Bitcoin is all the rage right now and is the latest tech trend to follow social-mobile-local. There are reasons to be excited about bitcoin, to be sure, just as there were reasons to love all other tech trends of the past decade. But bitcoin, and tech trends like bitcoin, tend to suck a disproportionate amount of oxygen out of the room when talking about investing. An industry that gets a lot less attention, relative to its attractiveness, is consumer. Investors, particularly those focused on tech, tend to have a lot of misconceptions about consumer products in general. They assume profit margins are low, pay back is slow and growth is stagnant. Those assumptions could not be more flawed, especially with respect to the personal care industry, which is overflowing with great investment opportunities at the moment. Why personal care and why now? A few factors have converged to make it easier than ever for companies—even small or new companies—to establish themselves in the space and build a loyal following. The five key factors currently making personal care an attractive investment space are outlined below:
1. Brand Loyalty You’d be hard-pressed to find stronger brands or brand devotees than those within the personal care space. Consumer product commodities like paper towels and dish soap? Sure, people will shift allegiances there based on price. But shampoo, make-up, fragrance and skincare? Not likely. Even the highest-priced among them are the last things to go when times are tight and budgets need to be trimmed. Even during the deepest dip in the recession (2008-2010), sales of skincare products were up 21%, according to global market research firm NPD. Customers stay loyal to their chosen beauty brands because the core asset in many cases is not the formula or some proprietary backend code, it’s the brand itself. That’s what people can’t copy. You could take Dior mascara to a lab tomorrow and copy it exactly, for example, but under a different name it wouldn’t sell the same. There is no industry where brand matters more than personal care. And if a brand hits it right and builds an asset, that’s an incredible barrier to entry for competitors.
2. Purchase Frequency. What’s better than extremely loyal customers? Extremely loyal customers who come back every month. The majority of personal care products are purchased once every month to two months. That’s a recurring revenue stream that, in the vast majority of cases, you’ve got for the rest of that consumer’s life. Why is recurring revenue important? Think about the cost to acquire a new customer vs. the cost to keep an existing customer. Recurring revenue is also great for stability- something investors love.
3. Nice Margins. One of the greatest misconceptions in Silicon Valley is that consumer product companies have low margins. There are a lot of VC investors here that still think of all consumer companies as giant manufacturing plants with billowing smokestacks. Nowhere is that less true than in the personal care industry. Skincare and hair care companies, for example, typically have greater than 60% gross margins, which gives them a lot of capital to invest in new products or acquire other companies. A private equity firm I worked with invested in a medium-sized shampoo company that sold to a major strategic. When it sold, it had 70% gross margins, 40%+ EBITDA margins and commanded an incredible valuation.
4. More Sales Opportunities. Because today’s consumers want products and experiences tailored to them, and are more willing than any previous generation to try new, niche products, retailers have opened up their shelves more than ever before. It has never been easier for a personal care product to make it onto the shelves of even some of the larger retailers, particularly those that focus solely on personal care products, such as Sephora and Ulta.
In addition to brick-and-mortar sales opportunities, personal care companies now have dozens of highly-trafficked websites on which to sell their wares. There are also the hugely popular beauty-focused subscription boxes like BirchBox just waiting to help them find more customers.
5. Exit Markets. Of course, the most important element of any investment is often the exit strategy. One of the first questions I always ask as an investor is “what strategic can this sell to?” Here again, the personal care market is a win. The major strategics in the space—L’Oreal, Estee Lauder, Unilever, and so forth—are highly acquisitive. Their large gross margins give them plenty of capital to spend on acquiring smaller companies. And it makes good business sense for them to do just that, whether because the acquired company was a competitor or simply because the acquisition helps them break into a new market without developing a new product themselves. Over the past several years, Estee Lauder has acquired Smashbox, Aveda and Bobbi Brown, while L’Oreal has snapped up companies in Africa and Asia to help it compete in those markets, as well as the shampoo brand PureOlogy and skincare brands Decleor and Carita. In the personal care space, as soon as a brand develops a following, an acquisition offer is not far behind.
All of this may have been true before today, but today’s world makes consumer product-related investing far different—and more exciting—than ever before. Why? Think about it. It wasn’t that long ago that young, robust, high-growth consumer product companies stayed under the radar; the average person never heard of them until long after the experts had invested in them. Today, those businesses have greater access to investors of all types. Conversely, investors have greater access—and earlier access—to these businesses.
The difference? There are a few including online investing platforms like CircleUp. Not only do the reasons outlined in this article merit investment in the personal care industry. Equity crowdfunding makes investment available to the very people who use and love personal care products and who never before had such access to participate in a great young company’s growth. What has always been good just got better.