This week, I dive into the Hero Cosmetics acquisition, and how its sale will impact its pimple patch competitors.
Today, Church & Dwight, home to Arm & Hammer, OxiClean, Viviscal and Nair, announced its purchase of Hero Cosmetics for $630 million. Best known for its problem-solution, hydrocolloid pimple patches, Hero Cosmetics is one of the earliest brands to create the acne patch category in the U.S.
The brand launched in 2017, exclusively with Amazon, before building out its own e-commerce site in 2018. Ju Rhyu, co-founder and CEO of Hero Cosmetics, previously said on the Glossy Beauty Podcast that Amazon was an opportunity “to prove out my hypothesis, which was that if I create an acne patch brand for the Western audience, it was going to be successful.”As a relatively new brand, Hero was expected to earn just about $1.5 million in sales in 2019, but that was before the brand hit critical mass during the pandemic. It hit the $100 million revenue mark last year, and in 2022, the brand is expected to earn $140 million.
“We’ve run really fast in an incredibly short amount of time, and I don’t anticipate that to slow down at all,” said Rhyu, who explained that the brand began seriously considering a buyer after reaching the $100 revenue mark in 2021. The brand, which enlisted Financo Raymond James, went to market earlier this year. “It was really about finding the best partner, who could give us the infrastructure and support we needed to make sure that we can continue on our amazing growth trajectory.”
With its home goods, personal care and health focus, Church & Dwight’s beauty brands sell functional products; they are not necessarily known for inspiration, community or sex appeal. For example, Toppik sells hair fibers for thinning hair and Viviscal sells hair growth supplements. However, Hero Cosmetics is a cool, DTC and community-driven beauty brand that modernizes Church & Dwight’s existing 14-brand portfolio. But most importantly, Hero fits Church & Dwight’s four-point acquisition criteria: to be the No. 1 or No. 2 brand in their category, a growing brand, asset-light and gross margin accretive to the overall business.
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Matthew T. Farrell, Church & Dwight CEO, detailed the runway Hero Cosmetics has on a call announcing the news on Tuesday. “Hero’s the No. 2 brand in the acne category in the U.S., with 14% share. The patch form subcategory has grown to 18% of the acne category as our consumers transition away from lotions and ointments to a patch solution. … The distribution runway for Hero currently has only 8% ACV, compared to the 99% ACV of the broader acne treatments category,” he said, adding that he hopes Hero Cosmetics can reach the 80-90% mark.
Despite its wide swath of existing retailers, Rhyu said, “We have limited distribution; we’re at Amazon, Target, Ulta and CVS, and then we have longtail specialty. There’s still a lot more to be done; for example, with grocery and drug or other places in a specialty.”
Hero Cosmetics is currently sold in a mix of mass and specialty doors including Target, Ulta Beauty, CVS Pharmacy, Bloomingdale’s and Neiman Marcus. Rhyu said that with Church & Dwight, distribution will grow both in the U.S. and internationally, explaining that Canada will be the first international market that the brand will explore.
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Though hydrocolloid acne patches caught on in South Korea more than a decade ago, many of Hero’s acne patch competitors, such as ZitSticka, Peace Out and Starface, are also in market, according to industry sources. And if last winter’s skin-care exit with Youth To The Beauty selling to L’Oréal and Supergoop turning to Blackstone was any indication, it will be a matter of time before the others hope to also cash out. Unlike Hero, which Rhyu said is about “making products accessible to anyone and everyone who needs them,” the other brands have leaned on partners to help define positioning and access: Peace Out is a Sephora brand, ZitSticka is sold at Ulta Beauty and recently moved into Target, and Starface is sold at Target and Walmart.
One lesson learned from the Hero sale is that, while Rhyu has been the most forward-facing co-founder and will stay on post-acquisition (Dwight Lee and Andy Lee are also co-founders and will remain in their roles of COO and chief design officer, respectively), the online-first brand wasn’t propped up by the elusive founder story alone, unlike the girlbosses of yore. In fact, Hero Cosmetics’ sale was driven by its powerful business fundamentals, i.e. 40% EBITDA, which is key in a slower M&A environment.
While Hero’s Mighty Patches are its best-selling product, it is naturally growing its skin-care assortment to compete with acne megabrands. In 2020, it debuted the Lightning Wand, a serum to reduce acne marks, and a Rescue Balm, a product to reduce redness. Those two products, along with its Original Mighty Patch, are the top-three selling products on its website. The brand also debuted a cleanser, a toner and a moisturizer last year.
“[Hero’s] the No. 2 brand in all of acne with 14% share. Of course, the No. 1 brand is Neutrogena, but [the Hero] brand has significant market share in patch — 63% market share in patch. When you think about this business, 86% of the businesses is in patch, another 8% is in acne aftercare and then they have another 6%, which [are] the skin-care items, so it is concentrated and active,” said Farrell. “We do think that, because [Hero’s] been kind of a first mover, it’s got a great following. … It’s got five times the number of reviews than the next largest competitor does on Amazon, so we do like our chances going forward.”
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