In a recent tweet, Cody Plofker, CMO at Jones Road Beauty, wrote, “Growth is extra hard to come by this year.” Prompted by his post, for the latest edition of our ongoing series posing questions relevant to indie beauty, we asked 14 beauty investors, entrepreneurs and executives the following question: What do you think early-stage beauty brands should expect for 2023 growth?
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Claire Chang Founder and Managing Director, Ignite XL We don't think that early-stage beauty and wellness brands' growth should be overly hampered by broader economic uncertainty. Despite the pessimistic-feeling outlook, the beauty market has remained surprisingly resilient, according to McKinsey, with mid-single-digit growth projected across all beauty categories through 2027.
We believe this is attributable to the continued convergence of beauty and wellness—and how important feeling beautiful is to the consumer in a post-COVID world. We're of the opinion that consumer spend on beauty and wellness will remain strong for the remainder of 2023 and beyond.
Given this positive outlook for the industry as a whole, we think it's reasonable to look for 2X to 4X YoY top-line growth for top-performing emerging beauty brands with one or several products in the market and moderate DTC traction. Such companies might be in the beginning stages of wholesale distribution with a hero retailer and benefit from growth via distribution channel expansion.
Of course, actual expected growth depends on product portfolio and pipeline, distribution mix and category. But we believe strong growth is still achievable this year, particularly for top-performing emerging brands.
For brands that lacked strong market positions heading into 2023, we think it's reasonable to see some sales compression, and those brands might be fighting hard to maintain steady revenue from 2022. There have been some recent shifts in focus from key retail partners that have resulted in brands being dropped from certain retailers, which can be disastrous for emerging brands.
In summary, we think reasonable growth is still possible for emerging brands that stick to the basics and focus obsessively on the consumer. Brands with strong market positions heading into 2023 will likely be able to achieve meaningful growth and capture more market share through 2023 and beyond. Brands that lacked strong market position heading into 2023 likely will struggle to maintain the status quo.
- Rich Gersten Founder and Managing Partner, True Beauty Ventures
In our view, growth expectations are not necessarily different this year than previous years, although economic uncertainties could slow growth for some brands.
In the world of pre-iOS 2021, all brands had potential for strong DTC growth, but, as that has changed in the last two years, online acquisition and DTC growth has been very expensive and very challenging. We do not encourage investment in paid channels to drive growth if the order is not first order profitable.
Ultimately, what we have seen with our portfolio is that brands that are able to generate strong organic demand have a lot of potential for strong and profitable growth, even doubling the size of their businesses.
The other factors driving growth will be distribution expansion in wholesale and product launches. Both levers could dramatically scale the growth depending on the size of the rollout and the success of the innovation.
So, in essence, there is no one answer to this question as it will always depend on the individual brand and its characteristics.
- Laura Meyer Founder and CEO, Envision Horizons
I believe that many beauty brands as well as businesses in general have had major reality checks in the last two years. COVID booms led to unsustainable growth levels for many businesses, and those that assumed this growth had no expiration date and over-leveraged themselves are now facing really difficult situations.
With increased interest rates, brands need to target "sustainable growth" or growth that they can afford. Growing too fast, especially in a high-rate environment, can actually be detrimental to small or emerging brands if they aren't careful. The best thing to focus on right now is your bottom line, not just your top line.
However, we are also seeing brands with unique positioning or products in the market experiencing triple-digit growth rates. It's absolutely possible, even with the increased cost of customer acquisition.
- Lisa Sugar Partner, Sugar Capital
First and foremost, there needs to be a clear path to profitability within a reasonable timeframe. Growth at all costs is not a viable strategy. Therefore, we are seeing growth expectations cut in lieu of running a more efficient organization to demonstrate a scalable and profitable business.
For early-stage startups, a minimum growth of a brand should be triple, triple, double, double over the first few years.
- Tina Bou-Saba Co-Founder and Managing Partner, Verity Venture Partners
Overall, beauty/wellness continues to be a healthy category. We saw in 2022 that prestige beauty was the only NPD-tracked discretionary industry with year-over-year unit sales growth. Consumers continue to be highly engaged in the beauty category, and they are trading up (driving so-called "premiumization"), experimenting with new products, practicing self-care and taking a broader view of beauty, inclusive of wellness (for example, supplements).
Beauty has historically grown faster than GDP, and I expect that general trend to continue given consumer engagement in the category and the relative accessibility and affordability of beauty products, especially compared to other discretionary categories.
During the pandemic, we saw spikes in certain subcategories, most notably skincare, as consumer stuck at home experimented with and engaged in new beauty routines and practices. Fragrance was a beneficiary of consumers' self-care regimens as well.
