product stewardship and environmental protection, including those relating to emissions to the air, discharges to land and surface waters, generation, handling, storage, transportation, treatment and disposal of hazardous substances and waste materials, and the registration and evaluation of chemicals. We maintain policies and procedures to monitor and control environmental, health and safety risks, and to monitor compliance with applicable environmental, health and safety requirements. Compliance with such laws and regulations pertaining to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon our capital expenditures, earnings or competitive position. However, environmental and social responsibility laws and regulations have tended to become increasingly stringent and, to the extent regulatory changes occur in the future, they could result in, among other things, increased costs and risks of non-compliance for us. For example, certain states in the U.S., such as California, and the U.S. Congress have proposed legislation relating to chemical disclosure and other requirements related to the content of our products. For more information, see “Risk Factors— Changes in laws, regulations and policies that affect our business or products could adversely affect our business, financial condition and results of operations. ”
Seasonality
The Company’s sales generally increase during the second fiscal quarter as a result of increased demand associated with the winter holiday season. Financial performance, working capital requirements, sales, cash flows and borrowings generally experience variability during the three to six months preceding the holiday season. Product innovations, new product launches
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and the size and timing of orders from the Company’s customers may also result in variability. However, the mix of product sales can vary considerably as a result of changes in seasonal and geographic demand for particular types of products, as well as other macroeconomic, operating and logistics-related factors, as evidenced by the impact of the COVID-19 pandemic.
Availability of Reports
We make available financial information, news releases and other information on our website at www.coty.com. There is a direct link from our website to our SEC filings via the EDGAR database at www.sec.gov, where our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge as soon as reasonably practicable after we file such reports and amendments with, or furnish them to, the SEC. Stockholders may also contact Investor Relations at 350 Fifth Avenue, New York, New York 10118 or call 212-389-7300 to obtain hard copies of these filings without charge.
We use our website as a channel for routine distribution of important information, including news releases, presentations, and financial information. We have also posted on our website our: (i) Principles of Corporate Governance; (ii) Code of Conduct (and any amendments or waivers); (iii) Code of Conduct for Business Partners; (iv) Charters for the Audit and Finance Committee and Remuneration and Nomination Committee; and (vi) sustainability information, including information on our sustainability strategy, Beauty that Lasts , and our diversity, equity and inclusion strategy. The information on our website is not, and will not be deemed to be, a part of this annual report on Form 10-K or incorporated into any of our other filings with the SEC.