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E.l.f. Cosmetics Races to Stay Ahead

The fast-beauty cosmetics brand has become a customer favourite, but growth is slowing and new competitors aim to knock the company off its perch.
Source: Facebook @elfcosmetics
By
  • Jessica Schiffer

NEW YORK, United States — E.l.f. Beauty upended the cosmetics industry by pumping out products faster and setting prices lower than its competitors. Now with a new crop of startups nipping at its heels, the company is speeding up even more to stay ahead.

The company, launched in 2004 by father-son entrepreneurs Alan and Joey Shamah, takes its cues from fast-fashion brands like Zara and H&M. It produces prestige-inspired products on the cheap, with some items selling for as little as $1. The family duo was also among the first to bypass stores to focus on selling cosmetics online. Sales soared, nearly doubling between 2014 and 2017 to $270 million, and the company went public in 2016.

But there are signs the competition is catching on to E.l.f.’s tactics. The company says it expects growth to slow to 6 to 8 percent this year, down from 18 percent in 2017. A push into brick-and-mortar retailers like Target, Walmart and Ulta boosted sales but left the company with more unsold inventory, analysts say. Rival fast-beauty brands like Morphe and Limecrime, led by influencers with built-in fan bases, are now fighting for the same space. E.l.f. shares hit an all-time low in response to the reduced growth outlook.

Even as they lower expectations, E.l.f. executives say they’re doubling down on what made the company successful in the first place: the company is making more new items and getting them onto shelves faster than ever.

“The tune of the story has changed from being an aggressive growth story,” says Erinn Murphy, a senior research analyst at Piper Jaffray. “It seems like management is trying to be more prudent — returning to a place of ‘under-promise, over-deliver.’”

All-Hands Innovation

Twice a week, roughly 35 of E.l.f.’s 413 employees in Oakland, New York and Shanghai come together via video conference to dream up the next wave of eye serums, lip gloss and face masks.

At one recent meeting, the group decided that the brand’s popular lip exfoliators should be offered in a bullet form, as the original pot was deemed not consumer-friendly. The product was also expanded to come in three trendy flavours: rose, coconut and grapefruit.

Ideas are put into development immediately after they’re approved. And there are a lot of ideas: E.l.f. Launched 128 new items in 2017 — an increase of 40 percent from the previous year. The average new product takes 22 weeks to hit the market, down from 27 weeks in 2016. Some products launch in as few as 13 weeks from conception.

The brand’s lineup includes a mix of cheaper "first-to-mass" alternatives to higher-end beauty lines. Last year, 39 products were first-to-mass, including Mineral Infused Face Primer and Matte Shadow, Brow and Liner Palette. Items typically retail for under $6.

“We think of it as making luxurious beauty accessible — letting our customer experiment and have fun,” said Ellie Off, E.l.f.’s vice president of innovation.

Everyone from top executives to marketers to researchers participate in product development from the get-go to speed up decision making, said chief executive Tarang Amin, who attends each product meeting.

By contrast, larger competitors, including Revlon and Maybelline, typically develop products in stages. That tends to be slower, with some products taking two years to launch.

E.l.f.’s labs are next door to production facilities in Shanghai. That way, teams can simultaneously formulate a product and work on its design and packaging. First prototypes are usually ready within a week, Amin said.

During the traditional process, you'll often find out that there was a better design choice you could have made eighteen months earlier.

“During the traditional process, you’ll often find out that there was a better design choice you could have made eighteen months earlier that would’ve changed the cost equation or the product’s popularity,” Amin says.

Once a prototype is approved, E.l.f. typically places a small order — anywhere from 10,000 to 50,000 units — with one of its suppliers in the US or China. While manufacturers often prefer a big contract, they’ll take a chance on E.l.f. in the hopes that one of those test orders grows into a multi-million-unit blockbuster, Amin said. For the company, the small batches also reduce the risk if a new release turns out to be a dud. Of the 128 products released in 2017, 118 are still for sale.

“There’s not a lag in decision-making, we empower the teams to keep moving forward with these small batches, which are less expensive than making a big bet on a large-scale launch,” Amin said.

Once initial work has kicked off in-house for a product’s development, E.l.f.’s suppliers are notified of target-timings for its debut on elfcosmetics.com and in its 22 stores. Its 63 employees on the ground in Shanghai — which range from those working in sourcing to quality control — make frequent visits to the local suppliers, not just to check in on development but to reassure them with longer-term planning: sharing the brands’ volume and capacity needs two to three years out, which also allows suppliers to invest where necessary in advance.

A Winning Website

For many products, the production trajectory has been steadily higher. The company’s sales nearly doubled over the last three years, to $270 million in 2017. Much of that growth came through the website elfcosmetics.com, which sees 28 million visitors a year, number one among mass cosmetics websites in the US.

The company was one of the first to prioritise online sales, which has helped it secure good placement for its products on major retailer websites and in search engines, according to Gartner L2, which tracks brands’ performance online. E.l.f. last year ranked as the No. 10 brand in L2’s DigitalIQ beauty index, which tracks online performance, up from 20th in 2016.

Unlike larger cosmetics brands, E.l.f. doesn’t pursue celebrity endorsements, relying instead on its website and search placement. The company also mines over 135,000 comments in its website’s review section to figure out ways to improve products even as initial sales figures are still coming in.

When E.l.f. launched its first micellar water last year, the immediate consumer feedback on its website and social channels wasn’t pretty: shoppers didn’t like that it contained alcohol and complained about the way it made their skin feel. The company reformulated the product within 10 days, sending a new version to everyone who wrote a review with a handwritten note from the R&D team.

It drove a level of engagement that was so much higher than if we had tried to just minimize the risk to begin with.

“It drove a level of engagement that was so much higher than if we had tried to just minimise the risk to begin with,” says Amin.

The willingness to use the site as a consumer testing opportunity has been especially valuable to the brand’s relationships with outside retail partners. Two retailers told BoF that they’ve been more willing to take on new items from E.l.f. than from other brands because of the testing and sales evidence the brand brings to back them up.

Analysts say E.l.f. is still in a strong position, thanks to its popularity online and its speedy production cycle. Its low prices help make many items perennial top sellers.

And if sales slump, E.l.f. can always replace their current offerings with new ones.

“The principles of the company remain very strong,” said Oliver Chen, a retail and luxury analyst at Cowen. “If it was a one-hit wonder company I might be concerned, but I’m confident that it’s a hero brand rather than a hero product.”

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