In a Crowded Masstige Market, Can E.l.f. Regain Cult Status?

E.l.f. Cosmetics is working to regain its footing.
Once the darling of the masstige market, E.l.f. was known for selling high-quality cosmetics for $1, $3 and $5. When the company went public in 2017, shares priced at $17, and later that year, surged to almost $31. In 2017, chief executive officer Tarang Amin voiced the company’s $1 billion aspirations. 
But last month, E.l.f. posted its worst numbers yet. Fourth-quarter 2018 net sales were down 4 percent year-over-year, to $78.6 million, and net sales dipped 1 percent to $267 million for the year — still far from the $1 billion mark.
These days, E.l.f. is working to course correct in a market that’s becoming increasingly competitive. There’s Project Unicorn, a shelf space and packaging redesign, which Amin contends will “drive greater productivity on shelf” at big national retail accounts, and there’s the closing of all E.l.f. stores, which brought in 5 percent of sales in 2018 but were not profitable. Coupled with a slight increase in marketing spend — from 4 percent in 2018 to mid-to-high single digits in 2019 — E.l.f. is hoping these actions will help it to return to growth.
Analysts and industry observers are skeptical, citing both beauty industry and sluggish mass-market retail dynamics. More brands than ever are hitting E.l.f.’s points of differentiation — low price and speed — and most big retailers are still not moving quickly enough to showcase E.l.f.’s signature fast-to-mass product launches on shelves, sources said.
“We are unclear Elf has the right strategy moving forward,” wrote BMO analyst Shannon Coyne in a note on Feb. 26
As Jefferies analyst Stephanie Wissink put it: "Curiosity levels are extremely high, conviction levels are extremely mixed.”
In recent years, brands like Morphe, Colourpop, Nyx, Wet 'n' Wild and retailer-owned lines like No7 and Soap and Glory have all solidified their masstige positioning, aiming to provide higher quality for fewer dollars — just like E.l.f.
"The ability to create low-priced, high-quality cosmetics…early on was one of E.l.f.'s claims to differentiation, but it's only a differentiator until somebody else does it, and does it well or better," said Wissink. "As mass and masstige brands have found ways to participate in prestige trends, sourcing for low prices has become part of the market."
E.l.f.'s other point of differentiation — speed — is also up for grabs in the broader marketplace, analysts said. Many smaller companies, like Be for Beauty and Winky Lux, can match or beat E.l.f.'s manufacturing speed. And larger players like Coty Inc. and the Estée Lauder Cos. are getting there through sourcing programs and targeted initiatives. "This idea of speed became part of doing business," Wissink said.
"The fast-beauty thing used to be impressive… even the items you can get to market in 22 weeks come with transparency in supply chain, an ethical obligation to the environment and world and pets of the planet in addition to speed," said one industry source.
On top of that, analysts also pointed out that innovation in prestige beauty has slowed in recent years, leaving E.l.f. increasingly to its own devices for product launch concepts.
"You've seen the entirety of their skin-care business decline in the teens for more than a year. It's hard to see that they're as successful at innovating as they think they are," said Mark Astrachan, an analyst at Stifel Financial Corp.
In an interview, Amin dismissed that notion that a prestige slowdown affected E.l.f., and said that was “less of an issue than our ability to make sure people understand what our first-to-mass items are.”
The other point of concern, outside of uncertainty around E.l.f.’s point of differentiation, is the brand's plans to rely heavily on retailers now that it has closed its own stores, sources said.
"They only reset the planograms twice a year," said an industry source. "They're slow and they're old. It's old school. Ulta is at least more progressive because they're trying to do three or four breaks a year."
E.l.f. has been picking up shelf space across major retailers in recent years, and has said this year it anticipates expanding with Ulta. One mass market source cautioned against overexpansion, noting that E.l.f. has already picked up lots of shelf space since Amin, a former P&G executive well versed in traditional retail distribution, joined the business in 2015. The source cautioned that if the brand can't keep up with productivity-per-linear-foot expectations, it'll be in the same boat as many legacy mass brands and start losing space.
In the early stages of Project Unicorn, E.l.f. has focused on categories like primers, brow and brushes, Wissink noted, in which it has been successful. Early signs — which include booming sales of the company’s $8 Poreless Putty Primer — point to improvement. E.l.f.'s sales improved 1 percent on a trailing four-week basis, according to Nielsen data, Wissink wrote in a March 21 note. Sales were down 1 percent over the last 12 weeks, and down 3 percent for the past year, she said.
Experts cautioned that the elimination of E.l.f.’s stores won’t allow it to deliver peer-level insights to retail partners, and that it also eliminates immediate shelf space for product launches.
"Closing all the stores was extreme," said one industry source. "What made the model really genius…was they had one or two stores to test new ideas, new concepts, new price points and sell that back to the retailers to say, 'these price points are winning in our stores.'"
Amin maintains that E.l.f. will still be able to provide those same insights with feedback coming in through its web site and loyalty program, Beauty Squad, which allows members early access to new products. Amin underscored Poreless Putty Primer as an example of how the relationship could work.
"On Putty Primer, we loved the response we were getting so fast and decided we would recommend to retailers they take it in with not as much of a lag," he said. Retailers quickly sold out.
That sellthrough was partially propelled by changes in E.l.f.’s marketing strategy, Amin noted. The company has a new chief marketing officer, Kory Marchisotto, who was recently hired from BareMinerals.
E.l.f. has generally spent very little on marketing, and even as it ramps up, Amin noted it will not spend on a peer level (around 20 percent). Experts said that E.l.f.'s gross margins, 61 percent, don't allow it to spend on the peer level. Other companies more typically have gross margins in the 70s.
Historically, E.l.f. mainly focused on generating buzz when products launched online, but not when they hit retail shelves. Now E.l.f. is starting to work with targeted mega influencers on big launches. Jeffree Star, one of the beauty's biggest influencers, has posted two recent videos about the brand — one comparing Putty Primer to Tatcha's Silk Canvas Primer, $52, and another doing a full face of E.l.f.
"We sent out more of those product kits to a wider range — still curated, but a wider range — of influencers," Amin said, including Star, who Amin said was not paid to post about E.l.f.
E.l.f. is hoping that strategy can help it cut through the noise coming from other brands.
Amin maintains that buzz, rather than infringement upon the brand’s core masstige proposition, is what has hurt the business.
“We need to leverage our ability to delight beauty enthusiasts with prestige quality cosmetics and skin care at extraordinary value. We still believe we’re the best at doing that. If you take a look at…the value creation we have, we don’t believe anyone else touches that,” Amin said.
"The overall category was flatish to slightly down, and you had a lot of new entrants. Some of those were not even direct competitors. If I think of some of the big mega influencer brands, they're at much higher price points a very different business model, but what we found was it took attention away particularly from our 18- to 24-year olds with all the noise in the category," Amin said.
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