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The Founders’ Club

Independent brands are beauty's wellspring of innovation. But as wary retailers balk at backing the untested, the question now is what price survival?


The days of starting an indie beauty brand with a dollar and a dream are gone.

During the golden era of the indies, one great idea was enough to rocket entrepreneurs such as Bobbi Brown, Horst Rechelbacher, Jo Malone, Jean and Jane Ford, Nicholas Perricone and many, many more into riches and stardom.

Today, it’s just a starting point.

Surviving in a postrecession-ravaged market requires more dimensionality than ever before: cutting-edge science, a steady stream of capital, an innovative business model and—not to be overlooked—the artistry, craftsmanship and innovation that has historically propelled the beauty industry forward.

What retailers once saw as new and exciting is now often considered an untested upstart. In some cases, retailers are removing the risk of stocking independent brands altogether by churning out exclusive lines of their own. It’s a marked reversal from when stores welcomed entrepreneurial brands with open shelves.

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“For every 20 brands today, there is going to be one gem that flourishes,” says Robin Coe-Hutshing, who has cultivated independent brands as the founder of Studio BeautyMix and created her own, including Mémoire Liquide fragrances and Burn candles. “None of us can just create something and expect it to stick. The stakes are higher. We all have to get better at what we do.”

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Whereas once both large and niche brands worked synergistically in a retail environment—the former providing the resources, the latter, excitement, which drew shoppers into stores—today, that balance of power has been upset due to overall stagnant sales. “Five years ago, beauty was a growing industry,” says Jani Friedman, a managing director for Demeter Group, noting that years of solid growth help spawn successes such as Bare Escentuals, which went public in 2006 and was purchased by Japanese cosmetics giant Shiseido Co. Ltd. for an estimated $1.7 billion in March. Those days are now gone, says Friedman. “There’s no rising tide anymore for entrepreneurs.”

Instead, independent brands have seen their sales rise and fall with the vagaries of the economy. According to the NPD Group, smaller brands posted solid returns in 2009—in some cases, double-digit increases—while their larger counterparts struggled to attract shoppers in the tough economy. In the makeup category, for example, at the height of the recession— the first half of 2009—brands with sales greater than $10 million suffered the most, declining 8 percent overall, while brands with sales of less than $10 million posted strong growth of 15 percent, says Karen Grant, vice president and senior global beauty industry analyst at NPD, adding that expanded distribution likely helped drive growth.

But now, in the second half of 2010, smaller brands are experiencing a reversal of fortunes. “The positive trend with smaller brands continued to a degree as we ended 2009,” says Grant. “But now, bigger brands are positive, up 2 percent in the first half of the year, while smaller brands, up against stronger comparisons, are having a tougher time, down 2 percent.”

While historically, independent brands have vied with the major players for market share, today the antagonist is as likely to be the retailer, many of which—such as Sephora, Target and Wal-Mart—are backing their own exclusive brands. “The retailers have all of the power,” says Friedman.

As consumer shopping patterns continue to shift, so, too, do strategies when it comes to merchandising the right mix between majors and indies. “Retailers have found it difficult to find the right balance,” says Wendy Liebmann, founder and chief executive officer of WSL Strategic Retail. “In 2000, everything that was niche retailers were happy to drop into the store, without real validation. Both sides got burned by that. Now, it’s the niche brand’s job to convince key retailers why having these brands is important.”

Marcia Kilgore, a beauty trailblazer who founded Bliss, FitFlop and Soap & Glory, has come up with the perfect litmus test for independent brands hoping to get buy-in from a retailer: The “So what?” test. “It’s brutal and you should be able to do it to yourself,” Kilgore told a roomful of beauty executives at the WWD Beauty CEO Summit in May. “Every new brand has to have a voice. If, within three seconds, your product doesn’t communicate to the customer what’s in it for them and why she should like it and buy it, it’s not going to be interesting—you don’t have a chance.”

