February 9, 2021
It’s our 20th episode of Earned! For this special episode, Conor invited the man involved in several of the biggest beauty deals in recent years, from Shiseido acquiring Drunk Elephant, to Charlotte Tilbury’s sale to Puig, to Too Faced and Estée Lauder, NYX and L'Oréal, and many more in between: Shaun Westfall, Managing Director of the Consumer & Retail Group at Jefferies.
We start the episode by discussing how COVID-19 has changed the market, and Conor asks Shaun how investors and acquirers are now evaluating brands with large offline footprints versus direct-to-consumer brands. The pair discusses the future of Amazon-exclusive distribution for personal care brands, and the deceleration of beauty in drugstores. We then take a step back and learn why Shaun, who graduated with an engineering degree, pivoted to the finance world, and zeroed in specifically on consumer beauty brands.
We dive back into business, and Shaun pulls back the curtain on the brand-selling process. He also gives advice to founders who may just be starting their businesses or are looking to sell (hire a good accountant, and make money right away), and emphasizes the importance of understanding—and recording—your business financials. Shaun then reveals the major brand KPIs that investors and acquirers pay attention to, before noting how being a genuinely clean brand is now considered “table stakes.” We also discuss the rise of the professional medispa brand, and how the esthetician is the new influencer in serious skincare. Finally, Conor and Shaun close out the episode by discussing the viability of the digitally native consolidator (like FORMA Brands) as a competitor to traditional strategics. According to Shaun, “the ability to disintermediate legacy shelf space has never been more apparent than today.”
The following interview has been lightly edited for concision.
Conor: Most of the people that are going to listen to this podcast are either going to be entrepreneurs [or] aspiring entrepreneurs. They’ll be inside some of these brands that maybe are looking to sell. And there's not going to be many times in their lives where they can get a real insider's view into how this process works. So if I'm a brand, and I reach out to you and say, “Hey, Shaun, I think it's time. I want to explore selling my company.” What does that process look like, beginning to end?
Shaun: The answer is it can look very differently depending on what your goals are. We start working with companies where they're a hundred percent owned by the family and the entrepreneur, or maybe they've taken on some friends and family capital or an angel round to get off the ground. They’re maybe looking to sell a small stake in their company. Oftentimes they've never done that. They've built their company over years and years and years or a decade, and they've made the decision: I'm ready to do something different in my life. I want to sell and I'm willing to help transition the company, but I want to go do great things. I want to travel the world, or do things that are charitable.
And so we try to sit down and understand what your goals are. Is it succession planning? Is it, I'm only going to sell to a strategic, or I'm willing to contemplate that private equity round? Strategics love to buy companies from founders, but there's always that question of what's going to happen when the founder leaves. I think the best situation you can put yourself in if you're a business owner, is having an answer to that question. Who's going to take over for me when I inevitably want to move on and do something different?
There are cases where founders have stayed on at big beauty companies for a long time. Look at Bobbi Brown and Estée Lauder, Francois Nars and Shiseido, they've lived it. They've lived rewarding, wonderful lives inside of the big strategic, and there's certainly lots of cases of the opposite, where people wanted to walk away right away. And those brands have thrived and had tremendous success inside of the strategic. So I think if you're a great business and you're highly desirable in the market, the buyer's going to figure out a way to make you happy because they want to buy your business and they want to do the right thing. They're making a big financial bet on the future when they make an acquisition, so really understanding what they want as the entrepreneur and then building the plan for them to help them achieve their goals [is important]. Anytime we design a process, we design it with the goal in mind for that, whether it's a founder entrepreneur, or certainly if it's also got a private equity involvement. More often, that's a much more clear cut case if a private equity investor is in the business. They're looking obviously for a big sort of strategic outcome, usually, in this part of the world.
Shaun: So the advice to the founder, I can't say this enough, and this probably sounds very simple and maybe you've heard it before, but find a good accountant. Hire a good accountant or a good controller. There's no excuse from day one not to have good books and records, whether you start with QuickBooks or NetSuite, and then you migrate over time. It's very simple to implement cloud-based accounting software.
Folks always tell a nightmare story about how they wish they had done it differently from the start. So my advice is, start right now. I'm not saying that about accounting so that you can balance your corporate checkbook. I really mean take and utilize accounting software and understand the KPIs, right? The key performance indicators. What are the levers in your business? What are the things that you need to monitor? Start with a good foundation of tracking your business from a financial standpoint, building proper books and records and journal entries and all that good stuff that unfortunately makes a lot of beauty entrepreneurs’ eyes glaze over. But you don't have to do it, just hire somebody that will.
Because it's not about making my job easier to sell your company. It's really about understanding your business. Are you profitable? Is this retailer profitable? Is this channel profitable? Are you making money in e-commerce? Are you making money on the sale of a single product? Which, actually is a nice segue into my next piece of advice, which is not original to me, and I believe Mr. Lauder would say this as well: make money right away. Don't develop a model where your first transaction is a loss leader. We're not in the software business. We can't have some sunk costs where ultimately the output is an infinitely scalable product at 90% gross margins. We make something, we sell something, and we need to make it at a price that's at a margin that works. I would say, generally, 60% gross margin or better. Your cost of acquiring a customer shouldn't be more than you sell the product for, whether that's online or on the shelf. These things are simple, but you'd be surprised at how often they're not sort of held to, or they're violated based on another thought or a proposition of, build it and they will come, or build it and in scale, we'll make up for margin.
