Startups should look at the bigger picture. Is it possible to fulfill their true potential without being omnipresent? What does it take to build an everlasting brand? What is required to realistically compete with big brand players and unabashedly “sit at their table”?
By Shipra Biswas Bhattacharyya and Achint Marwah
Conceived as a blog in 2014, digital beauty startup Glossier was generating $100 million in annual revenue by 2019. Talk of an IPO had begun to surface. Glossier opened the first store in New York, followed by outlets in Los Angeles and London. Vision 2020 was to build this retail footprint. Instead, the year marked the arrival of COVID-19. Glossier was forced to close the stores, furlough its retail employees, and eventually, lay them off.
This is not an isolated case. BPC (Beauty and Personal Care) startups have had to raise war-time capital, cut costs, and secure supply chains in order to survive the pandemic. They have been forced to rethink, and in many cases, reverse their channel strategies. Indian skincare brand Super Smelly had to shift its inventory online just after investing in airports and malls for offline sales. Wellness brand Global Beauty Secrets experienced a 4x increase in logistics costs during the pandemic.
There is cause for optimism, however. The pandemic has limited the choice of luxuries available to customers with spending power. Income traditionally reserved for travel, leisure, and entertainment is being redirected towards “use at-home” products. Beauty and personal care constitute an important part of this basket, being a safe source of indulgence-at-home. This bodes well for the BPC industry in India, which remains underpenetrated. The pandemic now represents an opportunity for Indian startups to acquire new customers and enhance their value propositions to meet evolving tastes and preferences.
A bigger source of debate is whether the BPC industry will retain its pre-pandemic DNA in the long term. Covid-19 induced an expedited shift from offline to online retail, with some believing this to be permanent. However, there is enough evidence to suggest that offline retail will retain paramount importance in the long run. We studied 30 global and Indian analogs of the most successful BPC startups from the last decade to identify their key success factors and found that offline retail has been imperative to their success.
True scale cannot be achieved without offline sales. We found one pervasive truth. All successful BPC startups with revenues of $500 million or more eventually transitioned from e-Commerce to offline retail.
These are select examples that represent the most successful growth stories in beauty from around the world. While the transition to offline retail happens at different inflection points for each startup, it remains a growth imperative to realize scale. It is also fundamental to establishing an everlasting brand.
However, offline expansion is expensive. How can startups stay and win? Rental and manpower costs can exert significant pressure on startups, and stunts ambition. It’s important to build flexibility and efficiency into their cost models at an early stage. While India has only had a handful of startups near this level of maturity, we found that globally, startups that optimized cost along the following levers were able to scale faster:
- Build a lean, mean, and agile team: Professional haircare brand Olaplex penetrated 100+ countries and achieved $60 million in revenue within 3 years of launch with fewer than 30 employees. It did not operate own stores, outsourced manufacturing, and did not engage in traditional advertising. Instead, Olaplex drove sales through its loyal community of hair therapists and stylists, at the 7,000+ salons it was present in, as well as exceptional social media engagement.
- Smarten up and partner up: $100 million plant-based beauty brand, Juice, has direct partnerships with organic farmers who produce botanical ingredients. The startup even acquired its own sustainable farm in California, now it’s the biggest source. Moreover, Juice also has exclusive partnerships with two processing companies that help convert these ingredients. This “Farm to Face” value chain – backed by strong partnerships – has enabled Juice to maintain quality, foster innovation, and control costs.
- Be minimalistic, ditch the window dressing: Beauty Pie, a startup built on a subscription service model, provides subscribers access to luxury 3rd party products without a premium markup (up to 80% less than retail price). This is made possible with the use of minimal, unbranded packaging, like recyclable parcels and eco-friendly inks. Beauty Pie also doesn’t spend on ambassadors or influencers.
- Influence the influencers: Tatcha, a Japanese geisha inspired skincare brand, has a loyal community of 1,200+ unpaid influencers. On average, each influencer generates $15,000 in EMV (earned media value) per quarter, making it a top 10 skincare brand globally by media engagement. Tatcha does not pay its influencers. Their primary means of outreach is through gifts and samples, shared with editors and makeup artists. 80% of the traffic directed to Tatcha’s website is completely organic, with users spending an average of 10 minutes per visit (top 5 percentile in the industry).
Apart from controlling costs, startups need to consistently raise capital to be able to transition smoothly to offline. Drawing from our study, the most successful BPC startup (many with billion dollar+ valuations) have received early and multiple capital infusions. This applies to Indian startups like Nyka and Sugar, as well as, international startups like Harry’s and Ipsy. So what’s next in store? The pandemic has posed tough questions for BPC startups – financially, operationally, and strategically. Financially, startups have been forced to fight a long COVID-19 battle with limited artillery. Operationally, their supply chains have been stretched. Strategically, they have had to adapt to an accelerated shift to online sales, as well as changing consumer tastes and preferences.
All this would have led them to ask: Is going offline worth it now?
Startups should look at the bigger picture. Is it possible to fulfill their true potential without being omnipresent? What does it take to build an everlasting brand? What is required to realistically compete with big brand players and unabashedly “sit at their table”? These are the questions the best startups will be pondering, as they plan their next steps in the post-pandemic world.
Shipra Biswas Bhattacharyya is the Principal and Achint Marwah is the Manager at Kearney. Views expressed are the authors’ own.