It’s a test industry veteran Rob Robillard experienced firsthand. A former veteran of L’Oréal, Robillard became ceo of the problem-solution hair care range Living Proof in 2008. The firm’s first brand, No Frizz, uses a proprietary molecule developed by scientists at the Massachusetts Institute of Technology rather than the more conventional silicone to fight frizz. To convince retailers of its effectiveness, he brought along three models to buyer meetings. “I took a hand steamer close to their hair, and the hair didn’t frizz. Jaws just dropped,” he recalls. “The moment QVC saw it, they said, ‘We’ll take it.'” Within a week, Sephora was testing Living Proof in 50 doors, and two months later, the chain rolled out the brand.

 

“Every retailer is very much focused on adding highly incremental ideas,” says Robillard. “To be a profitable company, you have to build share. The idea has to be big enough to take off.” Today, Living Proof is sold in about 400 retail doors and is pursuing the professional salon channel, as well.

To reach numbers like that in an accelerated amount of time also requires the execution to be up to snuff. “No matter how much technology you pack into a bottle, [consumers] want to buy a company and a brand they connect with,” says Robillard, who hired the branding company Wolff Olins for that purpose. “The graphic design, educational materials, letter to customers, Web site and packaging have to be completely consistent.…It signals to consumers that you know what you’re doing.”

In fact, size—or the impression of it—matters. Three years ago, Bryan Meehan, who co-founded the upscale U.K. grocery chain Fresh & Wild and later sold it to Whole Foods Market, created the natural skin care brand Nude with Ali Hewson, wife of U2 front man Bono. To compete today, he says, you have to think big. “Beauty is controlled by a small concentration of global brands because it’s hard to be successful without scale,” says Meehan. “From the start, you’ve got to make it a global brand. Everything has to be carefully thought out.”

Today, Nude is sold in about 250 doors, including Barneys New York, a haven for specialty brands. But even retailers whose very business depends on attracting the newest and most innovative products are more demanding when working with such brands. Take the issue of exclusivity. Many retailers today require it for a small brand, which in turn is challenged to grow a business while being in only a handful of doors. “Exclusivity is important to us,” says Bettina O’Neill, vice president and divisional merchandise manager for cosmetics and fragrance at Barneys New York. “It’s a fair exchange for us to invest our time, our money and our commitment.”

Barneys’ criteria for the beauty lines it carries is extremely precise. “The brand has to be about quality. It has to smell real, not synthetic; have packaging with clean lines; be very unique. It has to fit our aesthetic,” says O’Neill.

She cites Byredo Parfums as a concept well suited for Barneys’ taste, praising founder and creative director Ben Gorham as a “perfectionist.” Gorham, a graduate of Stockholm Art School, had no formal background in fragrance before launching Byredo three-and-a-half years ago. “I had no real relationship with fragrance, but I had one with smell,” he says, noting his brand’s name comes from the Old English word “by redolence,” meaning “sweet smelling” and “reminiscent of.”

Now comprising 12 scents, the brand is sold in 18 countries. “The viral effect has been amazing,” says Gorham, noting that, without a sizable advertising and marketing budget, the retail considerations become even more critical for a small brand. “The people at Barneys are the face of our brand,” he says.

The U.K.-based Space NK, which expanded to the U.S. in 2007, has built its business on offering a discerning mix of niche, hard-to-find brands. But with gloomy financial headlines fresh in consumers’ minds, founder Nicky Kinnaird says: “People are becoming more mindful in everything they do and they really need to be wooed and wowed by retailers.”

Space NK, in turn, has become even more selective about the brands it carries. “We don’t have elastic shelves, so decisions do have to be thought out and planned,” Kinnaird says. “But it’s an exciting time again for niche brands and retailers, because customers are looking for something different. They want to be moved by innovation, and that comes from entrepreneurs who feel truly passionate about their business.”

Poppy King, says Kinnaird, combines just such passion with an unwavering vision. King, who created her first makeup line at 18 years old, is gaga about lipstick—you’ll usually find her wearing a vibrant red shade, precisely applied. So in 2007, she launched Lipstick Queen, a finely edited range of 10 lipsticks in two textures—the matte Sinner and the sheerer Saint. Since then, she’s added glosses and liners—but no nonlip-oriented items. That focus has won her accolades from retailers.

