Earlier this year Vogue Business published an article about building a beauty brand. The article was an interview with the founder of a successful beauty brand brand who raised 1.5m to start a colour called Stowaway Cosmetics.
We think Julie Frederickson has done an incredible job with Stowaway, however we believe there’s more than one way to eat the pie.
This Vogue Business article will form the basis of a series of articles from our team on the mechanics, psychology, finances and hacks to starting a beauty brand… but why are we credible?
My firm, E xD Atelier is a design, development and manufacturing platform for beauty, health and wellness products. Essentially we launch beauty products and brands.
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How to launch a beauty brand for less than $1.5 million
MARCH 7, 2019
Although e-commerce and social media have lowered the barrier to entry, launching a beauty brand costs “at least $1.5 million in capital”, says Julie Fredrickson, CEO and co-founder of Stowaway Cosmetics. She outlines what’s needed to get up and running.
Beauty is booming online. The success of companies like Glossier, which grew an estimated 275 per cent in 2018, has led to a wealth of venture capital investment in direct-to-consumer brands like Drunk Elephant and True Botanicals.
Julie Fredrickson raised $1.5 million in 2015 to get Stowaway Cosmetics, which specialises in compact cosmetics, to launch. Here, she breaks down how a beauty startup should allocate capital over the first 12 to 18 months.
Here, in the breakdown of costs it’s important to separate these into two categories to understand them better. In order to understand what is necessary and what isn’t.
It’s helpful to look at initial start up costs and then ongoing operating costs. Remember here we are addressing the start-up phase of the business only. We look at the first round of product, finding traction and product market fit.
Here we would break it down like this:
Supply Chain Establishment
Breaking it down like this helps us understand the variables and decide how we want to launch. This is important to understand.
There are more than one way to launch a brand. We advise on launch strategy taking into account a variety of factors incl. our client’s risk appetite, experience, network and of course access to capital.
Break down of Stowaway Cosmetics’ launch spending.
$625,000 in salaries for an engineer, head of product, head of brand/marketing, head of operations, customer service and graphic designer. Plus whatever you plan on paying yourself.
$250,000 in initial product purchases if you plan to launch with four to six colour cosmetics in a few colourways. (FYI, most cosmetics have a minimum order quantity of more than 10,000 per item.)
$200,000 for general operational overhead for the first year.
$50,000 for initial brand and creative work to develop your identity, logos, fonts, and the colour scheme for your packaging, website and other customer touchpoints.
$50,000 for initial asset and creative production, including high-res product and lifestyle shots, as well as video tutorials, so you can show press, customers, et al what your product looks like.
$50,000 to find, lease and furnish an office. Even a co-working space like WeWork costs $500 to $1,000 per head.
$50,000 for IT, including systems development and integration.
$50,000 to set up a product supply chain and fulfilment, including the cost of a warehouse.
$50,000 for an expert e-commerce firm to help with your first website build.
Once you’ve got to launch, you’ll need to invest some funds in marketing, Fredrickson says. In the first year, plan to spend at least:
$120,000 on PR and influencer agencies
I agree with the break even year. This isn’t to say that profitability won’t be within your grasp, it just depends on the type of growth you want to achieve.
Whilst everyone will say they want Glossier-esque growth, this requires sacrifice. Sacrifice that will see all pennies earned re-invested into growth. This concept is called blitz-scaling. Frederickson is ambitious and is looking to grow, and fast. She is nailing the idea here.
$200,000 on paid media, primarily Google ads and search, plus some Facebook or Instagram ads.
$50,000 on product giveaways
Don’t expect to break even on your first year, advises Fredrickson. That’ll take between two and five years, even if a brand grows quickly. If she were to do it all over again, she’d allocate product spend and headcount a little differently — and go slower.
One bet that paid off? Ordering above minimum order quantities to capitalise on bulk discounts (usually around the 25,000 unit mark) and to ensure she had enough product on hand, since getting replenishments to market would take at least six to nine months. “It was a little risky and I’m glad we ended up placing larger orders… we literally couldn’t keep our eye palette or translucent powder in stock for months,” she says.
