Sponsored By Rosenthal & Rosenthal
As BeautyMatter has reported, 2021 was a blockbuster year for beauty deals, with over 407 deals closed, representing a 52% increase from 2020. Based on the activity and evaluations being recorded in the marketplace, we have every reason to be just as optimistic about 2022. For example, in January, P&G acquired both skincare brand Tula and celebrity hairstylist Jen Atkin’s haircare brand Ouai, while last month, makeup brand Il Makiage closed a $130 million funding round, valuing the company at $1.5 billion. Clean makeup brand Ilia was acquired in February, while Mad Rabbit, a clean and natural tattoo skincare company, and eco-friendly beauty and home care brand What Matters, both closed record fundraising rounds last month. Clean beauty is no longer a trend—it’s becoming table stakes, and we’re seeing more investors opt to align themselves with clean brands across all beauty and wellness categories.
Brands with well-known founders with proven track records also continue to dominate M&A activity, and we see no signs of a slowdown. Investors not only love the innovation, but also the margins that beauty brands offer, and they continue to bet big on them, driving record-level evaluations on beauty brands across all categories.
DTC Isn’t Everything Anymore
Five years ago, most digitally native brands were firmly against the thought of selling wholesale. Now, as customer-acquisition costs rise, having a diversified distribution strategy that includes having a couple of strong retail partners is not just attractive, it’s now often an imperative to a brand’s long-term financial health. Big beauty and grooming brands like Native and Dollar Shave Club paved the way when they entered Target in 2018 and 2020, respectively, before the pandemic. Now, two years later, consumer shopping habits have shifted permanently, and their top priority is convenience. Mass retailers like Target and Walmart have become one-stop shopping destinations where consumers can buy everything from groceries to grooming products, making them ideal partners for DTC beauty brands.
As many of the big-box retailers prioritize the beauty and grooming categories, the race to stock the hottest brands is playing out in the marketplace. We’re seeing brands enter into 12- to 18-month exclusive deals with the retail partner who can offer them the best terms, including optimal shelf space, marketing dollars, and sometimes, even the opportunity to create exclusive products for them. For example, the men’s skincare and haircare line, Hawthorne, that also sells at Nordstrom, recently co-developed an exclusive line of products exclusively for Target after customer feedback indicated demand for the brand at convenient big-box retailers.
When a DTC brand lands a deal with a big-box store, their financial needs immediately change, as the company now needs to fund production and delivery on more product than they’ve ever produced at one time. This often requires changes to their supply chain as well as exploring new financial solutions like purchase order financing, which allows brands facing explosive growth opportunities to borrow cash against orders in hand. Another financial solution the brand may need is factoring, providing for an outsourcing of the receivable functions (credit, collections, cash application) as well as lending against those receivables.
Minding Your Inventory Remains Mission Critical
While we still see some strain on the supply chain, we’re also seeing things open significantly as more products are being delivered and inventory is replenished. This is good news; however, we’re also seeing retailers starting to push orders out because they now have too much inventory on hand—especially those stores that placed big orders to backfill and compensate for the supply chain issues at the height of the pandemic.
Inventory management is critical for all brands, but it’s especially important for beauty brands. Newness is what drives the business—new colors, fast-moving trends, and innovative formulas. Brands that are nimble and well positioned to produce new products and move inventory quickly are best poised for success. Like food, beauty has a limited shelf life—especially clean beauty products that contain fewer or no preservatives—so no one can afford to have inventory sitting on shelves for 12-18 months. Carefully monitoring inventory and staying on top of supply chain partners becomes even more critical.
Inflation? Rising Interest Rates? Declining Consumer Confidence? Prepare for Anything
While the latest numbers on consumer confidence remain positive, concerns loom large about inflation. The cost of food, gas, and housing are all at an all-time high throughout the country and its effects are being felt everywhere. Beauty sales, historically, have been immune to economic headwinds, though it remains to be seen if consumers will start making trade-offs in what they spend their money on. While we have not seen any decline in activity due to the possibility of rising interest rates, we are advising clients to prepare for the possibility of the Fed raising interest rates to address inflation and spur a market correction.
Keep Your Partners Close and Your Employees Closer
With inflation concerns on the rise and uncertainty around how consumers will react in the coming months, we continue to advise clients to “control the controllable.” Brands should always be innovating and launching great products. They should tightly manage expenses, but always have credit and financing options available to ensure there is adequate cash on hand to take advantage of growth opportunities. Maintaining relationships within the supply chain is critical right now as the environment is changing so rapidly. We advise clients to only work with strong, reliable suppliers and stay well positioned so that when there is a need for more product, your company is a priority to them. With unemployment at a record low right now, it’s important to never forget one of your most valuable assets—your employees. The competition for talent is fierce and the cost to onboard new employees has skyrocketed, so brands should tuck in top talent and remember that, for many employees, it’s not just money that retains them. Know what your best employees value—flexibility, time off, or maybe the ability to work from anywhere—and try to offer that to them when you can.
Overall, Rosenthal & Rosenthal remains bullish about beauty as we head deeper into Q2 and through the end of the year. We believe that the brands who remain nimble and can react quickly to opportunities will be poised for success. That means having access to capital when needed, putting credit protection mechanisms in place, and retaining the best employees and partners they can. This allows brands to seize strategic growth opportunities and set themselves up for a bright future regardless of the economic changes that could lie ahead.