07.17.06
Starting Up
By Stephan Kanlian
While everyone working in the beauty sector is conscious of the new challenges posed by retail consolidation, increased pressure by consumer groups about regulatory changes, oversaturation of product in the marketplace and decreased attention to traditional media by an increasingly sophisticated consumer, these challenges present a unique situation for entrepreneurs trying to break into the beauty industry with a new product or new idea. At no time in the industry’s history has it been more challenging to be a start-up business. The fact remains, however, that what the industry needs most at this challenging time, is innovation. As entrepreneurs have always been a great source of innovative new concepts in the beauty sector, it is worthwhile to look at the market from their perspective and examine the challenges they face in entering the industry today.
“One of the positive things about our industry is that new products or concepts have the edge, and that creativity is what keeps our industry alive,” points out Karen Acker, head of KA Consulting Corporation and current president of the Independent Cosmetic Manufacturers and Distributors (ICMAD). “It is definitely more difficult today for start-ups, it is more expensive, the retail market is more sophisticated and more difficult to penetrate. The broker network is fragmented and difficult to set up a good distribution network. I don’t think access to venture capital has changed, but the market has become more difficult to break into.”
Acker’s own experience is a dream success story for any beauty entrepreneur. Her family started Pavion/Wet-n-Wild in her father’s garage in 1979, selling in 1997 to a group of investors. “It takes a lot of work – I remember him being up until 3 or 4 a.m. in the early days, waiting for that big break, which for him was an order from Woolworth’s.”
In the meantime, they kept up with the market and color cosmetic shades and introduced extensions to the line, until Inc. magazine named Wet-n-Wild one of the fastest growing companies of its era. Recalls Acker, “My father had a philosophy: if you throw enough on the wall, something is going to stick.” She credits Wet-n-Wild’s success to agility — the ability to turn on a dime and react more quickly to the market than its larger, less nimble competitors.
The business plan for the Malin + Goetz skin care brand was in development for 18 months. |
Part of the difficulty may be that it is too easy to set up shop. The cost threshold for entering the beauty sector is not very high. You can enter a contract manufacturer and leave that day with product to sell. While this has always been the case, at no time has long term success and brand differentiation been more difficult to achieve.
Perhaps no one sees more entrepreneurs in the cosmetics and beauty industry than Rita Malek, show manager, EX·TRACTS, a bi-annual trade show. Malek believes most entrepreneurs are in it for the long haul, with very few interested only for the opportunity to be acquired by a bigger player. But the problem is that their objectives may be unrealistic, in part because the entrepreneurs themselves are so passionate about their product, she says.
“Many of the entrepreneurs we see at the show every year are not from the beauty sector — they come at this as designers, having worked for packaging companies or other personal care companies — and have literally started from nothing,” points out Malek.
From her experience, she identified several common challenges beauty entrepreneurs face in their start-up phase:
• Financial constraints in terms of marketing funding;
• A need for realistic objectives/business plan;
• Challenges in terms of producing enough product to fulfill orders when their product catches on; and
• Competition now coming from the larger companies, who have acquired a number of niche brands, with whom entrepreneurial ventures can’t compete in terms of advertising or marketing support.
A first stop for entrepreneurs is often supply companies, and these packaging and contract manufacturing firms see a steady stream of entrepreneurs who don’t succeed. Steven Nussbaum, director of marketing, O.BERK, sums it up in one statistic: “1 in 20 products succeed — odds are against a start-up.”
The Challenges
Packaging: Perhaps the most frustrating initial challenge to a beauty entrepreneur is that the supply chain is not necessarily as enthused about their business as they are. While new business development is as important to packaging companies as any business, entrepreneurial start-ups don’t usually represent the kind of volume that drives business for the supply chain. Even more surprising to the creative personality who might start his own business is the notion that he can’t position his product with unique, custom packaging. The reality is that with the minimum orders required for componentry, the only option open to most start-ups is clever decoration of stock packaging.“A lot of start-ups want small quantities of bottles, jars and caps, and many hope to customize with their own packaging, in terms of color and shape,” says Nussbaum. “Instead they encounter minimums for glass of 50,000 - 100,000 pieces and 25,000 - 50,000 for plastic, a waiting period for shipment and costs for a custom mold.”
Nussbaum is quick to point out that this is not unique to the cosmetics and personal care sector. It is also common in the food industry, where an entrepreneur may want to market grandma’s special sauce and wants a custom bottle to set the product apart on the store shelf. “With our experience, we guide them to stock packaging with different caps and colors, and different labeling, to give them differentiation,” says Nussbaum. “There is a lot that can be done with silkscreen decorating on plastic, different caps and different labeling.”
