Beauty & Wellness Briefing: Has Drunk Elephant lost its luster?

Shiseido acquired the clean beauty brand in Oct. 2019 for a whopping $845 million. At the time, Drunk Elephant sold exclusively through Sephora, representing half of Sephora’s top 10 best-selling skin-care products as of 2019. Based on multiples, Drunk Elephant’s price tag was slightly higher than other beauty brands around the same time, at 8.5times its annual revenue. Shiseido had been slower to the M&A winner-takes-all beauty battle than competitors — its previous investments had been in technology companies MatchCo, Giaran and Olivo Laboratories between 2017 and 2018. Shiseido sold BareMinerals, Laura Mercier and Buxom to a private equity firm in 2021.

In Shiseido’s third-quarter 2019 earnings in November of that year, it noted that Drunk Elephant was “core [to its] prestige skin-care business and reinforce[d] the sales and profit base in the Americas Business.” The company’s fiscal 2019 earnings indicated that Drunk Elephant had “solid sales growth.” For 2020, it forecasted 16.5% year-over-year growth for the brand, to more than $150 million.

Then, Covid-19 happened. In May 2020, Shiseido withdrew its fiscal year forecast. Yet, throughout 2020, Drunk Elephant’s sales grew, largely thanks to strong e-commerce sales, according to Shiseido earnings. In 2020, Drunk Elephant launched in 11 countries and regions, including Germany. Shiseido planned to expand the brand into other major European countries and travel retail, as well as Asia Pacific, Japan and China, starting in 2021. In 2021, Drunk Elephant expanded to Ulta Beauty, and the brand grew its fiscal net sales by 11%. Overall, skin care achieved double-digit growth for Shiseido, and e-commerce sales increased by 20%.

But according Shiseido earnings, Drunk Elephant’s past year indicated a bumpy sales growth and decline period. Its first quarter of 2022 sales declined by 32%. Meanwhile, Shiseido’s prestige brands Nars and Clé de Peau grew by double digits. Drunk Elephant’s second quarter saw 26% year-over-year growth, but overall, its sales declined in the first half of 2022 by 10% year-over-year. Takayuki Yokota, CFO of Shiseido, said on the second-quarter earnings call that the sales decline was due to the Americas market. Shiseido would respond by “enhancing the digital media approach for higher brand recognition, as well as focusing on its strength in skin-care innovation.” Starting in June 2022, Drunk Elephant initiated a new digital media strategy with retailers in the Americas. The brand’s third quarter represented a further 7% decline year-over-year. Yokota said on the earnings call that global retail inventory adjustments negatively impacted the shipment sales, possibly meaning wholesale retail purchases declined, and that media investments in the third quarter “captured great trend in consumer purchases,” with plans to continue them and invest further in the fourth quarter. Drunk Elephant’s fourth-quarter sales grew by 19% year-over-year due to a “significant” growth in product shipments in the fourth quarter, but not enough to offset an overall 1% year-over-year decline for the entire year. Clé de Peau finished 2022 with 6% year-over-year growth, and Nars grew by 22% year-over-year. Shiseido did not respond to a request for comment.

“On a consumer purchase basis, [Drunk Elephant] continues to have a very strong growth momentum from third quarter, [and] we predict shipment[s] to have stronger recovery in 2023,” said Yakota on the 2022 year-end earnings call on February 11.

In 2021, Shiseido designated the year as a period of “Groundwork” for focusing on structural reforms centered on reviewing its business portfolio and strengthening its financial base. And 2022, the 150-year anniversary of Shiseido’s founding, was deemed the “Back on Growth Track” year to accelerate further growth of its global brands. As for 2023, it’s been outlined by the company as “WIN 2023” and a year of “Full Recovery.” Shiseido aims to achieve net sales of approximately ¥1 trillion yen ($7.5 billion) and an operating profit margin of 15% as a skin beauty company.

“Drunk Elephant was an early brand in the clean segment, but from 2018-2019, so many new clean brands launched, and Covid-19 has shown it’s a tough [market],” said Mitsuko Miyasako, an analyst at Jefferies. “At the moment, mid-level [premium] brand sales are declining because of inflation. Shiseido’s [brand portfolio] is 50-60% mid-level brands, not [luxury].”

Since 2019, other conglomerates have scooped up clean beauty brands, including L’Orèal with its purchase of Youth to the People in 2021 for an undisclosed sum and of Aesop last week for $2.5 billion. Other notable acquisitions include clean makeup brand Ilia by the Courtin-Clarins family holding company, Famille C, and Beautycounter by private equity firm Carlyle Group. Euromonitor estimated that 20% of skin-care brands worldwide made clean beauty claims by 2019.

Drunk Elephant has expanded its skin-care premise to include more body care and launch hair care, but so have many other clean brands. In 2020, it launched its first body- and hair-care products, including Sili Body Lotion and Cocomino shampoo and conditioner. It followed up in 2021 with a hair co-wash, around the same time as Function of Beauty and Authentic Beauty Concept. Meanwhile, the overall body-care category has seen an uptick in interest, and 2023 is poised to be the “year of body care” per Glossy Pop. Brands like JLo Beauty and Bliss have made a splash with new body products, and retailers like Sephora have expressed more interest in the category.

Though Miyasako said she was disappointed by Shiseido’s latest quarterly earnings due to weak sales in China and Japan, she still expects 2023 to be a year of full sales recovery. Both China and Japan recently lifted strict Covid-19 measures, impacting international travelers and local businesses. Shiseido is also looking to grow in newer Asian markets like India. This will be a boon for Drunk Elephant, which has a growing presence in the region.

