DISTRIBUTION

The transition to omnichannel distribution has been rocky for indie beauty brands. DTC distribution gave them comparatively greater ability to determine their own fate—an integral part of the appeal of DTC to begin with—and leaving their fate in the hands of major retailers, although potentially advantageous, is risky.

The balance of power between retailers and brands has swung to retailers, and they’re not averse to eliminating underperforming brands. Rohit Banota, founder of indie beauty brand advisory Jump Accelerator, says, “If your product is not growing in the number of units sold month-on-month, it’s a problem. Sales traction needs to happen within one to three months or the brand risks being delisted.”

Once available at Ulta Beauty, Bloomingdale’s and Costco, The Better Skin Co pulled out of most of its retail partnerships during the pandemic as retail sales slipped. When it was in Ulta with nine stockkeeping units, the skincare brand spent its entire budget on marketing without seeing much, if any, profit from being at the beauty specialty retailer.

Murphy Bishop II, co-founder and CEO of The Better Skin Co, says, “When you’re selling nine SKUs to a retailer that has thousands of stores, and you have to spend every penny of that on marketing because they’re not marketing you, you just can’t make money. So, even though you have more SKUs in stores, the turn isn’t there.” He asserts, “We’ve entered an era where retailers are not brand builders. They’re simply shelf space.”

Tina Bou-Saba, co-founder and co-managing partner of the early-stage investment firm Verity Venture Partners, says, “For a lot of brands, they spend a lot of money on trying to drive sales through retail, but it’s just not that effective. Then they realize, ‘Oh wait, we don’t need $2 million, we need $10 million.’ That’s a really, really tricky spot.”

As much as they can, retailers are pushing the costs to support sales to brands. Brands have to shoulder marketing, signage, education, shipping, chargebacks, brokers, software and more. The cavalcade of outlays shrinks wholesale margins. Bishop II says, “They’ve whittled away at any margin you had left. The expenses are like a snowball coming toward you, and a lot of them are new expenses that didn’t exist before.”

Safety data sheets (SDS) or material safety data sheets (MSDS) account for one of the newer charges, according to Bishop II. Largely produced by third-party agencies, they’re documents with detailed information about the substances in products and provide instructions for handling and transporting hazardous materials. Costs to create the documents generally start at around $275, but can increase depending on the agency tapped by a brand. Costco and Amazon require SDS documents from vendors, and Bishop predicts more retailers will catch on.

Indie beauty boutiques have their own troubles. Faced with towering expenses, fierce competition and limited resources, many small beauty shops are struggling to stay afloat and several have shuttered. Atlanta store Fig & Flower closed in July, Brooklyn beauty boutique Shen closed its brick-and-mortar store this month, and Inside Outer Beauty Market in Allentown, Penn., is set to close on Aug. 31.

Indie beauty retailers keeping the lights on are reducing merchandise orders as sales decline and forecasting becomes unpredictable. Jennifer Tinsley, founder of Augusta, Ga.-based clean beauty retailer Field Botanicals, says, “This all trickles down to brands, who are seeing sporadic POs and lower orders.”

Brands have to spend more to get more online, too. Brands entering exclusive online partnerships with retailers can achieve traction, but they often need substantial outside awareness or participate in a slew of marketing initiatives to drive sales on crowded websites. Sales volume for The Better Skin Co was higher on Ulta’s site than in any of its stores, but that was propped up by extensive marketing effort.

The spend-more-to-get-more principle applies to DTC distribution, which has been significantly affected in the past five years by customer acquisition costs rising roughly 60%. To Bou-Saba, only two kinds of businesses can fare well in DTC in the current market: Subscription-centered brands and luxury brands with items priced at $200 to $300. Of the latter, she says, “I believe a business like that can work DTC because you can spend $100 or more to acquire a customer and still be profitable on first purchase.” Of the former, she says, “However, it still needs good gross margins to work.”

Since departing from most physical stores, The Better Skin Co is funneling most of its DTC budget toward Amazon. Bishop II deems the e-commerce giant essential for indie beauty brands looking to grow outside of traditional brick-and-mortar retailers.

“Amazon margins are easier to control than traditional retailers. For instance, at a big-box retailer, you may buy into a marketing program for X amount of money. If that plan does not work, you’ve already spent that money,” he says. “At Amazon, if you are paying for advertising or coupons, for instance, you can see the results in real time and adjust spend as needed. It’s very similar to your own website.”

Bou-Saba agrees that the one-stop-shop distribution structure of Amazon makes sense for smaller beauty brands, but it’s not foolproof. “I’ve been stunned by how quickly some brands have been able to get up to doing hundreds of thousands of dollars a month on Amazon, but I think it’s important that you have that awareness in place so that people are searching for you on Amazon,” she says. “I don’t know that you want to be spending a ton of money on it super early from an ads perspective. I think, as a starting point, it’s more just meeting the customer where they are.”

