A New Pitch Platform for Beauty

By Ken Wasik, Managing Director, Stephens Investment Banking, Stephens Inc. | July 2, 2010

Looking to get a foothold in the competitive personal care and household product space? Consider direct marketing channels where there are still plenty of brands and companies out there that deserve attention.

Seeking to launch a personal care or household goods product in a crowded marketplace? The traditional “retail channel penetration” model may not be the most impactful or cost effective method. In fact, it may prove infeasible for a small or middle market company without the ability to spread high marketing and selling expenses over a large array of products. Instead, more and more companies are taking product directly to the consumer through direct marketing channels including direct sales, television shopping networks and infomercials. In fact, analysis of the recent emerging high growth consumer product companies shows that a good percentage originated over the direct marketing channels. There is no longer a perceived stigma for consumers to buy such brands and shop multiple channels for them.

Need proof of success? Just look at Bare Escentuals, which started marketing in 1994 on QVC. By 2001, Bare Escentuals was QVC’s best-selling brand. Using such unique marketing techniques proved an attraction to recent acquirer Shiseido. “Direct marketing is something Bare Escentuals has expertise in, which is something we don't have,” said Shinzo Maeda, Shiseido’s chief executive officer. In early January 2010, Shiseido said it would acquire Bare Escentuals, known for starting the mineral makeup foundation craze in the U.S., for $1.7 billion, a staggering 41% premium to its average stock closing price over the past three months.

It is no wonder that many strategic and financial investors are closely monitoring the high-growth brands emerging from these channels.

Why Direct Market?

During the past decade, direct marketing has evolved into a widely accepted medium for selling and marketing consumer products. The traditional QVC inventory clearance model and the “Ronco” TV info- mercials have been replaced with a very sophisticated selling approach that leverages the intimate one-on-one selling that direct marketing allows.

With the evolution in design/messaging, TV shopping networks have boomed, with the lead beneficiaries being QVC and HSN. Direct response television (DRTV) has also become a global phenomenon. For instance, QVC operates DRTV channels in the UK, Germany and Japan, and will soon be in China. DRTV continues to garner significant attention following the recent recession, as data suggests that consumer purchasing habits are returning first to this channel.

The advantages of TV shopping are numerous: a wide-reaching audience of more than 100 million
Philosophy got a boost through DRTV.
households, access to a captive audience for 20 minutes on average, ability to educate consumers on product attributes while driving sales and the ability to instantly change or modify a marketing message based on instant customer feedback. In addition, the channel requires no sales force or fulfillment infrastructure. What’s more, the direct model allows the company to sustain an ongoing relationship with its customers.

TV shopping channels pitch trusted brand-name goods, holding down prices while capturing higher margins by selling directly to consumers in massive volumes through round-the-clock TV programming. Beauty is one of the most popular categories on direct response TV. In 2008 alone, more than $560 million in cosmetics and toiletries had been sold through DRTV in the U.S., according to Estée Lauder.

Finally, TV-originated consumer product brands have amassed a very attractive track record of being very well received at retail. Thus, a consumer product company can build brand awareness and a large customer base at little to no cost and then launches at retail from a position of strength.

Successes in Direct Market

Even the big brands, like Estée Lauder, actively court opportunities to have a stronger presence in this channel, which was a big reason behind Lauder’s July 2007 acquisition of Ojon, a brand that markets its hair and skin care products primarily through direct response TV. Another Lauder product, Eyes by Design, a line of eye makeup products, was developed for exclusive distribution on the direct response TV channel HSN. Other successful ventures by Estée Lauder on direct response TV included Clinque’s February 2008 debut, Bobbi Brown’s debut, Origins’ A Perfect World collection on Korean home shopping channel and Ojon’s first foray onto QVC in Germany.