“Poppy has really stuck to her guns,” says Kinnaird. “It would be easy to spin off in different directions.”

To King, sticking to her guns means running her business smartly: “I operate a truly entrepreneurial brand so it’s about cutting costs that the customer— either the retailer or the end customer—doesn’t see.”

For instance, King decided to forgo establishing a company headquarters. She has found that her brand’s Web site, lipstickqueen.com, is emerging as a key sales channel, accounting for 10 percent of overall sales. “Online is much more suited to entrepreneurial brands, or things you can’t find everywhere. I do very well there and I only sell color.”

Sometimes, building a healthy business—one lipstick at a time—means turning down a large-scale distribution opportunity. “In terms of retailer partners, bigger isn’t always better,” says King. “If you’ve got a large but jittery potential retailer partner, sometimes you have to pass. As an entrepreneur, you are already jittery.”

Larger retailers with an interest in independent brands are emerging today. Both CVS Pharmacy and Duane Reade have introduced higher-end beauty concepts called Beauty 360 and Look Boutique, respectively. Macy’s and Dillard’s are experimenting with assisted, open-sell concepts. At Macy’s, Impulse Beauty coexists alongside beauty counters and includes smaller brands, many of which are entering Macy’s for the first time. Dillard’s reportedly plans to introduce a similar concept this fall called Edge. In the last three years, Target tapped three high-profile indie makeup brands (Pixi, Jemma Kidd and Napoleon Perdis) to create diffusion brands for its stores.

The 13-year-old indie darling Too Faced is participating in the new Macy’s and Dillard’s concepts, and the increased distribution has helped push its sales up 40 percent over last year. But Too Faced, which co-founder Jerrod Blandino describes as “the stiletto in a store full of flats,” is keeping the reins on further expansion. “I don’t want to be everywhere, because then nobody wants it. [The brand] would lose its glitter and shine,” he says.

Even Wal-Mart, the behemoth of beauty retailing, is courting entrepreneurial-led brands. Wal-Mart’s Carmen Bauza, vice president and dmm of beauty and personal care, is on a mission to dispel the notion that big retailers are not capable of nurturing small brands. Last year, Bauza zeroed in on the former indie darling Hard Candy and helped re-create the brand, injecting edginess into the retailer’s beauty assortment. Now she’s on the hunt for more. “We embrace niche brands as long as they have innovation and a point of difference,” she says. “We have seen a lot of smaller brands filling [the void] where the bigger brands are not going.” She would not divulge examples, but promised shoppers would see them—some as bold as the Hard Candy concept as well as subtler incarnations—soon. As for how the megabrands will react, “It’s healthy competition. There is a diverse consumer out there, too,” says Bauza.

For those brands that do broaden their door counts, expect financial investors to come calling. Investors seek to avoid brands with customer concentration, or a significant percentage of sales tied to one retail partner, says Demeter Group’s Friedman, who advises beauty companies with wholesale revenues between roughly $10 million and $20 million. In the last five years in particular, investment banks and private equity firms have played an increasingly important role in helping niche brands grow into midsize companies with one of two end goals in mind: taking the companies public or delivering them into the hands of a strategic buyer, such as Procter & Gamble Co., L’Oréal or the Estée Lauder Cos.

Friedman says she often hears potential investors ask if there is a “defensible brand positioning of technology—something that is proprietary.” She cites Allergan’s prescription-only lash-growth product, Latisse, as an example. “There is more demand from buyers than there are brands to buy,” says Friedman.

Still, there may be investor interest, but without strong retail backing, the future of independent brands remains unbalanced. “There is a real need for [niche],” says Liebmann. “Retailers are asking, ‘How do I get people to buy something today?’ And niche is where the innovation comes from at the moment. But, survival requires a different kind of sensibility and strategic thinking to build a long-term strategy.”