Other analysts echoed this sentiment. Shentao Tang, an analyst at Macquarie Capital Securities, remarked in his February analysis following Shiseido’s earnings call that the company’s problematic markets are Japan and China, but that it should see “significant recoveries” with cosmetics purchases normalizing. Additionally, he wrote that marketing expenses are likely to weigh on margins near term, but they will likely be an instant benefit; product efficacy-oriented marketing for Shiseido portfolio brands, for example, is helping a turnaround of the China market.

Miyasako said that, although Drunk Elephant’s presence in Japan is small, it can become very popular. The store near her apartment building in Tokyo sells Drunk Elephant, and products are frequently sold out.

In the U.S., Drunk Elephant has often sold out of its D-Bronzi Anti-Pollution Sunshine Drops and O-Bloos Rosi Drops liquid blush, as they’ve seen viral traction on TikTok. Drunk Elephant has over 488,000 TikTok followers, and at the time of this reporting, the hashtag #BronzingDrops had seen over 131 million views. Though Drunk Elephant, like any other beauty brand, offers free products to influencers, it’s takes a strong stance against paying for influencer coverage. There are plenty of dupe alternatives capitalizing on the TikTok success of the brand’s products. In place of the $38 Sunshine Drops, TikTokers suggest L’Oréal Paris’s roughly $15 True Match Lumi Glotion and Saie’s $28 Glowy Super Gel. Notably, in Sept. 2022, Saie appointed as its president Lucia Perdomo-Ruehlemann, who previously served as global brand president of Drunk Elephant.

“Product sell-outs can be positive if they create a sense of scarcity that drives consumers to want the product more,” said Dr. Jill Avery, a senior lecturer in the marketing unit at Harvard Business School. “However, there are also negative impacts of product sell-outs, such as straining [retail] channel partner relationships, supply chain pressures that stretch manufacturing capabilities or drive-up costs, and the possibility of losing customers willing to buy your product.”

The additional investments in digital media, on its own channels and those of retailers, have demonstrated success between the fourth quarter of 2022 and the first quarter of 2023. But both media and influencers are the most valuable relationships for Drunk Elephant. According to Hootsuite, the keyword “Drunk Elephant” has had 140,000 engagements, with 43% of sentiments being positive and 20.9% being negative across all media types in the U.S. between March 7 and April 4. Furthermore, Launchmetrics data shows that Drunk Elephant earned $25.8 million in global media impact value in the first quarter of the year. MIV is a proprietary Launchmetrics that tracks the impact of influencers, print media, celebrities, official third-party partners and a brand’s own media channels. Media represented 48% of the brand’s MIV, while influencers were 36%, retail partners 9%, owned channels 6% and celebrities 2%. Drunk Elephant amplified its own channels in the first quarter, as its contribution to MIV was 40% higher than in the fourth quarter of 2022. Within the U.S. market, Drunk Elephant generated $11 million in MIV for the first quarter, which is 20% higher than the fourth quarter of 2022. Media represented 46% of MIV, while influencers were 28%, its own channels were 15%, retail partners at 12%, and celebrities at less than 1%. The largest MIV growth was retail partners, accounting for 127% higher MIV than in the fourth quarter of 2022.

“We remain extremely positive about Drunk Elephant’s growth trajectory. It’s a key brand for our global expansion and an important brand to the Shiseido portfolio,” said Barbara Calcagni, president of global brands for Nars, Drunk Elephant, Tory Burch Beauty. “In our home market of the U.S., where the brand was launched in 2013, we have seen tremendous momentum in the first quarter. Consumer demand continues to grow across multiple demographics, and we’re excited about the year ahead.” 

Since Dec. 2022, Drunk Elephant launched an azelaic acid mask called Bouncy Bright Facial, as well as refillable pods for select products and a reformulated eye serum. In early February, Drunk Elephant hosted a Brighten Up Retreat for media and influencers in Austin, Texas to promote the Bouncy Bright Facial. The corresponding hashtag #BouncyBright has 9 million views on TikTok and over 100 pieces of Instagram UGC. Since 2018, the brand has also held House of Drunk consumer-facing pop-ups in places including London, Singapore, New York and Paris. The Paris opening, held in Oct. 2022, was attended by media and 70 influencers from around the world.

“Drunk Elephant is just one of Shiseido’s brands and not their biggest focus; they are more focused globally on Shiseido, Cle de Peau and Nars,” said Miyasako. “I don’t know Shiseido’s strategies for Drunk Elephant, but they should focus on international expansion.”

One key foreign opportunity is travel retail, which is a strength of Shiseido’s. Glossy recognized Philippe Lesné, president and CEO of Shiseido travel retail, in 2019 class of Glossy 50. According to Moodie Davitt Report, Shiseido introduced Drunk Elephant across APAC and EMEA travel retail throughout the fourth quarter of 2021. In 2022, its travel retail net sales grew by 14% year-over-year thanks to higher margins from product and region sales growth, according to Shiseido’s fourth-quarter and 2022 year-end earnings shared in February. The report also showed that Shiseido would further “nurture” Drunk Elephant in China in 2023 and that the travel retail division’s net sales would grow by 2.7% in the same year. Travel retail sales specifically in China are forecasted to grow by 2.6% and Japan by 15.1%, while Asia Pacific, Americas and EMEA will shrink between high single-digits and mid-double-digits.

“[In 2019] Drunk Elephant was a brand with a proven track record and the potential for rapid expansion to new geographies that could benefit from the distribution and marketing strengths of the Shiseido footprint,” said Avery. “It was a brand leading the clean beauty segment. I [still] see a lot of possible synergies between the competencies and competitive advantages of Shiseido and the strategic growth needs of the Drunk Elephant brand.”

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