How can Olaplex turnaround and what are the odds?
In a Harvard Business Review study, 67% of the brands that endured prolonged periods of sluggish growth or decline, ultimately faced the fate of bankruptcy, privatization, or acquisition.
On Thursday, May 2nd, Olaplex shares surged following the cosmetics company’s announcement of sales exceeding expectations in the first quarter. This positive performance coincides with the company’s ongoing execution of a business transformation and turnaround plan.
The stock surged 18% to $1.65 during midday trading on May 2, 2024, reflecting investor optimism in the company’s trajectory.
However, it’s worth noting that despite this recent surge, Olaplex has experienced a significant decline of 55% over the past year.
In terms of financials, Olaplex reported a net profit of $7.7 million, or one cent per share, aligning with analysts’ forecasts. This figure contrasts with the previous year’s profit of $21 million, or three cents per share, for the same period.
While sales dipped by 13% to $98.9 million, they still outperformed analyst estimates of $95.2 million, according to FactSet. Moreover, these sales exceeded the upper range of Olaplex’s first-quarter guidance, set between $92 million and $97 million.
In January 2020, Advent International led the acquisition of Olaplex Holdings Inc. Within a little over two years, the firm nearly tripled its initial investment, now holding a stake valued at around $9 billion, albeit with uncertain gains maintenance.
Notably, the Olaplex deal was largely engineered by women, rare in the male-dominated buyout business. The pandemic fueled surprising growth for the company, founded in a California garage less than eight years ago, yet the recent share drop highlights the risks inherent in investments tied to volatile consumer markets
What Happened to Olaplex?
In 2023, the company experienced a significant decrease in net sales, plummeting by 34.9% to $458.3 million. This decline was most notable in the United States, where sales dropped by 47.8% for the year, while international sales also saw a downturn of 18.3%.
Despite this substantial annual decrease, Olaplex’s fourth-quarter results showed a less severe decline, which the CEO, Amanda Baldwin, highlighted as a positive step towards stabilizing the demand trend. Net sales for the quarter decreased by 14.5% year-over-year, amounting to $111.7 million. There was a 27.9% decline in the United States, whereas internationally, there was a marginal decrease of 0.7%.
Causes of Decline
-Baldwin recognized the company’s “challenging” 18-month period and offered her evaluation of the factors contributing to its slowdown.
“I believe the headwinds were the result of the business growing too quickly, suffering from execution errors, and not appropriately investing in the resources needed to best support the professional stylist community, develop the right capabilities and brand marketing, and prepare for the reality that often happens to a category creator: increasing competition,” she said.
–I want to add that in a hurry to secure distribution, OLAPLEX spread itself too thin.
-Furthermore, apart from contending with a growing roster of competitors like K18 in its signature bond-building category, the brand faced challenges such as a lawsuit and viral TikTok videos alleging hair loss, resulting in a 15% decrease in direct-to-consumer (DTC) sales and a 42.6% decline in specialty retail sales for 2023.
OLAPLEX Turnaround Strategy with Jump Analysis
A. During the earnings call, she, Amanda Baldwin, outlined the brand’s comeback strategy, emphasizing
-a heightened focus on the professional stylist channel,
-an investment in enhancing brand equity and
-leveraging data for decision-making
&
-Given the reported 40.1% sales decrease in the professional channel in 2023, Baldwin underscored plans to enhance engagement with stylists through increased team salon visits, trade show presentations, account management, and educational resources.
Jump Analysis
This is the right move, but it doesn’t seem to have a well-thought, refined strategy to win back and penetrate the PRO Accounts.
B. Baldwin said that the brand plans to ramp up its product development and marketing efforts to earn “true brand love” through a focus on data to calculate marketing ROI, upgrading visual merchandising, sampling, and enhancing paid media at the retailer partner level.