Jim Brady, general manager, Brad-Pak Enterprises, Inc., echoes these sentiments. “Everyone wants something unique and different that nobody else has, and in small quantities. They often bring in other packaging as inspiration, but it requires custom molding,” he notes.
Brady recounts many stories of companies that will say “give me 5000 pieces this one time, and my order will be bigger next time.” Unfortunately, with custom or special order items, if it doesn’t sell through quickly enough, the entrepreneur may not be able to repurchase in small quantities. He suggests that beauty start-ups look to differentiate themselves through decoration technology and clever marketing. “We can take a stock package and what can be done with labels is incredible today,” Brady says.
Manufacturing: The challenges of the supply chain also extend to manufacturing and contract filling. New ventures often turn to a cosmetic chemist or consultant for advice.
Howard Baker of H.Baker Development is a cosmetic chemist who has been consulting on regulatory compliance and technical services for small and medium-sized companies for more than 20 years. “Choosing the channel of distribution and building the brand through initial sales that are frequently small quantity, presents a challenge in getting the product made,” explains Baker. “Contract manufacturers are not crazy about small quantities of production. Getting the attention of the contract fillers, or getting packaging components decorated in smaller quantities is a challenge, and if you inventory excess packaging, it creates a cash flow problem.”
Matthew Malin, CEO of Malin + Goetz, has experienced this firsthand. “This was the area in which I had the least experience – the minimums, the costs, were the biggest overall challenge. We had to get quality manufacturers to take a chance with us, and produce minimum batches, until we could develop a reputation.”
Another new entrant to the beauty industry, Michelle Meier of Body Buddy, points out a further challenge in trying to keep manufacturing close to the business. “Manufacturing in the United States has been very interesting. We really wanted to keep the product made in the U.S., and right now it is all being made here in Oklahoma (where the company is based). We sent contracts out all over the U.S. and most manufacturers were not interested.”
Distribution: Everyone in the beauty sector today has an opinion on the challenges of distribution. Increased competition and retail consolidation poses perhaps the most difficult barrier to new brands. “Objectively, there are more channels of distribution and the customer is cross channel shopping and this should present more options for start-ups,” says Baker. “Subjectively, once a start-up figures out which niche they are aiming for (Internet, QVC, infomercial, store distribution), there is a lot of competition.”
Those who have been successful entrepreneurs in the past don’t envy the challenge faced by today’s new entrants. “Even for a unique idea like mine, there were retail outlets that could be approached,” says veteran entrepreneur Roberts. “That is not the case today – consolidation has compressed the number of retail outlets you can access. The greatest challenge today is the retail distribution aspect, even for the big players, who have had to move on from traditional retail and come up with new ways to sell product.”
Part of the challenge is that niche brands have been gobbled up by the major players, and they enjoy a certain amount of clout from their parent company in terms of negotiating the retail landscape.
Another challenge is getting their attention in the first place. “Store buyers, people you are sampling, and those receiving information on your product are just as overwhelmed as you are as an entrepreneur, so you can’t take reactions to the product personally,” advises Meier. “You have to get your sales pitch into a simple, quick message. Good, concise messaging and great design is the best way to succeed.”
Despite the difficulties, there are new opportunities at retail that didn’t exist even a decade ago, such as the Internet and home shopping channels. These have their own unique challenges.
“Home shopping is a big opportunity if you hit it right,” observes Brady, “but there is also a big risk if you can’t fulfill an order of 20,000 kits. You are stuck with a great deal of product.”
In the end, it is still about making the connection and building relationships, and that is not an easy proposition for new brands. “We were fortunate to have retail connections so that at least someone would take the meeting,” says Malin, “so that was fortunate for us, but it is still a challenge. Without a distinct point of difference, you are almost destined to fail.”
Marketing: Explaining a new or original product is very challenging, and trying to approach editors with a new concept is very difficult. “You have a split second to differentiate yourself from anyone else – you have to grab people’s attention very quickly,” observes Meier. Successful entrepreneurs are characterized by their ability to distill their message into a compelling sound bite that attracts consumers, editors and retailers.
There is also the decision of where to position your brand, and how that decision impacts on costs and the ability to impart the brand message. “It is much easier for a start-up company to come into the market with a higher priced product. Mass businesses require volume and advertising,” points out Acker, a mass market veteran.