More recently, make-up has surged (go lip color!), and haircare has grown rapidly, driven by experiential products and innovation. It's normal for beauty subcategories to experience diverging growth rates due to consumer trends, but the pandemic dramatically amplified this. I think that we are just beginning to settle into our new normal post-pandemic.
Channel shifts have also been significant. Prior to the pandemic, we were already seeing significant increases in online customer acquisition costs, with digital marketing extremely crowded and competitive. However, the pandemic did provide a brief respite for DTC e-commerce as consumers spent markedly more time online and shifted spending to e-tailers, marketplaces and brand websites.
For about two years, it felt like DTC was back! Alas, that was something of a mirage. Brick-and-mortar has surged post-pandemic, and beauty consumers in particular enjoy discovery and trial in a physical retail setting.
Today, DTC is extremely challenging, particularly for relatively low AOV à la carte products. (Of note, the dynamics are different for subscription-based businesses and high AOV products.) Jones Road is an outstanding brand, and its growth has been extremely impressive. But, as a largely DTC brand, it is no doubt experiencing the same customer acquisition challenges as other DTC-focused consumer brands.
I think that this makes omnichannel all the more important, and I see many emerging brands whose growth at retail (and frequently Amazon!) is stronger than their DTC. I believe that many brands are shifting marketing spend to support the former, where ROI and contribution margin may be higher.
So, for emerging brands with a strong omnichannel presence, growth is likely "less hard" to come by this year than for those that are reliant on DTC. (I say "less hard" because of course growth is never easy!)
Lastly, for brands' DTC e-commerce, there are fundamentally two sources of growth, new customers and existing customers. In a challenging online customer acquisition environment, it is all the more important to lean into retention. Loyalty programs, new product introductions, tools like SMS, personalized offers and so on are just some of the ways that brands may drive growth more cost-effectively by activating their existing customer base.
I believe that emerging brands can drive healthy, if perhaps not dramatic, growth in their DTC channel this year by really focusing on these customers.
- Madeline Kaplan Partner, Selva Ventures
In today's landscape, early-stage brands face several challenges in achieving the same level of growth of years past. The market has become crowded, setting an exceptionally high bar not only for offering innovative and effective products, but also for telling a compelling story that can captivate audiences with diminishing attention spans.
There is less room to make mistakes or overspend on marketing efforts now that there is more of an emphasis from investors on profitable growth and a move away from growth at all costs. Additionally, discovery platforms are constantly changing, forcing entrepreneurs to adapt quickly and try to find new ways to connect with the consumer whether that’s on TikTok, Twitter or the next live-shopping app.
- Martin Okner Board Member, Beia Beauty and Fazit
The beauty and wellness industries have demonstrated—and I believe will continue to demonstrate—resilience in the face of macroeconomic challenges. For early-stage beauty brands with exponential growth potential yet limited resources, it is more important to set the right two- to three-year strategic plan with specific initiatives and goals spanning:
1) Consumer engagement, acquisition and retention
2) Channel distribution including e-commerce
3) Product innovation
4) Company culture and talent
Each initiative should be planned by year and vetted by applying specific sales targets and target contribution margins according to the resources on hand or available to the company - financial, operational, partnerships, etc. The combination of the remaining initiatives should inform annual sales and EBITDA targets for the company, that can be broken down into months.
If the projected growth year one, two or three in the first draft falls below the company’s or investors’ expectations or there are cash gaps in certain months, all of the planning and analysis that went into the preparation can help inform areas where the plan can be made stronger. This may include additional resource needs, focus and/or more efficient capital allocation to accelerate growth.
It will also inform the KPIs needed to monitor progress, sales, cash flow targets, retail sell-through, customer acquisition cost, social media engagement, follower counts, etc. Once the plan is put into action, monitoring the KPIs each week, month and quarter can help guide the company on how to best correct course in areas that are falling short and unlock incremental market opportunities. A strategic plan is also a valuable tool in guiding discussions with potential capital providers.
- Lila Sharifian Fractional CFO and Head of Beauty, Stage1 Financial and Operating Partner, BT3 Ventures
Early-stage beauty and personal care brand growth this year varies depending on factors such as core competency, distribution and cash position. For example, brands that are primarily DTC and thereby DTC experts continue to grow, while other brands have deprioritized their own e-commerce sites due to slow or no growth in that channel.
Omnichannel brands with anchor national retailers like Sephora and Ulta are growing. Some brands are growing less than they otherwise would have due to cash constraints hindering inventory purchasing. Lastly, clear and differentiated brand positioning is more important than ever before in this saturated market, and brands lacking it struggle with growth.
