“A V-Shaped Recovery Is Unlikely”: Investment Experts Discuss The State Of The Economy And Beauty Businesses
Nini Zhang, director of the luxury and beauty division at Credit Suisse, doesn’t expect the United States economy to rapidly return to full force.
“A V-shaped recovery is unlikely due to unemployment numbers and the continued uncertainty,” she said during the Beauty Independent In Conversation webinar Wednesday. “This is very different from the last financial crisis. It’s a crisis on both ends, demand as well as supply. It’s the first time we’ve willingly plunged our economy into recession to save lives.”
Zhang was joined by Michel Brousset, founder of investment firm Waldencast, Rich Gersten, founder of private equity firm True Beauty Capital, Janet Gurwitch, operating partner at Advent International, and former Feelunique CEO Joel Palix, founder of consultancy Palix Unlimited, in the webinar moderated by Nader Naeymi-Rad, co-founder of Beauty Independent parent company Indie Beauty Media Group. The participants sketched out economic scenarios that could occur as the pandemic evolves, and delved into the state of beauty businesses today and moving forward.
Zhang predicts what’s probable for the future of the U.S. economy is gradual progress overall coupled with fluctuating stretches of advancement and retreat. “It might not be as quickly as the furloughing happened,” she said, adding consumer confidence is a factor. She noted 40% of Chinese shoppers reveal in surveys that they remain afraid to visit stories to buy groceries. Zhang said, “What does it take for the American consumer to get back to where they were in January? Will the fall see another increase [of coronavirus]? We may need a dance-in and dance-out strategy.”
Based on the beauty industry’s performance in past recessions, Brousset, whose portfolio at Waldencast includes clean color range Kjaer Weis and supplement company The Nue Co., is optimistic it will remain relatively healthy in this downturn. He said, “The beauty of beauty is that it [has been] very resilient to economic shocks in the past. We know that consumers, even in moments of difficulty, buy beauty.”
As evidence of the beauty industry’s present strength, Brousset mentioned higher than ever consumer interaction with beauty brands on social media. “Customers are engaging, consuming content,” he said. “When we look at indicators from markets that are ahead of us—China, South Korea—what we are seeing is a tremendous amount of activity in digital. The digital activity of a couple of key strategics in China is plus 200%, 300%.”
E-commerce is strong as well. Brousset said, “When we look specifically in North America in the brands across our portfolio, what strategics are reporting [and]…what other brands are reporting that we talk to for Waldencast, they all have their dot-com business significantly up versus the period right before the coronavirus, partly because there’s no brick-and-mortar competition, but also because consumers are engaged.”
The portfolio brands at Tengram Capital Partners, where Gersten is an advisor, have seen similar online sales bumps since the pandemic took hold. He singled out brand Lime Crime as a robust performer. In particular, its hair dye is booming. Gersten said, “The DTC heritage of the brand and the on-trend category is helping that business.” Gersten continued that skincare brand’s ReVive’s online sales at Neiman Marcus last week outpaced sales at the retailer for the same period last year, when it had an in-store presence. He noted, “We’ve also had weeks with Algenist at Sephora where the e-commerce has almost recovered the loss of the door sales.”
“You can’t clean your slate, but it’s a time when you can clean it up a bit.”
Beauty companies are modifying their operations to buoy business. On the board of salon chain Drybar, Gurwitch shared it’s created a “relaunch notebook” to outline reopening plans sensitive to the current environment and its customers. “We want to be true to our DNA. We got yellow masks. We’re trying to take some humor with this while we take it seriously,” said Gurwitch. “We’ll have to make some changes, maybe have every other one of our chairs filled. We’re not going to reduce price, but we are going to offer some special values to get people back in.”
Gurwitch, a veteran investor and the founder of Laura Mercier, advised brands to use this time to “take whatever wasn’t working that needed improving and improve it. I think that’s what we’ve done at Drybar. You can’t clean your slate, but it’s a time when you can clean it up a bit.” Gurwitch doesn’t see Dry Bar swiftly matching the revenue it was generating prior to the lockdowns. However, she agreed with Brousset that the beauty industry is better positioned than many industries to weather the slump. She says, “We’re lucky we’re in beauty. For anyone that is innovative, there’s still some great opportunities for startups.”
Around the one-hour mark of the webinar, Naeymi-Rad introduced a prognostication game into the conversation. He presented a grid with 18 boxes representing beauty subcategories in different retail channels—mass, masstige and prestige—and had the participants place three bets each on which categories they believe will thrive three to five years out. Prestige skincare was the only category to receive votes from the entire webinar roster. Zhang was the only panelist also bullish on mass skincare.
“I like the mass channel right now,” she said. “I’m hedging my bets a little bit. If we have a longer recovery and people start trading down and really start looking for value, [mass skincare is] an area that will benefit as people trade down in terms of price point.” Zhang’s third choice was prestige color. She explained, “Looking at data from the last recession, prestige skin and color were the two strongest categories that bounced back post-recession. I think there is pent-up demand for these things as businesses reopen and life gets back to normal.”
Brousset, Gersten and Palix viewed supplements as a bright spot. Brousset and Palix identified prestige and higher-end masstige channels as having promise. Gersten worried about supplement distribution at the high end. He called the category as a whole “on fire,” but said, “The prestige distribution [for supplements] I don’t think has scaled. It’s still an afterthought for those retailers catering to that segment. That’s why I [chose] masstige [supplements]. I think there’s a broader audience that can be reached.”
Naeymi-Rad wrapped up the webinar by asking the participants to provide recommendations for brands trying to raise capital amid the pandemic. They all stressed the importance of conserving cash. Brousset said, “For many early-stage companies, it’s the difference between survival and not.” Palix concurred brands’ top priority should be to “reduce your burn rate. If you’re losing money, you have to take drastic action.” According to Zhang, there are exciting marketing opportunities for brands with cash on hand because digital and television advertising rates have dipped 30% to 40%. She said, “If traditional [media outlets] are usually too expensive for them, now may be a good time.”
Market uncertainty makes it difficult to value companies, causing Gersten to pause capital deployment. On the other hand, Brousset is still meeting with brands about investment, and Gurwitch argued it could be the ideal moment to back a small beauty brand on the rise. She said, “The valuation doesn’t matter so much in the beginning because it’s who’s going to take you to the finish line, where you will make your real money.”
You can listen to a recording of the full webinar here.