The benefits of direct response TV translate to even bigger prospects for smaller cosmetic names. Some of the biggest successes include:

Bare Escentuals. The company started out in direct marketing, TV shopping and infomercials. After achieving size, scale and brand recognition, it made the leap to Sephora and Ulta chain cosmetic stores, and finally broadened to general retail. Brand differentiation, in combination with Bare Escentuals’ sales model of unique channels/pipelines, proved attractive to acquirer Shiseido. In fact, Bare Escentuals exacted a hefty premium in the acquisition, as it capitalized on its marketing success and the potential translation of direct response to the No. 2 cosmetic purchase market—Japan.

Philosophy. The company launched in department stores, an anonymous player in a wide field of cosmetic brands. The company subsequently backtracked from this strategy and started selling product directly through QVC. Direct response TV elicited strong brand recognition and a cult buyer following; Philosophy then expanded back into retail. In 2006, Philosophy was the No. 1 beauty brand on QVC, the No. 1 skin care and bath and body care brand at Sephora USA and among the fastest-growing beauty brands in select department and specialty stores, according to The Carlyle Group, a global private equity firm that acquired Philosophy in February 2007. Since the acquisition, the Carlyle Group has achieved phenomenal success with Philosophy, which may have the potential for an IPO.

GoSmile Inc. The tooth-whitening company launched a successful long-form DRTV campaign in 2006, helping the company start a growing continuity program. Prior to DRTV, the four-year promotion push was largely organic, relying heavily on guerrilla tactics.

“Our brand traditionally lives in the high-end prestige sector of the beauty category,” stated Chris Valletta, senior director for business development at New York-based GoSmile Inc.

“With the evolution of the direct response industry providing the opportunity for more prestige brands like Bare Escentuals and Philosophy to enter this landscape, it provided an excellent chance to bring a product mix that traditionally has been sold on Madison Avenue to Middle America as an affordable luxury,” according to an article in the June 2007 issue of Direct Magazine.

The process worked, as GoSmile captured the attention of consumers and investors—and the company was acquired by San Francisco’s JH Partners. Today, GoSmile continues its dominance on TV shopping networks, with expansion to Sephora and retailers such as Nordstrom.

Ones to Watch

Which companies are next to shift their business models away from selling to retailers and targeting consumers directly? We are witnessing a new crop of beauty brands including Proactiv, Perlier, Nick Chavez and Murad coming up through QVC/HSN, hoping to replicate the successes of Bare Escentuals and Philosophy. Following a successful run in the direct market, many of these branded companies may warrant attention from strategic and financial investors. Access to capital/funding may prove quite open, as investors see a two-fold attraction in direct market beauty brands:
• One, companies supply access to a faster growing channel (direct selling); and
• Two, brands tend to have powerful followings that translate very well into broader retail channels.

Expect to see more transaction activity and new funding sources bolster direct marketed beauty brands in the months ahead.

This article has been prepared solely for informative purposes as of its stated date and is not a solicitation, or an offer, to buy or sell any security. It does not purport to be a complete description of the securities, markets or developments referred to in the material. Information included in the article was obtained from internal and external sources which we consider reliable, but we have not independently verified such information and do not guarantee that it is accurate or complete. Such information is believed to be accurate on the date of issuance of the article, and all expressions of opinion apply on the date of issuance of the article. No subsequent publication or distribution of this article shall mean or imply that any such information or opinion remains current at any time after the stated date of the article. We do not undertake to advise you of any changes in any such information or opinion. Our employees, officers, directors and/or affiliates may from time to time have a long or ­­­short position in the securities mentioned and may sell or buy such securities. The author principally responsible for preparation of this article has received compensation that is based upon, among other factors, Stephens Inc.’s investment banking revenues. Additional information available upon request. Stephens Inc. Member NYSE, SIPC.

About the Author
Ken Wasik is a managing director with Stephens Investment Banking, a division of Stephens Inc., where he covers specialty products and retail investment banking. Stephens Inc. is a full-service investment banking firm headquartered in Little Rock, AK, with offices across the country. For further information, contact Wasik in the firm’s New York office at (212) 891-1777 or via e-mail at ken.wasik@stephens.com.
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