Do beauty-centric private equity firms need a focus?

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When private equity shop Tengram Capital Partners announced the acquisition of the hair-care and skin businesses of High Ridge Brands Co. last week, it seemingly appeared outside the firm’s purview. Though it has experience with complex carveouts, including buying a once-sleepy RéVive from Shiseido in 2017, Tengram is best known for its luxury beauty portfolio and proposition. Think: RéVive and Algenist today, and in its past life, it invested in Nest Fragrances, Devacurl and This Works. Meanwhile, High Ridge’s brands include V05, Zest, Rave, White Rain and LA Looks, which are primarily found in mass channels like Target, Walmart and Dollar General.

Tengram’s portfolio diversification comes at a time when other private equity firms are trying to bet on pure play expertise. And increasingly, the funding arena is getting more crowded as investment deals become smaller and smaller. For instance, LB Equity formed an early-stage fund of $50 million to invest in CBD beauty and wellness brands like Standard Dose and Herb Essentials in January 2019. And Silas Capital, a growth equity and venture capital firm that has invested in clean skin-care brand Herbivore and clean color company Ilia, is on the hunt to add a clean hair company to its mix to further its positioning.

Conglomerates, too, are also trying to nail down their focus. Estée Lauder Companies has stayed true to its prestige take, even with the widespread blurring of mass and luxury. And Coty continues its talks to offload its professional hair business, despite the sector driving its quarterly earnings results. This is being done to right its consumer beauty ship.

Tengram’s intention to purchase High Ridge follows the latter’s bankruptcy proceedings that began last December. The business ended 2018 with approximately $301 million in net sales and about a $62 million loss. Bill Sweedler, Tengram Capital Partners co-founder and partner, said that the firm is interested in V05 and Zest for their value positioning and legacy brand recognition.

“We invest in companies that have high brand equity within certain demographic groups,” said Sweedler.

Beyond customer loyalty, it helps that stores like Dollar General have seen a turnaround in beauty, thanks to lines like Believe Beauty. Target and Walmart have also been bullish on stocking digitally native and influencer-led brands to compete with Sephora and Ulta. James Daniels, High Ridge’s former president and chief executive officer, will return to lead this business for Tengram.

“Going back to this portfolio of brands that we built between 2011 and 2016, one of the things that was quite powerful was the vast number of Americans that fit into the area of ‘value-seekers.’ They aren’t necessarily looking for the cheapest deal, but they are very shrewd about where they spent their money. They would rather spend on iPhones or Xboxes if they know they can get the same quality for less,” said Daniels. “Fundamentally, it comes down to capitalism and economics.”

While Daniels is well-versed in large retailers like Target and Walmart, he acknowledged that in the last two years, High Ridge could have had better synergies with those wholesale partnerships.

“There are a lot of customers that walk through those doors, and its important to listen to that consumer and not make a brand something it is not. But it is just as important to listen to the retailers and understand their strategies, whether it’s around millennial families or clean [beauty]. Those primary values need to be tied back to a brand’s product innovation and marketing,” he said.

Even without an exact sector expertise, if a private equity firm can provide channel value, they are more likely to A) win the deal in the first place and B) surpass retailers’ forecasts.

“From a competitive advantage perspective, having a specialty and proving you can deliver in a Sephora or Ulta or QVC moves the needle,” said Brian Thorne, Silas Capital partner. Silas Capital’s brands largely sell in those retailers. “Twenty-five years ago, L. Catterton’s differentiating factor was that it was practically the only dedicated consumer fund. Now there are a lot more out there. There is a vast amount of capital today than there was in the past, so when talking to founders, you have to prove your value add to win.”

Winning deal opportunities then moves beyond pure cash and turns to trust.

“Founders look to your past successes and failures to see how you can build and grow their business in the retailers they are in or want to be in,” said Thorne. “Our understanding of how to drive sell-through in Sephora and how to work with its freelancer community to scale customer education is something they have observed, and then hope to count on.”

As Silas Capital has become well-versed in Sephora’s clean push in both skin care and color cosmetics, the company has been more bullish in its bet on clean hair. Elsewhere, LB Equity is hoping that its expertise selling CBD in smaller format retail stores and DTC will give it a first movers’ advantage when and if bigger funds and conglomerates start to dabble in the ingredient.

But from Sweedler’s and Daniels’ experience, PE firms can be less specific in regards to prescriptive terms like luxury, prestige, masstige, mass and value.

“Marketing is marketing,” said Daniels. “Knowing your target customer doesn’t change whether you are in a prestige or a mass channel. You just need to know how to talk to them in their language, listen to them and then engage.” — Priya Rao

On our radar
After relaunching its lipsticks lineup last May, Gucci Beauty is focused on retail. Between March 6 and 7, the beauty brand will debut its first interactive consumer pop-up experience dubbed “Gucci Beauty Network Studios” in Los Angeles. It is pegged to the launch of the brand’s new mascara, L’Obscur, and Gucci Beauty’s foray into Sephora stores. Up until now, the line has only sold on Sephora.com.

Experiential pop-ups have been a tried-and-true tactic for cosmetics licensees like YSL Beauty (Gucci works with Coty on its makeup and fragrances), but the more pressing issue is how Gucci Beauty will sell in Sephora locations. The pop-up is strategically placed near Sephora stores for further discovery, and of course, there is a customer data play during the activation: All pop-up purchases will be made through Sephora.com via QR codes and iPads. — Priya Rao

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