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How Indie Beauty Brands Punch Above Their Weight

Independent beauty brands only represent a sliver of the global market but constitute a growing challenge to legacy players.
By
  • Chantal Fernandez
BoF PROFESSIONAL

NEW YORK, United States — Among the 250 displays inside the Indie Beauty Expo at Pier 36, a brightly coloured grocery store-themed installation attracted an inquisitive crowd.

Under a neon sign of her brand’s logo, Everyday for Every Body, founder Charlotte C. Pienaar fired off facts about her newly launched business of daily cosmetics, including sunscreen and deodorant, all available for under $30. The line is produced in Australia, made without parabens, sulphates, and other controversial ingredients and topped off by a millennial-friendly design and tongue-in-cheek names, like Resting Beach Face.

“It is a very crowded space,” said Pienaar. “I know what I’m doing and I’m passionate about it. I really want people to know more about [my brand] and I feel that, in itself, will be able to differentiate me.”

The $375 billion global beauty market is dominated by giant conglomerates like Estée Lauder and L’Oreal, but the fastest growth belongs to independent brands like Everyday for Every Body. In colour cosmetics, for example, “challenger” independent brands only account for ten percent of the market but are growing four times faster than their legacy competitors, according to Nini Zhang, vice president of luxury, beauty and apparel at Credit Suisse. She spoke at Indie Beauty Expo’s BeautyX Capital Summit, a panel and workshop series that preceded the expo this week.

Beauty isn’t the only consumer category overrun by upstarts: in food and beverage, small companies with a health and wellness angle are taking market share from packaged food conglomerates. In men’s shaving, Dollar Shave Club and Harry's have cut into Gillette’s business.

Nader Naeymi-Rad, an entrepreneur who founded Indie Beauty Expo with esthetician Jillian Wright in 2015, likens the growing wave of independent beauty brands to the rise of mobile app developers. He says legacy brands cannot compete with the hours that beauty entrepreneurs invest in developing products that they feel fill an unmet need in the market.

“A lot of these brands are saying, ‘I’m not trying to build a billion-dollar business here, I just want to help people with eczema find a face oil that they can use,’” he said. “The [legacy] companies are realizing that their internal innovation is not suited to this new environment.”

Meanwhile, Indie Beauty Expo has expanded to meet the demand for services supporting beauty entrepreneurs, growing from one event with 82 brands in 2015 to four events featuring about 600 brands in 2018. The company also launched a publication, Beauty Independent, the educational series BeautyX and, as of this week, Uplink, a service marketplace that connects entrepreneurs with specialists in manufacturing, influencer relations and more.

In order to get their own piece of the indie beauty action, legacy companies and investors have invested $3 billion in independent beauty brands over the last decade — and valuations are rising. Between 2010 and 2014, the total enterprise value of beauty brands averaged 2.5 times that of the value of total sales; after 2014, the multiple increased to 3.6 — and has grown even higher in the last 12 months, especially in prestige skincare, said Zhang.

But the “swim lanes are getting full,” she said, adding that while she does not predict “deal fatigue” in the beauty market, she does see that strategics are focused on integrating the brands they have acquired in the last five years. Everyone across the market is more choosy about their targets, while newer players to the market such as Unilever and The Hut Group are increasing their M&A activity.

But the competition, both in the hall of the Indie Beauty Expo and in the market in general, is exceptionally high. Consumers are spoiled for choice and loyalty is diminishing. Whether their goal is to build a billion-dollar brand or get bought by one, how can independent beauty brands stand out from the crowd?

Wellness Connection

Brands that market their products as clean, non-toxic, healthy have a leg up on their peers, especially brands that are not transparent about their formulas, ingredients or whether they test on animals. Brands that also offer ingestibles, such as protein powders and supplements, are also becoming more popular.

Victoria England’s cannabidiol hemp extract enriched skincare and tinctures line, Tulip, on display at Indie Beauty Expo, is one example. Many of the products are handmade in Humboldt County, Calif., America’s unofficial marijuana capital, where she lives. By offering both topicals and ingestibles — in this case, an extract infused solution for drinking — and boasting the therapeutic properties of hemp, her brand hits on consumers' desire to explore cannabidiols.

“Wellness is the new status symbol,“ said Carol Hamilton, who oversees acquisitions for L’Oreal, at BeautyX. “The wellness phenomenon is just at the beginning of its growth spurt, and it’s going to fundamentally change so much about beauty, already in skincare, but also in makeup and just the whole beauty experience.”

Specialty Retail: Reaching a Boiling Point? 