So, my motto for long-term growth continues to be, “Cash is king, and brand is queen.”
- Alaina Hartley Principal, Greycroft
I believe it’s much more important to demonstrate profitability and efficiency than growth in this environment. I would rather see early-stage beauty and wellness brands prioritize retail velocities and building a scalable ecommerce engine than driving pure topline growth.
That said, we are still seeing 50%-plus year-over-year growth in many seed-stage brands that are growing retail distribution, thoughtfully expanding assortments to increase AOVs, and diversifying marketing channels and creative.
- Maggie Abeles VP, NewBound Venture Capital
Investors who are deep in the space have seen some of this recalibration in our current portfolios, and often have a deep appreciation for the changing landscape. But certain headwinds such as higher customer acquisition costs aren’t temporary, they’re the new normal.
Brands that are quickly adapting to this, putting purposeful effort into creating and cultivating community and telling a strong, differentiated story to consumers are still going to see solid growth. Your customers are still out there, but it’s definitely a new challenge to reach them efficiently.
For this reason, growth efficiency is one of our main focus points in diligence. In our minds, an entrepreneur’s ability to gauge how and when to dedicate the resources at their disposal to maximize outcomes is equally important as their headline growth number.
- Marla Beck Co-Founder and Founder, Bluemercury and Atmosphere Ventures
I think when Cody says, “Growth is extra hard to come by,” what he really means is two things. First, growth is more difficult for direct businesses given the changes last year in iOS, which has significantly reduced the effectiveness and increased the cost of digital customer acquisition.
Second, the consumer euphoria of coming out of the pandemic with extra spending money combined with the sheer novelty of shopping in stores has worn off, reducing the amount of spend compared to last year, which was an exceptional year.
In both channels, the costs of customer acquisition have increased while the consumer propensity to spend compared to last year has softened. For early-stage beauty brands that used to be able to rely on DTC customer acquisition to scale their businesses, this has meant they have to also expand to retail sooner than expected, which means investing in separate teams, marketing expenses and resources to excel in that channel also.
For young brands that are trying to build their following and acquire clients, it’s harder than ever.
- ODILE ROUJOL Founding Partner, Fab Co-Creation Studio Ventures
The path of growth, but also profitability matters. It hasn’t changed a lot for consumer brands to have this virtuous model for a successful exit that’s not about pushing for growth at all costs, but carefully choosing their main retailer and developing their own DTC business with organic growth. Growth above 50% if there’s high product margin and excellent retention rate is great.
2023 is for sure about choosing priorities and cutting spending, but also exploring new shopping experiences such as video shopping and livestreaming as new channels for exponential growth. Veracity has done so with Trendio, and other beauty brands has done it with BuyWith.
- JOEL PALIX Founder, Palix Unlimited
It is harder this year on average, but very much a case-by-case story. I know some brands that are doing very well, including online where cost of acquisition started to come down a bit actually. I think it works better for brands that have a very differentiated product with a strong innovation to tell a story about.
- ANDREW ROSS Senior Advisor and Venture Partner, XRC Labs
He's talking about growth through performance marketing to acquire new consumers, and I think everyone in any consumer sector, including beauty, is seeing much higher acquisition costs post-iOS14, and therefore high pressure on CAC/LTV metrics.
If you combine that with the shift in investor preferences on traction metrics towards a better balance between top line and bottom line, you get a "double squeeze," and therefore DTC e-commerce (and in some cases retailer e-commerce) seeing growth go to single digit, flat or often negative. There is also a post-COVID adjustment back to brick-and-mortar from e-commerce that is still working its way through the system.
This is why repeat rate is so important to both growth and profitability. The higher the number of people that come back voluntarily because you have an effective and quality product that they like, the lower the amount you have to invest in trial for new consumers and still drive sustainable, profitable growth.
Does that mean that no one is growing? Not at all! For brands that have traction on earned and owned marketing (i.e., viral momentum on TikTok especially), and those that have the right wholesale or even owned FSS brick-and-mortar distribution where there is non-paid traffic, there is still plenty of growth out there. It is just impossible to "make" a viral moment on TikTok happen!
Dollar growth in the beauty market is still mid-single digits! Everyone needs to pay more attention to units, however, especially in mass. Given all the pricing that has happened in the last 12 months, everyone, but especially mass brands, need to be paying more attention to unit as well as dollar growth to ensure that they are not taking even loyal consumers for granted.
If you have a question you’d like Beauty Independent to ask beauty investors, executives and entrepreneurs, please send it to editor@beautyindependent.com.
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