Before President Trump extended social distancing guidelines on Sunday until the end of April, pessimism surrounding Covid-19 and resuming normal retail operations had more than sunk in. Beauty service companies and beauty PR firms reported layoffs and furloughs as cost-cutting measures last week, and those same tactics were now trickling to bigger retailers like Macy’s and Neiman Marcus. Beauty and wellness brands, of all sizes, are now faced with a set of priorities primarily focused on the balance sheet.
“Every founder and CEO is thinking about cash and having the runway to make sure our financial resources weather the current situation, so we can survive in the aftermath,” said Zak Normandin, founder and CEO of Iris Nova. Normandin made the difficult decision to lay off “valuable employees” on March 20 when the non-traditional hospitality and food service partners selling Dirty Lemon closed their locations. Iris Nova did not disclose the number of employees that were affected.
“In 2019, those partners made up 50% of our top-line revenue and then that was essentially shut off the last few weeks,” he said.
This dotted line of cash coming in versus cash going out becomes clearer than ever to founders and CEOs when channels are shut down and retailers like Macy’s are extending payment terms from their typical 60 days to 120. What’s more, once-expected April and May shipments to retailers to create accounts receivables is unlikely. Internal payroll is typically the largest expense for businesses, but there are other ways to cut costs on the accounts payable end. In many ways, running companies today will become as basic as managing a college checking account.
Tina Bou-Saba, founder of CXT Investments, said founders and CEOs are going to have to be more watchful of non-essential and variable costs like PR and marketing in the coming weeks and months.
“Operators need to drill down to productive dollars,” she said. “Brand awareness activities like subway ads or out-of-home [advertising] need to be put on the back-burner unless there is a strong reason to believe they are driving sales. Influencers might see a downturn, unless you an see that their content results in meaningful conversion, and I would suspect a contraction on performance marketing. Brands will be raising their targets on ad spend and how it affects lifetime customer value.”
The same cuts are likely to hit creative agencies, consultants and freelancers, as well as retail field support teams since many beauty-centric stores remain closed.
Smart founders and CEOs will learn to do more with less, and use existing resources in-house to build on digital capabilities such as DTC sales, email marketing and social media.
Though Iris Nova’s Dirty Lemon product will still be making its way to Walmart locations next month, for now, Normandin is laser-focused on the company’s own e-commerce channel. In the last two weeks, it has seen a 200% increase in sales.
To support that growth, Normandin is working to ensure delivery times are met. He is personally picking up his warehouse team and chief of staff in his car before driving them to the company’s New York warehouse — gloves and masks in tow — to pack and ship boxes with his employees. (The company’s other warehouses are in LA and Chicago.)
“I’m texting everyone on our team, asking how they are feeling and if they can work because, unfortunately, if all of us worked from home, our business would go to zero. Automation can not oversee the process entirely, so we’re creating a predictable and strategic schedule to and from the warehouse in a clean car to mitigate risk,” he said.
Likewise, Bou-Saba said beauty and wellness businesses should strive to understand “what they are really good at.” “If you are good at driving e-comm sales, then funnel dollars to driving that. If you have great relationships with your retailers, then work to prioritize your partnerships with those sites because eventually those stores will be open,” she said.
Jana Bobosikova, managing partner at Epic Brands, which is the operating partner of Petite ‘n Pretty, Bread, Sweet LeiLani and Good Science Beauty, said any quick jump to driving e-commerce sales needs to be thoughtful and not be driven by promotions or discounts.
“Healthy e-comm sales today include smarter and more affiliate partnerships, as well as deeper sales focused on targeted cohorts of previously engaged customers. [That includes] those who have abandoned carts or brand subscribers who have not purchased for several months,” she said. “Brand e-comm engagement that is driven by content and personalized offers may deepen the connection and fuel conversion. Unhealthy e-comm sales would be the utilization of brand-wide discounting. This should only occur in absolute-last-resort situations. Brands ideally never have to pull this trigger.”
Inventory is also a big consideration for beauty and wellness brands, in that it takes money (product, in this case) to make money (sales). Launching product or new brands in this climate is not ideal, so companies need to weigh the costs of debuting newness on deaf ears.
“We are taking a lot of these signals to push spring launches to fall and to push fall launches to spring of next year,” said Rich Gersten, True Beauty Capital founder and managing partner and advisor at Tengram Capital Partners. “For existing orders, brands need to look into stopping or reducing any [purchase orders].