Where department stores and drug stores once dominated beauty sales, specialty retailers such as Sephora, Ulta, Blue Mercury, Credo Beauty and Cos Bar are now reaping the benefits of the beauty boom. US specialty beauty retail sales grew at a compounded annual growth rate of 9.1 percent per year between 2013 and 2016, according to Zhang, second only to e-commerce sales growth.

However, some industry experts predict disruption in the distribution channels, both online and physical retail, driven by the blurred lines between mass and prestige channels and the increased role of Amazon.

“We are borderline overstored right now,” said Rich Gersten, partner at Tengrem Capital. “There is no way this number of players will survive in the long run; it will contract.”

“I don’t believe that you are going to have a duopoly forever in specialty retail,” said Julian Steinberg, co-founder of Alliance Consumer Growth, referring to Sephora and Ulta on a BeautyX panel about private equity. “The question today of where you distribute a luxury brand is a real question,” he continued.

The barriers between the prestige and mass beauty channels, once unsurmountable, have become blurred, creating opportunities for newcomers and challenges for brands that want their environment to signal luxury.

For Sapelo — an Indie Beauty Expo prestige skincare brand founded by Stephanie Duttenhaver and Cindy Edwards in Savannah, Georgia in 2015 — the fact that the brand is carried by top-tier spas in the region, such as in Atlanta’s Mandarin Oriental, is an important differentiator and signifier of its luxury market ambitions. The brand is unusual in that it purports to stimulate the skin’s regenerative properties without using damaging chemicals, and the target consumer is older women looking for alternative anti-aging solutions.

The Amazon Effect

Amazon is riding the indie beauty wave, too. The e-retailer opened a dedicated shop in June 2018 for emerging brands that are not available at major retailers such as Target, Walmart or Ulta Beauty.

For brands that don’t qualify for the shop, Amazon can present a complication to the distribution strategy. The marketplace is swallowing a growing share of overall sales but often erodes other retailers’ margins by offering discounts. It’s also a popular destination for grey-market sellers who are not authorized brand sellers. Credit Suisse’s Zhang estimated Amazon's US beauty and personal care sales at $7 billion annually, growing 40 percent year-over-year.

“Target, Walmart, Walgreens — they can really no longer say [to emerging mass brands], 'I don’t want you to sell on Amazon,' that ship has sailed,” said Alliance Consumer Growth’s Steinberg. “It’s something that in prestige, people are still dealing with.”

Gersten explained that there are ways to secure good placement in Amazon’s search results, which is often achieved through discounting, while still maintaining full retail price. Brands also need to police the grey-market sellers.

It’s not easy, but “being your brand owner allows you to protect it a lot easier than otherwise,” he said.

Sharpening the Brand

Entrepreneurs need to focus on one or two “hero” products,” said Hamilton at BeautyX. That way they can invest the time and attention to build a reputation and a product that consumers return to over and over. Brands with a distinct identity, built around a few key products and a compelling narrative, also have a better chance of sticking with consumers confronted with hundreds of options in the beauty aisle.

That raises the stakes, however. Brands need to pick the right retail channel and price point right off the bat.

“Listen very carefully to feedback,” said L’Oreal’s Hamilton. “Brands need to be developed like children and nurtured. If you launch with the wrong pricing, you’re dead.” When asked what an early stage brand with less than $1 million in sales should focus on, she stressed the importance of perfecting the brand’s DNA, which can take four or five years and impacts formulas, names of products and packaging. “Know what those things are that differentiate your brand, so you can communicate it that quickly to everybody,” she said.

At BeautyX, one such brand was O’O Hawaii, a prestige skincare brand founded by nutritionist Holly Harding, formulated with “superfood” ingredients and infused with crystals. The brand stood out during the finale of the conference when three entrepreneurs pitched investors in front of the audience. O’O Hawaii won top pick with each because the investors agreed that the brand's story, the ingredients and connection to Hawaii, was clear and compelling.

Dream Big But Be Realistic

Hamilton also stressed the importance of not giving up too much control of the brand to too many investors while raising capital.

“Some of the great romances that we’ve had have not been possible due to the ... financials,” she said, referring to brands L’Oreal wanted to acquire in the past. “It’s very hard because [founders] do need the cash…. How can you manage that so you can be as much in control as possible?”

And when it comes to attracting investors, Gersten stressed the importance of presenting ambitious but realistic sales projections. “There is no wrong or right answer and investors are going to poke holes in a plan and probably create their own plan in concert with it, but there is an intangible message you’re sending,” he said.

Such intangible messages are especially powerful in beauty where, even though the market is crowded, there is room for more than a few brands to win.

“Beauty is in a winner-take-all category,” said Kelly Dill, principal at Imaginary Ventures, on a panel at BeautyX. “It means there is opportunity for everybody.”

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