The startup capital crunch has impacted brands’ retail success. Those that are well-capitalized have better chances at success. “Access to capital has been more and more of a differentiator over the past year or two, and that unfortunately favors more experienced founders,” says Bou-Saba. “That makes it much harder for a lot of smaller indie brands to the extent that I would say that I just don’t think that a place like Sephora is the right partner for them until they’re much further along.”

She figures that early-stage investors at the moment are zeroing in on profitable brands grossing between $1 million and $2 million in annual sales with a proven track record in at least two channels of distribution, preferably DTC and a major retailer like Ulta or Amazon.

Exploring possible distribution openings for indie beauty brands, Mayo highlights third-party e-tail marketplaces, but it can be hard for beauty brands to stand out from the horde on them. Michelle Jacobs, co-founder and COO of the skincare and wellness brand Womaness, points to online wholesale marketplace Faire as conducive to emerging brands keen on cracking stores. “We use it all the time,” she says. “So, if there’s a doctor’s office that wants our product, it’s just easier to point them to get our product on Faire. It’s easier for them, it’s easier for us.”

Speaking of doctors’ offices, brands are extending to professional channels for expert validation of their merchandise and sales. In June, Briogeo, a prestige haircare brand sold at Sephora and Ulta, partnered with SalonCentric to funnel its products to 600-plus stores geared toward hair professionals. This month, ingestible beauty specialist Imaraïs Beauty announced a partnership with Chatters, Canada’s largest salon company, to sell Grow, its gummy vitamin for hair, and an upcoming scalp health product.

Imaraïs co-founder Aaron Hefter calls salons the “biggest untapped channel,” He says salons are “putting a big emphasis and focus on retail sales and growing retail. An ingestible product like this is a perfect supplementary sale that doesn’t compete with anything they currently have. The products have to be aligned and make sense in the channel, but we see it as a huge opportunity.”

Historically not the province of smaller brands, the resurgence of travel retail presents an opportunity for beauty brands, too. “The challenge is it costs just as much to make an ounce as it does to make three,” says Bishop. “But there’s an opportunity there. In an airport, you’re kind of trapped, and you don’t have anything else to do.”

Branded stores are also making a comeback as indie beauty brands bypass traditional retail and own the customer experience. Brands like Elorea, Ceremonia, Jones Road and D.S. & Durga have opened their own stores.

“Mono-retail, while a bigger investment than pursuing a wholesale strategy, enables brands to create a real-world brand experience that tells their story in a holistic and controlled way,” says Manola Soler, senior director at the global management firm Alvarez & Marsal. “If you are using stores as an acquisition vehicle, having control over the brand expression is critical.”

SUPPLY CHAIN

In a huge relief to brands, the supply chain problems brought on by the pandemic, the war in Ukraine and China’s coronavirus lockdowns have mostly dissipated, and brands have learned to forecast better in reaction to the earlier problems. Eric Korman, CEO of clean beauty manufacturer The Goodkind Co., says, “We’ve seen raw materials markets loosen up considerably over the past 12 months both in price and availability, and while there are certain raws here or there that become challenging for a period of time, I don’t think any more than the historical norm.”

But not every supply chain issue has vanished. Melody Bockelman, founder of beauty brand development consultancy Private Label Insider, points out that indie beauty brands are being pinched on the manufacturing side. “A lot of the manufacturers that were working with smaller brands, meaning the 500, 250, 100 MOQs, have stopped that side of their business, and they’re now going after larger accounts,” she says. “It’s not profitable. The raw materials that they need to order, all of those things, it just doesn’t make sense for them to do business that way, especially when you have a client that can order consistently 5,000, 10,000 units.”

Robyn Watkins, founder of product development consultancy Holistic Beauty Group, is seeing suppliers be less flexible on payment terms. A couple of years ago, a brand could purchase 2,500 units of a hand cream and put down a 50% payment to allow the supplier to order raw materials. When the product was done eight to 12 weeks later, the brand could pay the other half. Now, until a brand establishes good credit history with suppliers, they’re insisting on the full amount upfront.

Watkins says, “Obviously they’re bleeding money, and they just want to protect all of their resources, assets and time prior to going into full production because maybe brands can’t pay at the end of the day or maybe they’re losing terms from their banks.”

Watkins is encountering more enforcement on research and development fees and charges for setup and samples. Watkins says, “Let’s say the formula’s been approved and now we need 50 samples for clinical testing, I’m seeing labs actually submit invoices for those samples where in the past they’d be like, eh, they’re a paying customer.” She’s mostly finding fees for quantities under 5,000 units.