Moreover, Gersten said that even if retail e-commerce picks up considerably, there is uncertainty if Sephora or Ulta would create new orders with brands or simply replenish with inventory in their distribution centers. This means smaller companies could be stuck with more orders than they can possibly sell on their own.
For now, Iris Nova is not working on new product launches in order to “scale out existing SKUs.”
Curls CEO and founder Mahisha Dellinger is also not focusing on two planned product launches, which have now been pushed back to an undetermined date. Instead, she is focusing on understanding inventory levels. In 2019, 70% of Curls’ sales were through retailers like Target and Walmart, and 30% via its DTC site. The natural hair company saw 33% year-over-year growth in 2019.
“We use a distributor for Target, so they have about six months of inventory in place and haven’t faced any disruption. When our bestsellers do sell out, we won’t be able to re-up because our production is backlogged and we are waiting on components from China. At Walmart, we have a direct relationship and they are low in inventory at the warehouse, but we are waiting for them to zero-out before we ship,” said Dellinger.
Like Iris Nova, Curls has experienced unprecedented DTC growth of 20% in the last two weeks. So, rather than oversupplying to Walmart and being potentially unable to move product, Dellinger is using this time to better build direct relationships with customers through Curls’ own site.
However, Bobosikova said some product newness can lessen potential supply chain disruption.
“While optimizing to core products may appear to be the most sensible approach, a healthy SKU-level [pricing] mix can also play a big factor in mitigating supply chain risk,” she said. “Brands, have to find the right mix of relevant and practical [products]. Innovation, direction and content must be re-envisioned through current consumer behavior.”
In terms of other accounts payable, Gersten said most beauty brands should prioritize payments to third-party logistic firms since those businesses can still move product and “generate cash.” Other vendor relationships, whether in the manufacturing vein or landlords (both corporate or storefront), should be approached for deferrals of at least 30 to 60 days, he said.
“With our businesses, we are taking the approach that we are all sharing this pain; this cycle will affect the brand to the retailer, to the local jurisdiction, to the bank,” he said. “There is a school of thought that larger businesses and lenders should be more understanding.”
Like bigger retailers, Gersten suggested drawing on additional lines of credit, and Bou-Saba suggested looking into bridge financing from existing investors, for those brands who were planning to raise capital. However, she noted, borrowing money today is likely to be much more expensive than six months ago.
While the $2 trillion relief bill seemed to suggest some assistance to beauty and wellness companies in the form of the Payroll Protection Act, there is a level of vagueness around if private equity- and venture capital-backed businesses can qualify for SBA loans.
Under the Cares Act, the Keeping Workers Paid and Employed Act provision provides loans of up to $10 million to small businesses with up to 500 employees, but the “affiliates”or ownership structure is under review. The National Venture Capital Association is working to clarify this opaqueness and has sent a letter to Steven Mnuchin, Secretary of the Treasury, to vouch for the estimated 2.3 million workers who would be affected, if VC-backed companies are exempt. It noted that the “vast majority of American startups are below 500 employees and are not yet profitable,” thus showcasing the need for the raised capital in the first place. Moreover, a survey of VC-backed companies by NVCA said many businesses expected to lay off “between 25-50% of their workforce.”
Though Iris Nova’s cuts were made prior to the government assistance bill that President Trump signed last week, Normandin said the “stimulus bill does not take into account the reduced revenue across specific channels.” Therefore, the company is not applying for this kind of assistance at this time.
“That loss of revenue and the change in customer behavior is something we can’t predict or know right now, but we all have to take steps to be in business after this crisis is over the best way we know how,” he said. — Priya Rao, executive editor
What we’ve got our eye on
On Monday, Ulta announced it would keep its 1,254 stores “closed until it is safe to reopen.” The news comes after President Trump’s weekend extension of social distancing guidelines until the end of April. Ulta had originally planned to reopen its doors by March 31, at the earliest.
While other retailers have taken to laying off or furloughing employees to solve for a cash crunch, Ulta CEO Mary Dillon said the company would “remain committed to paying our store and salon associates through mid-April and providing benefits for those who are currently enrolled.” Ulta has also bumped up distribution center associates pay by $2-per-hour to compensate for the rise of e-commerce orders and traffic.