Before I get to Elf Cosmetics’ phenomenally successful turnaround strategy, which has delivered a higher speed of growth compared to pre-decline years, here’s a bit of where ELF COSMETICS is and where it was before the turnaround.
In April ’24, e.l.f. Beauty investors faced a significant downturn due to worries sparked by Ulta Beauty’s unfavourable remarks about Gen Z shoppers. Despite this, e.l.f.’s growth strategy remains solid, though we might see a slight slowdown. Investors should keep a close eye on the company’s international growth and its progress in the skincare market.
E.L.F. COSMETICS has an excellent growth strategy focused on the brand’s core fundamentals.
My confidence in the brand’s prospects is based on the company’s remarkable turnaround after suffering a significant sales decline in 2018.
Diagnosis: What happened in 2018?
Elf Cosmetics had just crossed $270 million in 2017 and was growing 18% year on year, with a big part of sales from the website, which had close to 28 million visitors in a year.
In sharp contrast, 2018 sales declined far below the trend and expectations. The online business was impacted heavily, with colour cosmetics bearing the biggest brunt.
In its existing markets, elf was in the late growth stage of its lifecycle.
As I have said before, a year of sales slump, after years of continuous growth, can be drastic for a brand as quite a few never recover.
Elf's 5-Step Brand Turnaround Strategy
1. Core Issue-Strategy
Core Issue
Took focus away from the vision of offering game-changing, prestige products at affordable prices and a digital-first brand.
Elf Cosmetics had forgotten its vision and adopted a fast product launch as a growth strategy. They brought over 100 products to the market in one quarter without adequate screening for brand fit, aligned with the vision of bringing prestige-level products at affordable prices, and without proper support to make the innovation succeed.
Loss of profitability in nearly two dozen standalone stores due to a slump in colour cosmetics overall, with stores diluting focus away from the digital-first brand.
Strategy
Women of all ages, who seek minimalist and prestigious beauty without killing their wallets.
Further improve the quality and margin of prestige hero products to expand demand, to offer higher value, and increase revenue and profitability/loyal consumer.
2. Source of Power
Back to basics-core strength that helps take the brand toward the vision: High-margin, high-volume masstige products, biggest D.T.C. volume channel in colour cosmetics
a.Plugged the Leaks for Investment in Strategic Imperatives
They closed 22 unprofitable retail stores to invest the money they saved in the strategic initiatives below.
b.Cost Advantage for Stronger Competitive Position with Higher Perceived Value Offering
Leveraged economies of scale and outsourced manufacturing to offer an even higher quality at highly-attractive prices, with even higher margins.
3. Key Strategic Opportunity
a.Strategic Imperative 1: Expand Market Demand
-Focused on fewer but game-changing innovations, prestige-level products at affordable prices, such as Poreless Putty Primer at $8, to generate a higher return on innovation and expand the category to penetrate the early mainstream consumers further.
The masstige products expanded the existing markets by entering the early majority market for non-consumers who did not go for the alternative options, such as Tatcha’s Silk Canvas, at $52.
-Apply the core-strength of masstige products to adjacent category of skincare and take the existing hero products to an adjacent market of Canada for new consumer acquisition.
b.Strategic Imperative 2: Loyalty
Elf focused on its loyalty program during the pandemic, which resulted in over 2 million Beauty Squad members, a 40% increase over the previous year.
c.Strategic Imperative 3: Improve Brand Funnel: Higher Consumer Trials, Loyalty-Revenue & Profits/Consumer with Higher Perceived Value
Personalization strategy for direct digital consumers, beyond the skin and makeup enthusiasts, and creating over 60 consumer segments based on their online behaviour to offer relevant content and journey to these consumers.
The above is an example of creating a higher perceived value for the late majority consumer, one of the strategic opportunities in the late growth stage of a brand lifecycle.
4. Success Signal-Fast Forwards
a. Elf was able to support the innovation launch amply in the first quarter of 2019 and received higher channel support to deliver much higher sales and profitability for the particular innovation.
The brand sold more per current consumers, both loyal and infrequent buyers, and acquired new consumers by developing the masstige category.
In 2019, the brand delivered four quarters of increased sales and profitability, far better than the makeup competitors.
b. After implementing the personalization strategy, Elf converted higher % of site visitors into buyers.
c. The loyalty program delivered 70 % of D.T.C. sales, buying more often with much higher order value versus the rest of the consumers.
5. Ultimate Desired Outcome
a. Elf also acquired the late majority of consumers, who are well aware of the brand because of penetration within their circle. They are attracted to the high value of masstige products, leading to increased channel/innovation profitability.
b. According to Nielsen, Elf Cosmetics was the only mass cosmetics brand to post growth during Q2 in 2020, with its colour cosmetics sales up 3% yearly vs. an average of 20% decline for other brands.
Fast forward to 2023, ELF Cosmetics has grown its core business, without Naturium, approx. 20% YOY from $270M in 2017 to targeted $950M+ by 2024 end.
SUMMARY & LEARNINGS
The growth stage in a brand’s lifecycle has 2 phases: early and late. Early growth includes rapid growth followed by slower, late growth.
During the early growth stage, the target consumer is the early adopters, and the early majority are tempted to buy after the early adopters in their circle have tried and tested the brand. The experience is perfect(sublime for ahead of the curve and need not be simple), and the early mainstream buys so as not to be left too far behind. In contrast, the early adopters buy to stay ahead of others in their communities and circles.
A brand needs to focus on building brand preference for trials during the early growth stage and use it to penetrate existing distribution channels. The communication strategy needs to move from exclusivity to social proof while covering all bases and not giving a reason not to buy for brand trials.
The late growth strategy targets conservatives, who are very price-sensitive and buy out of the social pressure, from their persona or professional circles.
It makes sense to create a higher perceived value to penetrate existing geographies and distribution channels further and build market demand by developing the category.
Communication should focus more on purchase intention and C.T.A.s with higher perceived value offerings and leveraging the social pressure to buy the brand.
Finally, at some point in its lifecycle, every brand would hit a sales and profitability slump while the category is still growing and the brand hasn’t matured. The slump is usually sudden.
While quite a few make it back, a significant % of brands can never reverse the trend and are either acquired, bankrupt or go private.
To overcome the decline in sales and profitability, a brand needs to create a turnaround strategy, which takes at most 1-2 years to reach healthy growth goals.
The turnaround involves:
- Quick fixes and wins.
- Quarterly impact on sales and profitability.
- A strategy to address the critical issue causing the slump to achieve the Ultimate Desired Outcome.
The renewed focus on the brand’s vision and core strength and reduced unnecessary complexity is common to all turnaround strategies.
Please do read my other blog on how your consumer-influencer evolve on your growth curve.