One method for quick success is the celebrity connection in editorial – considered the holy grail by most beauty entrepreneurs. However, similar to making retail buyer connections, it means building a network from scratch for most start-ups. “If you are trying to market a product from middle America, you are challenged to get product into the hands of celebrities – a tried and true method of building awareness for your product, or getting your product into print,” points out Meier.
Successful marketing for start-ups in the beauty sector really comes down to the message. It is still the key to creating a buzz and garnering attention in a crowded marketplace. “Honing the message so that you can stay competitive even without national advertising is the key,” confirms Malin.
Technical/Regulatory: While the threshold for entry may be low, the price for sustained success in the cosmetics industry is high, especially when it comes to regulatory compliance. “There is more regulation entrepreneurs have to deal with today,” observes Acker, “labeling requirements and regulatory compliance adds cost, and not having the right information before launch can cost a small firm dearly.”
“Either you are using an approved active ingredient, or follow a monograph about claims, or you are facing several hundred thousand dollars of testing over several years to substantiate a claim or ingredient that is classified as a drug by the FDA,” warns Baker. Through his consulting work in regulatory compliance, he knows that compliance is most strictly enforced among small companies.
“If the FDA is going to enforce a regulation more strictly, they will start with the smaller companies, without legal resources, and make a test case of it, to send a message to the larger companies.”
Another hidden challenge is product integrity. The only way you can know that a cosmetic product is safe is to test it. A basic battery of tests (patch and microbial tests) costs approximately $2000, yet many small firms want to avoid these costs. As a result, small companies have an exposure in this area that the larger firms may not. For smaller firms, insurance is available at more reasonable costs, thanks to the efforts of ICMAD.
Finances: Critical to start-up businesses in any industry is capital. Depending on the industry, the costs vary, but well capitalized entrepreneurs have more options available to them for marketing and distribution. However, it all starts with the business plan, and many start-ups find this aspect challenging. “[They] don’t seem very sophisticated about putting together a business plan, such that they can access financing and capital to approach the market in a more meaningful way,” points out Baker. “There do not seem to be many consultants in this arena, helping companies build meaningful business plans and matching them with venture capital or small business loan programs.”
From the entrepreneur’s perspective, this area of expertise is critical. “You need to be aware of international marketing, and be prepared in terms of pricing structure to service interested overseas buyers and brokers. That has to be part of your original business plan and pricing structure,” warns Meier.
There was a time during the internet craze that venture capital (VC) flowed more easily to beauty entrepreneurs. However, that changed when the dot-com bubble burst. “VC companies don’t love the cosmetics industry — the payback isn’t quick enough,” observes Roberts. “The notion of starting with nothing really doesn’t work today.”
Resources
There are resources available to help entrepreneurs in the beauty sector. As a trade association, ICMAD is specifically focused on smaller and independent firms. “What we are trying to do is vitalize and revitalize the industry,” says Acker, “which is often done by smaller companies bringing new concepts to market.”
Acker also believes the Internet gives small companies a great advantage and puts them on equal footing with larger firms in terms of retailing. “I’m not sure the Internet is utilized as much as it could be, and the opportunity is greater than it currently represents,” she adds.
Suppliers can also be a good source of information for entrepreneurs. “Most start-ups are supported through relationships with their private label or contract manufacturer, who offer enough support to get entrepreneurs going and over the threshold of being in business,” observes Baker. Beyond trade associations and supplier relationships, many small firms participate in trade shows as a way of gauging interest in their products, gathering market research and building awareness for their brand.
Wanted: Passion and Tenacity
The need for innovation in the beauty sector has heightened the importance of new concepts and products to the industry, but it pays to be an educated entrepreneur, mindful of both the challenges and the rewards. Advice from successful entrepreneurs has a common theme – the importance of commitment and dedication.
“The rewards are definitely there – but it requires persistence,” confirms Acker.
“To run a cosmetics business is so difficult, it takes great passion,” says Malin, who maintains she is excited by innovation she sees from companies coming into the sector. She offers some sage advice for start-ups: “you need a clear business plan and clear short and long term objectives.”
The lure, of course, is the financial opportunity for entrepreneurial success. That spirit is summed up by veteran Roberts. “How old is Microsoft, Wal-Mart, FedEx?,” asks Roberts. “ They are only 35-40 years old. There are always new ideas and the market needs new ideas. However, it takes a great deal of tenacity to be an entrepreneur.”
