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How Direct-to-Consumer Beauty Brands Can Thrive During the Coronavirus Crisis

With major retailers shutting down, emerging and indie beauty brands, many of which rely on their direct e-commerce channels for business, could be poised to win online.
Sales for The Nue Co.'s immunity focused products grew by 70 percent in the past week | Source: Courtesy
By
  • Rachel Strugatz
BoF PROFESSIONAL

Welcome to BoF's Beauty Newsletter, featuring members-only analysis and the week's top news from the front lines of the global beauty business. Subscribe here.

On Monday, stocks saw their worst decline since 1987, public schools shut down in New York City, the biggest system in the country, and the Federal Reserve slashed interest rates to near zero in an emergency effort to shore up the US economy. Businesses from restaurants to airlines calculated whether they could survive months of reduced demand.

But The Nue Co., a line of supplements that launched in 2018, was on target to hit one of its highest sales days ever, according to Jules Miller, founder and chief executive. Overall, the company's online business saw a 20 percent lift and the repeat purchase rate jumped from 60 percent to 78 percent since last week.

The Nue Co. is a rarity in the beauty world: a successful new brand that generates most of its sales online, via its own website. For most start-ups, getting into Sephora (or Ulta Beauty, or Target) is often the goal at the outset. Experts and investors caution founders that it is virtually impossible to scale a beauty label without securing a multi-brand retailer's help, with difficult and expensive tasks like logistics and marketing. Consumers also like to try new brands before they buy them, which requires nationwide or even global store networks. Even Kylie Jenner, whose Kylie Cosmetics range proved wildly successful when it launched on the influencer's own website in 2015, entered Ulta three years later.

The coronavirus outbreak has turned that logic on its head. Covid-19 has infected nearly 230,000 and killed over 9,000 worldwide, and has forced millions of people to quarantine themselves in their homes. Governments across Europe have ordered non-essential stores — including beauty retailers — to close, as have officials in New York, San Francisco and other major American cities. Sephora on Tuesday announced closures of all US and Canadian stores through April 3.

Digitally native brands have a leg up on some of their competitors, in that they don't rely so much on try-before-you-buy or in-store sales. Where brands that once counted on Sephora to get their products in front of new customers may now be hastily drawing up social media marketing strategies. Online-focused start-ups are already experts at navigating the complexities of e-commerce, with teams in place to execute online campaigns and product rollouts.

“When you cut out the middleman and have the ability to reach somebody in social isolation without them leaving their couch, you’re in a position to sell well,” said Wesley Gottesman, principal at Brand Foundry Ventures, an investor in Peloton, Warby Parker, Allbirds, Birchbox and Rmdy. “A lot of our portfolio companies are having record days.”

A lot of our portfolio companies are having record days.

Problems still loom for digital labels. Beauty sales across the board are likely to take a hit, as the global economy slows and consumer spending power is squeezed. Many start-ups and indie brands are venture backed, without the cash reserves or inventory of multi-billion dollar global beauty behemoths. Called-off events and delayed launches can have an outsized effect on these smaller operations.

The Nue Co. is in a unique position: not only is 80 percent of the business direct, but its range of supplements target various wellness concerns, including sleep, gut health and immunity (searches for that term in particular have soared in the last month, according to Google). In one week, sales for the “Immunity” capsules and “Defence Drops,” a tincture with “immune boosting” properties, jumped 70 percent, becoming the second and third best-selling items on the label’s e-commerce site, according to Miller. To meet this demand, the brand significantly increased its supply for “Defence Drops,” working with manufacturers to get costs down so bulk-order savings could be passed down to customers. On Wednesday, the price went from $55 to $35 (or $28 for a monthly subscription).

Despite some immediate lifts in sales, emerging brands are still taking precautions.

The Nue Co.’s launch of its first topical product, a serum, will be pushed by a few months. And though engagement with social media ads has shot up in recent weeks, the brand cut its paid digital spend by 80 percent. The company wants to save money in case access to capital dries up in the coming months.

“We wanted to have a better understanding of what levers we could pull should we need to in preparing for a worst-case scenario,” said Miller, adding that the company is on track to be profitable within two months. “We are fortunate but we are still preparing for the worst.”

