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Why Beauty's Most Untouchable Social Media Brand Is Facing Challenges

Anastasia Beverly Hills founder Anastasia Soare talked to BoF about the brand’s future amidst growing pains in a sluggish makeup category flooded with new entrants.
An Anastasia Beverly Hills eyeshadow palette | Source: Courtesy
By
  • Rachel Strugatz
BoF PROFESSIONAL

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NEW YORK, United States —  One of the biggest brands of the Instagram-driven cosmetics boom is experiencing some turbulence.

Last June, colour cosmetics label Anastasia Beverly Hills was riding high after an investment from TPG Capital Partners that valued the then 21-year-old company at $3 billion. It was an astronomical figure for a makeup brand; even white-hot labels like Huda Beauty, Glossier and Pat McGrath Labs have gravitated toward valuations of around $1 billion.

The sky-high valuation sparked chatter within the industry about just how big Anastasia could get: some speculated an initial public offering was in the brand’s future. But a little over a year later, Anastasia is experiencing some growing pains.

The brand, founded by Anastasia Soare in 1997, took the Romanian-born entrepreneur's expertise in the brow space to social media before many of its competitors. Product tutorials and influencer relationships transformed the line into a social media sensation with nearly 20 million Instagram followers. Sales last year were said to have totalled about $375 million, up from $350 million in 2017.

But the brand saw its sales plunge almost 30 percent in the first quarter of 2019 compared with a year earlier, according to Fitch Ratings, which predicted a six percent drop for the full year. Last month, the credit ratings firm downgraded the company’s debt to B-plus, indicating a higher risk of default and writing that “management may be unable to reverse the current negative trajectory.”

So what happened? First, the makeup aisle is crowded with other struggling high-end brands. Prestige makeup sales were down four percent in the first quarter, according to NPD Group. Many new brands have charged into the market over the last couple years, including some fronted by celebrities like Kylie Jenner who previously endorsed Anastasia Beverly Hills, said David Silverman, senior director, corporates, at Fitch Ratings.

In the middle of all this, Anastasia Beverly Hills was attempting a post-TPG transition.

For companies even bigger than ours, this kind of transition period slows down the company

“For companies even bigger than ours, this kind of transition period slows down the company – it takes away significant time from work, product development, production, and day to day operations … moving from one warehouse to another, that was also a disruptor,” Soare told BoF.

Investing in infrastructure to allow for global expansion was a top priority, she explained. The company invested in IT, a warehouse, new offices in London and Paris and a slew of executive hires. Product releases were delayed, including a new 50-shade foundation range that comes out Aug. 4. It’s one of the brand’s biggest launches of the year.

“Foundation was meant to launch in the spring, but because the transition slowed us down, everything was pushed,” Soare added. “If we were able to launch products the way we planned to in Q2, the numbers would have been different.”

What sets Anastasia apart from other struggling prestige brands is the $650 million in debt the company took on as part of TPG’s partial buyout, putting a ticking clock on efforts to turn sales around. If sales (and presumably, profits) shrink, it may struggle to pay back creditors in the long run. The cost of servicing debt can also hamper a company attempting a turnaround as it leaves less funding for developing new products or opening stores.

“I’m not sure if Anastasia is getting hurt worse, but Anastasia is in more of a risky position with $650 million of debt,” said a senior executive at a private equity firm. “It doesn’t really have room for error.”

Anastasia has plenty of assets to draw from: it remains one of the largest US beauty companies, its sales ranking 10th among prestige makeup brands, just behind Too Faced and Estée Lauder, according to NPD. Its products are routinely among the most talked about on social media and sell briskly at major beauty retailers nationwide. Any reckoning with creditors is a long way off; the company is “not as of yet in a kind of capital structure problem,” Silverman said.

Anastasia isn’t just fending off new influencer lines, however. The makeup tutorials that made Anastasia famous are now ubiquitous. Big beauty brands armed with larger marketing budgets — particularly LVMH-owned Benefit Cosmetics — have targeted the eyebrow market.

“Benefit is going all in on the brow category … they’ve taken an increasing percentage of the brow conversation, which was a really big percentage of the overall conversation around Anastasia,” said Conor Begley, co-founder and president of Tribe Dynamics.

Tribe’s data showed that Anastasia had a 13 percent decline in earned media value — a measure of social media engagement — between the first and second halves of 2018. However, the brand’s EMV has partially recovered this year, and its Dip Brow Pomade remains the top makeup product in terms of EMV for 2019.

According to Fitch Ratings, Anastasia spends just one percent of its revenue on marketing, a sliver of the 20 percent to 30 percent spent by peers at The Estée Lauder Companies and Coty Inc. While healthy organic traction up to this point led to a sizable Instagram following, brands that reach Anastasia’s size typically need to supplement word-of-mouth with paid advertising.

It doesn't really have room for error.

Buckling down on marketing could help ward off competition. However, even after the TPG investment, Anastasia lacks the marketing muscle of LVMH or Estée Lauder, analysts say. If sales don’t turn around, the brand may eventually need to find an owner with deeper pockets, said Fitch’s Silverman.

“Going with your gut and going with your product-smarts and marketing-smarts may only take you so far,” he said.

THIS WEEK IN BEAUTY

Kylie Cosmetics might need Coty's investment more than ever. Kylie Jenner's makeup, which dipped 14 percent during the first five months of this year, is having trouble attracting repeat customers.

L'Oréal is seeing sluggish makeup sales too. The beauty giant missed second quarter sales growth goals and said disappointing US makeup sales are the culprit.

Coty wants to offload some of its companies. As part of the conglomerate's restructuring plan, Coty is said to be looking to sell between $500 million and $1 billion in assets.

Beauty's glitter problem. Some brands are looking to biodegradable alternatives for the in-demand, sparkly substance.

Sephora had a data breach. The beauty retailer informed customers in Singapore, Philippines, Malaysia, Indonesia, Thailand, Australia and New Zealand that their personal data might have been compromised.

New York City is getting another Ulta. The retailer is reportedly opening a 12,000-square-foot Herald Square flagship.

Sephora and Ulta might get some competition. The Target-owned Dermstore is undergoing a rebrand to go up against specialty retailers.

This is the most googled name in skincare. Augustinus Bader, which amassed a cult following when The Cream and The Rich Cream came out a year-and-a-half ago, is launching a body product.

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