Coty turns to AI amid slow Consumer Beauty figures

Coty has partnered with Pencil, a generative AI marketing platform, to position AI-produced content at the center of its Consumer Beauty division. The move comes parallel to a slow fiscal quarter reported for Consumer Beauty.

In its Q3 financial report, Coty logged profitability despite geopolitical volatility and declining sales. Its Consumer Beauty division sales decreased 4% on a reported basis and 10% on a like-for-like (LFL) basis, including an estimated 1% headwind from the war in the SWANA (South West Asia and North Africa) region.

The global beauty conglomerate is recalibrating its operations to prioritize AI-driven efficiency through initiatives like the AI partnership.

A transformation and creative team led by Pencil’s sister company, Jellyfish, will embed Pencil’s end-to-end content platform into Coty’s Consumer Beauty brands, creating content for the company’s subsidiaries. The move aims to enable efficient content production on a larger scale for the beauty brands.

“Our brands operate in a high velocity consumer environment, but speed without control doesn’t scale,” says Gordon von Bretten, president of Consumer Beauty at Coty. “This partnership allows us to increase the pace and volume of content creation while maintaining governance, brand integrity, and data ownership. It’s a step change in how we operationalize creativity across Consumer Beauty.”

Details of the AI dealThe AI-generation partnership spans the entire content creation workflow.

On July 1, Pencil will institute an integrated team at Coty, embedded into campaign operations in global brands and markets. Coty’s Consumer Brands division boasts a strong portfolio with subsidiaries like Rimmel, Sally Hansen, and Max Factor.

The AI-generation partnership spans the entire content creation workflow, covering roles like copywriting, image and video production, and ideation. It is said to meet industry standards on governance, security, and intellectual property ownership, and assures that Coty is to maintain full ownership of brands, assets, and data.

“The brands who win in the future will be those who are best at leveraging Gen AI,” says Will Hanschell, co-founder and CEO at Pencil. “Coty has really leaned into how transformative AI can be for marketing when deployed with clarity and intent. This focus on end-to-end application at scale means the opportunity to extract value from AI and drive growth is huge.”

Consumer Beauty troubles

Coty leverages AI technology in an attempt to stay competitive in the beauty market.

In its Q3 report, Coty posted a net revenue of US$1.28 billion, logging a 1% reported basis decrease and a 7% decrease in LFL. The figure includes an overall estimated 1.4% headwind due to the war in SWANA. Overall, operating cash flow grew to US$422 million and free cash flow to US$276 million, fiscal year-to-date.

In addition to the 10% LFL and 4% reported drop in Consumer Beauty, the company suffered a US$362.8 million impairment charge associated with the reduced value of the division. This increased the company’s overall quarterly reported operating loss to US$372 million.

Coty reports that CoverGirl and Sally Hansen have aided in mitigating the retail sales gap in the Consumer Beauty division in the US by outperforming on a volume basis.

Its Prestige division accounted for 65% of total sales and recorded a net revenue of US$830.9 million. The figure was flat on a reported basis and down by 5% LFL, including an estimated 2% negative impact from the war.

Coty’s Prestige strategy is rooted in hero brands like Burberry, Hugo Boss, Calvin Klein, Marc Jacobs, Chloé, and Kylie Cosmetics. The company reports that major launches from the brands, including BOSS Bottled Beyond and Cosmic by Kylie Jenner Intense, continue to perform well, fiscal year-to-date.

“We are methodically implementing the Coty.Curated strategic framework announced last quarter, centered on sharper priorities, more focused investments, improved execution, and increased support behind our core businesses,” says Markus Strobel, executive chairman and interim CEO.

“We are embedding this framework into our fiscal year 2027 action plans for both divisions, including significantly reducing the number of smaller launches, lowering marketing asset production costs in part through broad-based AI deployment for our owned brands, while increasing consumer engagement spending, and working to simplify our operational model, all with the ultimate objective to grow our sell-out and market share over time.”

The poor reflection of Consumer Beauty in Coty’s Q3 financials is not new for the company. Last year, Coty launched a strategic review of its Consumer Beauty division due to a weak fiscal year, marked by a US$381 million loss. The review considered partnerships, divestitures, spin-offs, or other options to strengthen the company’s balance sheets. 

Coty also integrated its Prestige and mass fragrance businesses, which together accounted for 69% of its sales at the time.

As part of its long-term divestment strategy that began in 2020, Coty also sold its remaining 25.8% stake in hair care company Wella to investment firm KKR this January. The terms of the transaction gave Coty US$750 million in upfront cash consideration.

Legal concerns rise over AI-generated imagery in beauty marketing.

AI precedents and legal liabilities

Earlier this year, Coty partnered with OpenAI, the creator of ChatGPT, to expand the company’s use of AI across selected parts of its global business.

The deal granted Coty access to ChatGPT Enterprise, enabling employees to use OpenAI’s “most capable” models with advanced security and privacy protections. According to Coty, the AI was integrated with the intention of supporting employees in their daily work and collaboration to improve efficiency and operability.

At the time, the company stressed that it would keep human expertise at the center of its operations and that the technology would not replace creative or strategic roles in the business.

While Coty embeds generative AI to streamline its content creation process through its Pencil partnership, the industry is pondering the potential legal implications of AI-generated imagery in personal care.

In a recent interview with Personal Care Insights, Ceren Canal Aruoba, managing director of consulting firm BRG, warned that, when AI-generated visuals suggest outcomes that consumers may not reasonably attain, potential legal concerns around deception, misleading advertising, and unsupported consumer takeaways can arise.

Canal Aruoba, who specializes in consumer protection and product liability, underlined the potential liability risks that may arise with the use of generative AI in marketing and product efficacy claims.

“From a litigation and compliance perspective, beauty is often viewed as a category where increased use of AI in marketing can have meaningful implications for long‑term brand trust and credibility,” said Canal Aruoba.

Hot water with Beckham

Coty is facing legal backlash over alleged “flagrant material breaches”

Moving from AI liability to licensing breaches, Coty is facing a lawsuit from former professional footballer David Beckham. The suit from DB Ventures — the company that manages Beckham’s brand — is seeking a minimum of US$41 million in damages for alleged “flagrant material breaches” of its license agreement.

The lawsuit claims mismanagement of Beckham’s brand, including the alleged availability of his fragrances for sale in gas stations.

“How could this possibly have happened? Desperation and greed,” says the lawsuit.

The company is also facing a similar fragrance-focused lawsuit from Nautica, a subsidiary of Authentic Brands.

Coty has been facing pressure in its fragrance division through license losses — most notably the imminent 2028 expiry of its Gucci beauty business license, which is estimated to contribute approximately 9% of Coty’s revenue. The license was agreed to be sold to competitor L’Oreal.