Private equity takeovers have contributed to some manufacturers moving away from smaller minimum order quantities. Emerging manufacturers are swooping in to service those orders. Cosmos Labs, Indie Brand Lab, Bluebeauty Lab, Indie Cosmetics Lab and Natural Contract Manufacturing are among a group of newer beauty contract manufacturers.

Bockelman launched private-label manufacturer Indie Brand Lab last month. “I wanted to create it in a way that was accessible for small brand founders,” she says. MOQs start at 100 stockkeeping units, and the manufacturer provides end-to-end solutions inclusive of concept development, formulation, packaging design and production.

Years in the making, Watkins says she launched Holistic Beauty Group Innovation Lab in May “to collaborate with brands and other formulators who need to bring their formulation visions to life in a safe space without being on the hook for manufacturing.” She continues, “We recognized a growing demand from brands seeking unique and authentic formula development solutions, which fueled our expansion to offer laboratory services under our roof.”

HBG Innovation Lab has taken on brands with generational formulas that want to scale and own formula rights. It charges a flat rate of $12,500 for formula development and ownership compared to an industry average of about $20,000 to $25,000, according to Watkins. The cost goes up to $24,000 for over-the-counter products like skincare targeting acne and sunscreen.

Shipping has been a hindrance for brands. Watkins recommends brands be strategic about sourcing to cut down on air freight costs. She says, “It used to not matter as much, but now we have to look to other markets to find components. It cannot just be out of Asia or China or Korea anymore, we have to look to South America, we have to look to Canada.”

Watkins stresses that brands should weigh lead times on top of cost, especially brands with retail relationships and purchase orders to fill. Not planning ahead could end up costing a brand money. Watkins says, “What’s happening is you might have a product that costs you $3 to make and you might be making a really good margin, but, if you’re rushing and you’re not planning, you don’t have the operational execution, you’re going to end up paying like $6 because of freight. So, freight will blow up your cost and ruin your profitability if you don’t plan for it.”

Korman tacks on that founders should be as communicative as possible with supply chain partners with respect to forecasting. He says, “As a former brand founder myself, I know it’s easy to focus exclusively on the consumer/growth side of the business, but you cannot overlook your supply chain even if it’s mostly outsourced. Supply chain partners can be enormously helpful in preparing for good times—and for bad times—but partnership works in two directions and requires transparent dialogue by both parties.”

Watkins suggests founders reconsider their product mix as they confront shipping concerns and the shaky economy. “Are you launching something big and heavy that you have to ship or should you pivot to something small and light?” she asks. “Think about where the consumer is in this economy and meet them where they are.”

Watkins suggests essential, accessible products could be appealing during a period when budgets are tightening on all sides. She elaborates, “It can still be innovative and still be amazing, but less novelty. If you had some sort of gaudy launch plan with all this packaging, maybe rethink that to survive this cycle.”

CATEGORY, CONSUMER AND SOCIAL MEDIA SHIFTS

As indie beauty brands carefully review their expenses, they’re abandoning influencer marketing programs that haven’t met expectations for return on investment. Gonzalez says, “We are not playing the influencer game of hiring an influencer with 100,000 followers and she posts. That totally stopped working for us. It never really worked for us. What we have found is that micro-influencers make a difference for us because it’s a testimonial from a real woman. It’s really content that I use to promote my brand.”

Skincare brand Urban Skin Rx has decreased its influencer spend in the past year. Director of marketing Keran Look Loy says, “The current economic climate coupled with changes in customer behavior have evolved our goals. Measurable return is now the top priority. For these reasons, much of our marketing spend has been invested into performance marketing channels like Google, Meta and CTV.”

New personalized textured haircare brand OurX is electing for key long-term partners in its ambassador program. CEO Meghan Maupin says, “OurX’s priority is fostering authentic relationships, focusing on these smaller influencers who are trustworthy, relatable and responsive to followers. Our strategy involves cultivating lasting partnerships with these influencers beyond one-off posts. Our brand ambassadors, for instance, model in campaigns, create content and collaborate closely with us for both organic and paid content.”

Clean makeup brand LYS Beauty takes a multifaceted approach to influencers involving content creators with small, medium and large followings in its product seeding initiatives. Tisha Thompson, founder and CEO, says, “There’s incredible value in all influencers, regardless of their following size, so it’s important to diversify your approach.”

She expounds, “Big influencers will offer brand awareness and also intrigue smaller influencers to try your brand. Medium influencers create the best and most robust UGC that you can then repurpose. as well as additional awareness to the brand within the community. At the smaller influencer level, we have found that, although the content may not be as strong for repurposing, these folks have strong conversion as they have extremely loyal fans that trust what they share. It’s truly the word-of-mouth effect with the smaller influencers.”