Jump Analysis
Sequence and leverage matter in any strategy, and the more significant issue was the focus on distribution and lack of focus on protecting and penetrating the Key Accounts in the PRO channel. Thus, the expense of visual merchandising and paid media at the retailer partner level, independent of the PRO Channel strategy, is misplaced and won’t produce the needed ROI in the short term.
C. Distribution is also a part of Olaplex’s strategy to boost brand equity. As third-party sellers have listed Olaplex products on online platforms such as TikTok Shop, Baldwin said the brand planned to “combat the diversion of our products by closing some accounts where we find evidence that the distributors were the source of the diverted product.”
Jump Analysis
It’s not that surprising. Distributors can divert, but never to the extent that it leads to high sales drops. It simply conveys that the Key Accounts lost preference for a brand that consumers could buy at marked-down prices and with higher availability.
1. It only means that distributors needed to be vetted and had too many distributors to enforce compliance
2. The distributors diverted the product to wholesale/deal-seeking channel and did not create the resultant repeat demand purchase at PRO Key Accounts or DTC
D. When it comes to operations, the company is also in the process of “evolving our integrated business planning capabilities to improve forecasting and overall business performance management,” and will “bring our team together in person more frequently” to facilitate a “strong corporate culture,” said Baldwin.
Jump Analysis
OLAPLEX is very likely to have a culture issue. Advent International, a PE firm, likely bought the brand targeting an exit, but the kind of dividends and gains Advent has made with OLAPLEX helped their cash flows, so they may want to wait, turn around and get the BIGGEST bang for their buck, ever. PE firms aren’t quite the culture experts; their drivers and brand purpose can be at odds.
Improving culture comes after you frame and aim for a culture. It is the proper thought, but it goes beyond the capabilities of PRO & Retail, which are different businesses.
1. For culture, OLAPLEX needs to uncover “their purpose: why they exist” + values that the founders and leadership will never compromise.
For example, Loreal identifies as a beauty company ‘serving beauty that moves the world’ and not a CPG company like Unilever or P&G. Loreal values entrepreneurship, leadership and innovation and hires, rewards and promotes people for the same.
Culture will remain a challenge for a startup brand that generates more than $400M in revenues and is owned by a Private Equity Firm. Culture is a long-term game, and as it becomes more complex, it goes way beyond the discipline of making things happen, which is what OLAPLEX needs right away.
2. How to have specialists under the same brand for PRO & retail businesses: Assortment & Pricing matter
Learn from Loreal, which considers itself a beauty company. It moves people internally but still lets them become specialists in its three different types of business: Pro, CPG, and Active Cosmetics.
E. The company is limiting new distribution this year to focus on its existing customers and current channel, as well as rationalizing some accounts, after realizing that some of its distributors were the source of diverted product.
Jump Analysis
Good: Focus and having a key account approach is the right way to start. PRO Channel needs a solid Joint Business Development strategy with Key Pro Accounts.
5-Step Brand Strategy Framework for OLAPLEX Turnaround
67% of the brands close or are acquired if they don’t turnaround their sales decline within 1-2 years?
1. Core Issue-Strategy
Core Issue
“OLAPLEX does not have a core culture & strategy that combines PRO Channel, distribution and retail channel together to achieve its brand goals.”
In the rush to scale up, OLAPLEX let go of the focus on the PRO Channel, which was the driver behind its success and ill-planned & executed distribution without well-thought-out retail execution.
Core Strategy
“Win and penetrate PRO Channel as a lever to drive DTC and retail.”
a. Start with the best-performing (anytime in history) PRO Channel Accounts and the core DTC consumers and figure out “what will bring incremental consumption.”
b. Then look at penetrating the early and late mainstream consumers on DTC.
c. For retail, you need to again have incremental consumption in mind with a product assortment that gets new traffic for the stores in the door without taking them away from your PRO channel
2. Source of Power
Uncover the source of power that delivers a turnaround in sales or profits, whether it’s a narrative, channel, Pricing, target consumer, or marketing initiative.
