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Happy public holiday if you’re in Sydney! Apologies for the rest of you who have to work today - this might be the bright spot for the start of your week. We’ve built a strong e-commerce background here at Fresh Capital and we’re applying what we’ve learnt to Adore Beauty, the Australian beauty and health e-commerce business (ASX: ABY).

As always, we’ve released two podcasts this week:

Adore is a health, beauty and personal care e-commerce business operating in Australia and New Zealand. Started by self-described beauty junkie Kate Morris in 2000, the company went public in October 2020 and has been heralded as one of the most successful e-commerce businesses in Australia. Kate was inspired to create a beauty shopping experience that empowered consumers and provided a unique experience to cosmetics sections in department stores.

Adore Beauty offers its customers a vast range of products across skin care, hair care, body care, cosmetics, fragrances, oral care, and dietary supplements. Currently Adore Beauty generates ~$180m in revenue, with over 10,800 products, 260 brands and over 818k customers.

Adore operates a reseller business model - buying products wholesale from its brand partners and reselling these products at a higher price in order to generate margin. Its business model is unpinned by three pillars of its strategy:

There are more private labels—’store-brand’ products available on shelves than ever before. More and more companies are integrating across the value chain, expanding into the manufacturing and production of goods, or buying white label products and branding them as their own. In Australia, an estimated 18% of FMCG sold were private label and that is only going to increase with brands like Kogan, Aldi and Costco increasing their penetration in the Australian market, and other brands like ASOS and Amazon moving into private label.

Research by the Harvard Business Review found that private label manufacture and spent increases during economic downturns, most likely due to the consumers becoming more price sensitive during these periods and opting to purchase the lower cost option - often private label products. Additionally, the rise of private labels in the last decade has increased the quality and branding of private label goods, further increasing their appeal for customers. The move into private label has a few key benefits for companies:

As part of their growth strategy, Adore Beauty is looking to expand into private label in FY22. This means Adore Beauty will produce and market their own product, and it’ll compete with the 260 brands on their platform.

However, as we discuss on the podcast this week, producing a health and beauty product can be extremely difficult. Health and beauty products are incredibly personalised - people choose their products based on a range of characteristics including:

Adore Beauty has been incredibly successful because of its strategy to offer a range of products - competing on range enables Adore Beauty to meet these needs for the widest range of customers.

In order for Adore Beauty to find success in private label, they’ll need to narrow their customer segment and focus on a specific set of customers initially. They’ll be able to leverage their brand, customer loyalty and wealth of customer data to undoubtedly create the best product but this takes hard work in sourcing and manufacturing - capabilities that Adore Beauty doesn’t yet have in its toolkit.

If you believe that Adore Beauty can successfully enter private label and win against the increasing competitive health and beauty market, then the sky is the limit for this company.

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