Thompson urges brands to manage influencer marketing in-house. She says, “The personal one-on-one connection to the brand is the most effective when appealing to an influencer…Although influencer marketing is quite costly, it’s a critical part of having a successful beauty brand.”

Look Loy agrees that layered strategies encompassing a variety of influencers is optimal. “In some cases, a big influencer can be a game changer or a nano-influencer may take your brand viral on TikTok, but a consistent multi-channel strategy that reaches your target audience is a strong approach. Partnering with macro-influencers is a tried-and-tested tactic. It’s a great channel to reach a high volume of new potential customers, especially when the partnership reaches a receptive audience, is engaging and most importantly, authentic.

She adds, “If you have to be more resourceful, as most indie beauty brands do, nano-influencers and product seeding is a more cost-effective way to drive awareness across social channels, but, in these cases, high volume is critical. Integrating these influencers into an affiliate program is also another great way to retain them in the long run.”

In an effort to pull back from crowded social media platforms, brands are pushing into areas like streaming to find customers and boost sales. Jacobs says, “You’re seeing a lot of this right now because I think people want to get off of Facebook and Instagram, and they’re like, ‘How can we still reach a lot of people?’ With streaming in particular, you can really retarget and find a demographic more easily and cheaply.”

As gen Z comes to the fore as a consumer powerhouse, brands can nail down gaps in the market in which their perspective isn’t yet reflected—and they can pay close attention to gen alpha’s perspective. Anthony Standifer, chief brand architect and co-founder of contract manufacturer mSEED Group, contends there’s room in the textured haircare category for brands tailored to gen Z consumers who haven’t used relaxers.

In general, he says, “I am adamant about the opportunity for premium- and luxury-priced products. Everybody wants to launch an accessibly priced product, and yes there’s opportunity in that space, but it is a crowded field when you are talking about haircare, body care and skincare. There are not as many premium- and luxury-priced brands that really lean into the fact that there are customers with disposable income who will pay $50 for a haircare product.”

Per NielsenIQ data cited by publication Women’s Wear Daily, 61% of gen Z shoppers are purchasing luxury beauty. Partially to court them, premiumization has been sweeping the beauty industry, notably in haircare, fragrance and makeup. Skincare is a different story. In skincare, Jensen explains, “We taught the consumer that they don’t need to spend a lot to get results.” Digging deeper into skincare performance from 2022, she says, “We are seeing that luxury skincare is flat to declining in units, whereas the overall category is up 12%. That said, we do see brands with a luxury price point doing well. It’s not about a blanket statement. You need to have a reason behind that price point.”

For consumers across the income spectrum, the popularity of multi-use products enabling them to slim their routines isn’t diminishing. A recent survey of over 10,000 beauty brands that use customer experience platform Jebbit discovered that consumers are drawn to minimalism. Eighty-three percent of consumers spend five minutes or less on their beauty routines, and only 2.5% spend 20 minutes or more on their routines. Additionally, 54% prefer a natural look with a slight pop of color, a trend that’s shifting the lip category away from lipsticks towards tinted glosses, balms and elixirs.

Ashleigh Barker, director and head of beauty and personal care at investment bank Lincoln International, is excited about the convergence of beauty and personal care with health and wellness. She says, “This spans the spectrum of ‘cleanical’ formulations, once only available with a doctor’s visit and prescription to now be accessible and within reach of a broader audience, to solutions in feminine health and wellness that go beyond organic, sustainable positioning and are truly improving our everyday health and wellness experience.” In women’s health specifically, a category Barker is bullish on, she says she’s discovered “exceptionally impressive founders and companies that are really changing women’s lives for the better.”

As beauty pushes into once-edgy merchandise arenas, brands have multiplied in the intimate care and women’s wellness spaces, but those spaces are still underdeveloped compared to other beauty, personal care and wellness segments. Scholibo is of two minds about building businesses in edgier segments like sexual health and women’s wellness in an uncertain time.

“It’s going to be harder when funding is hard to find,” he says. “The people who are going to get funding are probably going to be some new version of something that already exists, that we know we can sell. The customer base is built in. There’s nothing wrong with that but there’s probably a product being invented right now that I’ve never heard of for a category I’ve never heard of, but it’s genius. And it may not see the light of day.”

Despite words of caution, Scholibo is confident in the consumer appetite for mission-driven brands that wade into taboo conversations around menstruation, menopause and hair loss. He says, “If you can find an issue that is zeitgeisty, there’s a huge opportunity to create virality.”