And there's a difference between losing money right away when you sell a product, and actually making money at the unit level, but then using capital to scale a business that needs growth capital. Very different. It perhaps sounds subtle, but it's very different if I need working capital to grow my business, but at the unit level I make money. That's certainly something that's favorable, but to raise money to fund losses on day one because I don't make money on my fundamental product—that's a tough road.
Conor: You mentioned KPIs. You've developed this specialization in beauty obviously, but at the same time, you've been involved in a lot of these digitally native or digitally forward brands like Charlotte Tilbury, Drunk, Elephant, Too Faced, Morphe. What are the KPIs that they're presenting on the digital side? If I'm a brand and I'm trying to figure out the numbers that are important when I'm trying to sell my company or raise money for investment, what are the investors and acquirers paying attention to?
Shaun: What I would say to listeners is, there was a time when the digital-native business was much savvier in digital than were the big companies. And in many cases, the big companies were buying to learn because they didn't know about digital, and they didn't know about social. I think those days are way past us. Meaning, the big players are now very sophisticated. They know how to live and work on Amazon. They know how to build their own e-commerce platforms. And now, their digital businesses are in the hundreds of millions, if not billions on the beauty side.
So they know all the KPIs, they know how to assess the KPIs, which are the ones that we sort of talked about: make money at the unit level. Meaning, is my average order higher than my customer acquisition cost? Am I truly getting repeat purchases that actually equate to a lifetime value that is logical and not sort of exaggerated? How am I calculating lifetime value?
Conor: That's so tough when you have somebody that can buy on your website, then go and buy in-store, and then buy it Amazon. How do you track that person across all those different ecosystems?
Shaun: That's another thing, be real about your marketing costs. When I say be real, be intellectually honest about which marketing costs you're allocating to CAC. And I get it, you do something on Instagram, and they may not buy off your website, they may buy on Sephora, and that's the multichannel world that we live in today. I think as long as you put some intellectual rigor around it, I believe most folks know in their heart of hearts what's working and what their real costs are. And you need to be intellectually honest with yourself about what costs are loaded into your KPIs.
ROAS is another big one, right? Return on ad spend. If you're a multi-channel business, I think if [the consumer is] sort of in the click-and-buy mode, that's certainly easy to track, but if you’re sending an ad or sending an email campaign and [the consumers] don't go right into buying, but they buy at an Ulta or Sephora the next time they walk through, I think you need to understand that, but also there are ways to figure this out. If you're running your own campaign or you're doing something on social and your dotcom sales sort of do okay, but you watch Ulta’s dotcom sales go way up or Sephora's dotcom sales go way up, then it's probably working. You need to think about how you allocate that in your metrics.
The other thing I will say is, sophisticated companies today are not competing with different channels digitally. Meaning, if Sephora is doing something with your brand, don't go out there and do something digitally direct on your own and compete with Sephora to outdo Sephora and drive folks to your website, right? You want to be coordinated with your campaigns. When Sephora is off, you're on. If you happen to be in Ulta and Sephora, Sephora and Ulta don't compete with each other [for your brand], right? You shouldn't be competing with them either on digital.
The other part is that, clearly just being on Instagram and [getting] Instagram likes or Instagram followers [isn’t enough]. Those days are now over, and you could tell folks that better than anybody. I think what you guys are doing around engagement and retention of influencers is super, super important, and needs to be monitored and tracked because that's really what [buyers are] looking for. Are you identifying, are you catering to, are you speaking to influencers that aren't just sort of one-and-done with your brand, but really are engaging and staying with your brand because it speaks to them—back to that word, “authentic.” If your brand isn't genuinely authentic to them, it doesn't speak to them, well, guess what, they're not going to really talk about it that much. It's going to be sort of a one-off and it's probably going to be diluted by talking about a bunch of other stuff at the same time.
Conor: Yeah, I think a big takeoff point for both of us was NYX, right? When we met NYX, it was like, wow, they're doing it way differently than everybody else. And in the metrics we were tracking, which was EMV at the time, the numbers were just through the roof. What are they doing that's different than everybody else? It was long-term relationships, authentic relationships, supporting the creators as much as a creator supported them. It wasn't about going out and finding Jennifer Lopez and paying her to talk to her about the brands.
Shaun: That’s a mistake I think the big brands made initially, is they were basically utilizing influencers and essentially doing things the old way in a new medium, and saying, well, this is like a magazine ad and we're going to pay a spokesperson on social, just like we paid a spokesperson to be on TV or in a magazine. And clearly that came across as very inauthentic and it was what it was, it was paid advertising, which didn't resonate with the consumer. That consumer was following somebody because they spoke to them as a person, not because if XYZ celebrity talks about [a product], then I want to buy it.
We know there's obviously an onslaught of celebrities getting into beauty and using social and trying to leverage their star power to sell beauty products. I think if that [celebrity] does it in an authentic way, then it works. If the consumer kind of sees that they're just doing this to make money...
Conor: They're just slapping their name on it and putting a logo on some private label product and hoping they can make a quick buck. I don't think it'll work.
Shaun: And I must say that there's no exit for that business, because the buyers will see right through it too.
You can watch the entire interview here, or listen to the full episode on Spotify, Apple Podcasts, or Google Podcasts. To catch up on our other 19 episodes, featuring leaders from brands like ColourPop, INH Hair, Tula, Sweaty Betty, and Huda Beauty, visit our Earned Podcast page.
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