Fredrickson elaborates on lessons learned in an edited Q&A below.
Addressing Frederickson’s point around MOQs — there are two ways to think about it, and to our mind it comes down to access to capital.
We are ok to recommend lower MOQs at reduced margin to reduce the initial risk, safe in the knowledge that 90%+ margins will come.
This is all about the unit economics of your business. Having more attactive unit economics paid off for Frederickson but she wasn’t spending her capital, she was spending investor’s money.
Again this comes down to your access to capital and risk appetite.
Much has been written about how e-commerce and social media have lowered the barrier to entry for upstart beauty brands. How much do you think it would have cost you to launch cosmetics brand a decade ago?
I think the hype that it has “never been easier” is overblown. Some things have a lower bar — minimum order quantities used to be 25,000 and now you can do some things for 10,000 — but overall it still requires a huge amount of capital and connections on day one to make it work. Retailers and private equity shops are chomping at the bit to find brands that they can take from $5 million to $50 million in sales. But to get to $5 million you still need the upfront costs handled and to get initial distribution/growth.
What legacy costs are today’s upstart brands exempt from?
You can actually start a brand without a retail presence which simply wasn’t true even 10 years ago. That means you don’t have to allocate money for retail displays, sales staff, gratis product, testers and marketing dollars to your retail partners. Those are big cost savings, and let a brand develop a voice, style and merchandising assortment before the stakes are so high that you can’t afford to make a few mistakes.
Many young brands are pouring their money into influencer marketing. How effective and expensive is it, really? Where have you found positive ROI?
Focus on building a relationship with someone who influences your customer. Just because someone is popular doesn’t mean they speak to your customer, which is largely why I’m incredibly skeptical of the return on investment of many influencer programmes. If you are going to work with them, apply what I call the law of “drop the zeros” to any influencer. For instance, If they say they reach 10 million people a month, then on any given day they maybe they reach 1 million of those. Of those, maybe 100,000 will engage with your content. Of those, maybe 10,000 make it to your website. And of those, only 1,000 are going to make a purchase.
Even with that large amount of fall off, these campaigns can make sense, but you have to understand your break-even points and expectations before starting. For instance, I’ve seen $100,000 paydays for Instagram influencers for a single post. If your average order is $50 and you go all the way through that funnel, will that person really be able to deliver the 2,000 orders you’d need just to break even on the sponsorship? Often, the math simply won’t add up.
The short answer is time.
Because we have work with great brands with strong creative vision we are constantly having to create new and inventive supply chains. We work directly with Asia for packaging, our product designers are often creating challenging products to manufacture.
Accessing the labs taht Frederickson mentioned is difficult but this is why we exist. We take great pleasure in setting up beautiful supply chains with world leading manufacturers.
The challenge with starting with a less desirable supply chain, as Frederickson suggests might be the only way to begin (because the bigger players won’t give you the time of day) is changing your supply chain 1 or 2 years in is a costly exercise. It takes time to and money make this transition. We prefer to create a scalable supply chain from day 1 with the best labs and manufacturers in the business.
How did you find the right partners (manufacturers, technical, advisors, etc.) to get to market? Your supply chain spans three countries. How’d you figure that out?
Become a member of CEW and subscribe to the relevant trade publications. Beauty Packaging Magazine is one of my favourites, as well as the more specific Cosmetic Design. Both have lists of manufacturers for all needs. You will quickly discover there are lots of options but just a few truly great packaging and formulation shops that all brands rely on. If you can convince them to work with you then you are set. But it takes a lot of phone calls and credit checks and references to get started and not everyone I reached out to at first was interested in working with us. Once we won some awards I did get a lot of very nice emails from the shops that didn’t want to help us launch asking if we wanted to work with them as we grew which was nice.
Any other advice for would-be founders?
The best investments you will make are good product design and good public relations. A distinctive look and feel to your packaging and formulations combined with a great story makes or breaks a brand.
This story was originally published on 23 July 2018, and was updated with Glossier’s 2018 growth estimates on 7 March 2019.
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