Juice Beauty chief executive officer Karen Behnke fields more phone calls from investors itching to grab a piece of her San Rafael, Calif.-based organic skin care brand than many people receive from their next of kin.
“I am literally getting a call a day. It has not slowed down, not at all,” she says. Gently, she tells her suitors Juice Beauty is not for sale by repeating this well-worn refusal: “Thank you for calling. We’re not ready for anything like that. We are well financed. Our cash flow is high. We have got a lot of work to do.”
Behnke’s experience seems so two years ago, when the mergers and acquisitions market sizzled with activity. But today, concerns about consumer spending and the shaky retail environment have stalled deal making. The credit freeze has paralyzed much of private equity, and tanking valuations have kept sellers on the sidelines. The latest M&A figures from Thomson Reuters tell the story of deal erosion. Across all industries in the U.S., the number of deals plunged from 11,303 to 9,358 from 2007 to 2008 and to less than 1,500 through March 23 of this year. That would result in around 6,000 for 2009 if the rate of M&A doesn’t pick up.
The pursuit of California brands, such as Juice Beauty, suggests that the tide could be turning, though. Interest in beauty and personal care transactions hasn’t died. The recession, while steamrolling longheld business assumptions, hasn’t shaken an underlying faith in the potential of well-positioned brands. In fact, that faith may be stronger than ever.
“Beauty is one of those areas where women are treating themselves, even in this economy,” says Sarah Chung, author of the Beauty Information on Demand report, about deals in the sector. “As long as consumer appetites are not satiated, entrepreneurs will continue to respond, and people will want to participate in the market. There is nothing inherently wrong in the beauty industry.”
As banks start to loan cash again, industry watchers say the pace of deals is poised to pick up. “There is some latent demand now,” says Michael Farello, a partner at Catterton Partners, the Greenwich, Conn.-based private equity firm with beauty investments in Niadyne and Zeno. “There has been a lull for the last six months, and it feels like we’re coming out of that lull.”
If a new beauty gold rush is in the near future, it’s likely the suits will be looking to California to strike it rich. It’s familiar territory. The state has given birth to numerous brands coveted throughout the years by investors of all classes. Recent examples include PureOlogy, bought by L’Oréal, Smashbox Cosmetics, owned partly by TSG Consumer Partners, and the publicly traded companies Physicians Formula and Bare Escentuals.
Current market conditions could spark a heated California sweepstakes. The state has been a fertile breeding ground for budding brands in many promising categories, particularly at-home beauty devices, natural/organic products, ethnic beauty and personal care, and the larger skin and hair care fields. In a culture in which fascination with celebrities continues unabated, the Hollywood connection doesn’t hurt. And the state’s technological capabilities make it a leader in cutting-edge beauty products.
“It is just such a hotbed,” says Scott Elaine Case, managing partner at VMG Partners, a San Francisco private equity fi rm with mineral cosmetics brand Colorescience in its portfolio. “I can’t imagine a better place for cosmetics and skin care than California.” Adds Jeremy Johnson, chief executive officer of Irvine, Calif.-based makeup brand Too Faced, “People are really looking to California for the next trend.”
With around 34 million people, California is the most populous state in the nation, giving it an internal market unequaled in the country. Nearby states—Washington, Oregon, Nevada and Arizona—offer ample opportunity to solidify a significant regional presence. West Coast residents also have a taste for beauty. In a WWD list of average annual household spending on personal care products published in 2007, four of the top five metro areas were located on the West Coast. Orange County and Los Angeles-Long Beach claimed the number-one and number-two spots.
“Women in California wear makeup…lots of it,” writes Wende Zomnir, co-founder and executive creative director of Newport Beach, Calif.-based Urban Decay, in an e-mail. “Many East Coasters, even those in the beauty business, forgo it on a daily basis.”
Existing distribution channels are robust growth platforms for the state’s wealth of entrepreneurs. A handful of influential boutiques— Apothia and Studio BeautyMix, Vert, Planet Blue and Kalologie, to name a few— help incubate fledging brands. DuWop and Stila developed a following in those boutiques before branching out nationally, for instance.
Natural and organic-oriented stores also have substantial and expanding footprints in California and surrounding states, including large chains like Whole Foods and Trader Joe’s and a group of smaller players, most notably Pharmaca.
Alternative distribution channels— infomercials and the Internet— are increasingly popular, with Dr. Howard Murad of skin care brand Murad and Leslie Blodgett, ceo of mineral makeup powerhouse Bare Escentuals, becoming household names as the result of infomercials.
Juice Beauty offers a prototype for up-and-coming California brands. Behnke, who cobbled together around $5 million from 15 individuals to fund the company, is a serial entrepreneur. She launched Juice in 2004, after launching and selling the health education and wellness program provider Execu-Fit Health Programs to PacifiCare Health Systems. In its first three years, Juice’s revenues went from $200,000 to $12 million; Sephora is its anchor retailer, and the brand continues to post monthly sales increases.
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