Recommendation:
a. Fostering a culture that celebrates a shared purpose for the brand, that brings together both the PRO and retail business, and then a set of values to ensure consistent behaviour that delivers momentum.
b. Wowing the PRO Channel Key Accounts with a focused Joint Business Development Strategy and the consequent impact on DTC by leveraging the innovation capabilities to drive incremental profits for the PRO accounts.
3. Key Strategic Opportunity: Winning with the PRO Channel
a. OLAPLEX needs to understand and use the current opportunities/trends in the PRO Channel. E.g., introducing new services that are trending(like healthier hair & scalp treatments) will add to the profitability of the PRO account.
b. Exclusive partnership with PRO Key Accounts to protect the leadership position and consistent growth
c. Limit the distributor partners. Work with as few as possible but very closely. PRO Channel is rarely worried about moving the stock every week. Out of Stock is not a big deal. I’m not saying you should be fine with OOS, but you can sell to them in bulk.
d. For retail, the PRO Channel should be the lead instead of wasting resources on merchandising independent of PRO channel success. OLAPLEX needs to simplify the education and assortment for retail with shopper marketing
e. A PRO-derivative assortment for retail to capture the consumer who doesn’t frequent the PRO Channel
4. Success Signal: Fast Forwards
A turnaround needs fast forwards to motivate the team and stakeholders and validate the turnaround strategy.
a. Protect & Penetrate PRO Channel: Growth within & winning back the existing top key accounts as a success signal
b. Subsequent application to the retail success drivers like merchandising, events and education, resulting in higher conversions & repeats
Note: A brand should always turn around light without any excess baggage. So, let go of the low volume-low margin products, unproductive marketing, under-performing partners and agencies, unnecessary expenses, lavish office space, etc.
5. Ultimate Desired Outcome-Back to above average growth days-revenues & profitability in 1-2 years
Over 60% of beauty brands that don’t turnaround in 1-2 years post decline either go bankrupt or are bought out.
Measure the contribution of the below metrics and initiatives to the overall outcome to see if you are on track to achieve the 1-3 years turnaround goals and iterate.
a. Win back key accounts
b. Increase in repeat sales and profitability/account for PRO Channel
c. Scale up exclusive partnerships with the PRO Channel accounts
d. Improvement of brand health and DTC sales as a resultant
e. DTC & Retail sales growth as a consequence of PRO channel-focused strategic lever
SUMMARY
Olaplex beat analyst expectations for the first quarter of 2024, but it still needs to turn around the business, which suffered considerable declines in the last year.
While the CEO, Amanda Baldwin, initiated a turnaround strategy touching on distribution, diversion, social media, and culture issues, the strategy seems not that well thought out, especially with a lack of focal points and a list of to-dos that don’t quite come together as a unified and systematic bounce-back strategy targets the core challenge.
OLAPLEX has a strong chance to recover since it has not spiralled down in 2024, when the conditions are tougher and the CEO has identified the right issues. Now, it’s up to the quality of turnaround strategy and execution.
I recommend a turnaround strategy starting from
1. a sequential focus on PRO Channel, DTC and retail targeting incremental consumption
2. Creating a culture with a shared purpose that infuses passion for both PRO & retail business and then leveraging innovation as a source of power to design a Joint Business Development Strategy for the PRO Key Accounts, delivering incremental profits to the channel.
3. Focus on opportunities to add treatment profits to PRO accounts, limit distributors but offer more enormous volumes and profits to get back committed support and the retail merchandising should be driven as a derivative of the PRO account learnings
4. Create Fast Forwards(speedy success signals) via winning back and penetrating the PRO Key accounts that suffered the biggest jolt along with exclusive partnerships with high volume-high image accounts
5. OLAPLEX should measure the turnaround strategy against winning back key accounts, number of exclusive partners, resultant DTC and retail sales and profitability leading to above-average growth in revenue & profitability.
Do check out my article on How to win with the PRO Channels.
Jump offers profitable growth to women-led, early-stage beauty brands with a “fit, fundamental & fully executable” solution using first principles of diffusion
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