On Tuesday, Beauty Pie, a subscription-based, direct-to-consumer beauty brand that sells makeup, skincare, haircare, fragrance and bodycare, had to close its first pop-up shop at Harvey Nichols in London, just 72 hours after it opened.

"It was an incredible opportunity, but you want to be safe with your staff and the public," said Beauty Pie Founder Marcia Kilgore. She's looking at doing an "online pop-up" where customers could buy at the heavily discounted member's price before subscribing.

Arnaud Plas, co-founder of direct to consumer brand Prose, a customisable range of haircare, had to cap orders Sunday afternoon and pull back on digital marketing to decrease demand. Because all product is made-to-order by hand in Brooklyn (users fill out a survey so Prose could blend product that addresses specific concerns), the company doesn’t hold any inventory. Prose’s R&D team, which is based in Paris, had to halt operations.

“We capped the demand at what we can digest without compromising the quality and the security of our employees,” Plas said. “The goal is not to make a quick dime for one month if it’s at the cost of the health of our employees.”

The goal is not to make a quick dime for one month if it's at the cost of the health of our employees.

Philippe Glessinger, partner of Redo Ventures, the family office of L’Occitane, sees bumps in e-commerce sales as a short-term effect. Even if quarantines and retail closures mean customers will head online to do their shopping, brands will need physical retail because the situation is temporary.

“We might see a benefit of people trying out a brand,” Glessinger said of an immediate uptick in online businesses. “If you establish that relationship brands will benefit from new customers who may be likely to remain with them for a longer period of time.”

Gottesman thinks coronavirus has the potential to impact the way people shop online permanently. Habits born from a quarantine could increase overall e-commerce penetration in the US, which still lags behind other global markets.

He looks to history as his guide, comparing the current situation to the SARS outbreak in China between 2002 and 2004.

“We used to dwarf China in terms of e-commerce,” said Gottesman. “China went through the social distancing measures that America is going through now, and now they have one of the largest and most developed e-commerce penetrations in the world.”

But brands need to be careful about sounding self-serving during hard times.

“Digitally native brands don’t want to be seen as profiteering or tone deaf during this time,” said a founder of a venture backed beauty brand who requested anonymity. “You love your business and you want it to grow, but it’s ... beauty products during a pandemic. Some customers don’t care about a new colourway during this time.”

THIS WEEK IN BEAUTY

Perfume manufacturers are pivoting to hand sanitiser. LVMH, L'Oréal and Coty have all said they will start producing hydroalcoholic gel to give to hospitals and local authorities free of charge, in a bid to aid medical supply shortages as the coronavirus pandemic takes hold of Europe and the US.

Now is the time for recession-proof beauty. As the coronavirus forces Amazon to double down on selling essential products, the beauty industry is poised to look beyond luxury products and focus on personal care, a category long overdue a makeover for the Instagram age.

Coronavirus means online fitness streaming is big business. As Covid-19 forces more and more people to work remotely, avoid the gym and cancel their boutique, wellness-centred workout classes, at-home workout videos — once a fad of the 1980s and 90s — are seeing a renaissance.

Ulta beats Q4 estimates for sales. Net income rose to $222.7 million for the cosmetics retailer, with comparable same-store sales up 4 percent from the previous quarter — compared to the average analyst estimate of a 3.8 percent rise. The company, however, forecast profits per share slightly below expectations for 2020. The results sent shares up 3 percent in aftermarket trading.

Sephora, Ulta, Glossier and Benefit temporarily close their doors due to coronavirus. The brands and retailers' online channels will remain open, though the beauty industry as a whole faces the challenge of engaging customers and maintaining sales without the usual models of in-store advice and tester products.

Manny MUA accuses Makeup Revolution of plagiarism. The YouTube-famous makeup artist said the brand copied the packaging of his Lunar Beauty line for its newly released Glass highlighter. Makeup Revolution has since removed the product from stores.

Increased remote working has created demand for makeup filters on Zoom. However, the video conference app does have a function for touching up appearances.

Razor brand Billie looks to expand into more categories. The buzzy subscription-based start-up, which was acquired by P&G in January, will venture into face wipes, dry shampoo and lip balm, all priced under $15.

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