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What’s behind beauty’s bankruptcy blitz? In the past two years, companies including Revlon, Forma Brands, Beautycon, Birchbox and Becca Cosmetics have entered an insolvency process. More brands are expected to topple, as the era of easy money ends.
Insolvency and restructuring specialists say they are bracing for bigger workloads, as more companies seek ways to manage debts and move forward financially. The latest figures from The Insolvency Service show 2,552 companies in the UK filed for insolvency in May, 13 per cent higher compared to the same period last year and the highest since 2009. The number of creditors’ voluntary liquidations was also at the highest quarterly level since the start of the series in 1960. A similar picture is forming in the US. Annual bankruptcy filings rose 10 per cent to 418,724 in the 12-month period ending 30 June, compared with 380,634 cases in the previous year, according to statistics from the Administrative Office of the US Courts.
Beauty is particularly susceptible to these headwinds, says Stacey Jones, a partner who specialises in high value insolvency at UK law firm BDB Pitmans. Supply chain issues and increased competition for core ingredients, as well as “unbearable” trading conditions such as high interest rates and soaring inflation, are among the key factors having an impact on brands. The rise of disruptive upstarts and celebrity labels have also taken market share from larger incumbents struggling to adapt, she adds.
Covid led to the liquidation of Becca Cosmetics, an Australian beauty company owned by the Estée Lauder Companies; at its height, it was stocked by thousands of counters globally and had collaborated with stars such as model Chrissy Teigen and make-up influencer Jaclyn Hill. However, the brand struggled to expand beyond highlighters and concealers. Revlon, the cosmetics maker that owns brands like Almay and Elizabeth Arden, and Forma Brands, the parent company of cosmetics brand Morphe, both sought bankruptcy protection in the US, after failing to keep pace with changing tastes. Meanwhile, high-profile beauty event Beautycon and subscription service Birchbox both filed for an assignment for the benefit of creditors.
Some celebrity brands are also showing signs of weakness. Parent company Cronos Group shut down actor Kristen Bell’s CBD skincare brand Happy Dance in January after only two years in business. (Cronos Group noted in its recent financial report that true cannabis demand lies in edibles with actual THC in them.) In March, Purely Byron, the skincare brand founded by model Elsa Pataky and backed by her husband actor Chris Hemsworth, collapsed less than a year after its first product launch. Major beauty and wellness company BWX, which owns 47 per cent of Purely Byron, was suspended from trading on the Australian Securities Exchange and placed into voluntary administration a month later.
In addition to changing market dynamics, credit markets are “closing up” and “people can’t get money as freely and as easily as they have in the past,” warns John A Simon, a partner focused on corporate restructuring and insolvency at US law firm Foley Lardner. “Many companies in fashion and beauty have struggled with sales and paying their debts. This has created conditions that are ripe for company insolvencies in the industry. We’re definitely seeing more of them.”
While plenty of angel investors were once willing to put money behind a startup, that’s no longer the case. A beauty company that is currently being advised by Foley Lardner was considered “a hot product” and raked in millions of funds only two years ago. Today, the brand “cannot find money anywhere”, says Katie Catanese, a partner and bankruptcy and restructuring attorney at Foley Lardner. “You may have had some flexibility a few years ago when the economy was much better, but today that flexibility is diminishing.”
Insolvency options
Companies that are near the end of the road have two options: a non-insolvency route, which may consist of refinancing, restructuring or a board change; or insolvency, which has multiple pathways. The most common is a Chapter 11 filing (referred to in the US as bankruptcy and in the UK as administration) where a buyer is sought to rescue viable elements of the business, or liquidation, where the company is closed down and no longer operating in any form.
There are no bespoke or sector-based options when it comes to insolvency, experts say, although intellectual property is the main asset for most beauty brands and should be the primary consideration. “The option that preserves it best will assist companies with navigating and emerging from insolvency,” says Miles Hacking, insolvency director at UK law firm Freeths.
Each process has its benefits and disadvantages. Companies that emerge from bankruptcy can start fresh with a clear balance sheet, but the process is expensive and very public, which can hurt customer perception. The process can also diminish claims of pre-sale creditors, putting vendors such as raw materials suppliers in a vulnerable position as they could be left unpaid after the sale of the business to a new buyer. Meanwhile, scrutiny around workers’ rights and labour protection is growing among Gen Z.
An out-of-court sale is viewed as an inexpensive and more private option, but offers companies less protection and does not allow them to shed contracts and financial obligations in the way that a bankruptcy filing does. The assignment for the benefit of creditors is emerging as a popular alternative to bankruptcy for companies with 150 or fewer creditors. The process requires handing a company’s asset over to an independent assignee who decides whether to sell or liquidate. However, it requires companies to cede control.
As M&A activity slows, investors are increasingly wary of beauty brands that shot to success through social media. Instead, those with unique products that can demonstrate true customer loyalty and have a strong balance sheet are top of the acquisition list.
The decision of which path to take is largely driven by the size of the company and its creditor base and the urgency of the situation, says Foley Lardner’s Catanese. “We’re looking at what stop sign the company is facing. Do they have a lawsuit that’s pending? Do they have a landlord that doesn’t want to negotiate?”
Insolvency is an opportunity to wipe the slate clean, although too many brands wait too long before exploring their options, believes Hacking. “You need runway to get the money you need to carry on. Sometimes, it’s ostrich syndrome and people bury their heads in the sand. Other times, they think they can fix things by next year, but then something [unexpected, such as the pandemic] happens.”
The problems facing several companies didn’t start with Covid-19; too many were simply not reactive enough, says Hacking of Freeths. UK and US government support measures during the pandemic also helped to extend the lifeline of some “zombie” beauty companies that were already drowning in debt, he adds. “It saved a lot of businesses that would have gone into insolvency anyway. That’s why we’re at a bit of a peak at the moment.”
The silver lining is that a bankruptcy filing doesn’t mean the end of the road, and companies can emerge with fewer stores and less debt. There’s also less of a stigma attached to insolvencies as attitudes change compared to two or three decades ago, adds Rebecca Howlett, a partner that specialises in beauty and personal care at Freeths. She attributes the shift to greater empathy from younger generations and customer loyalty that is more prevalent in beauty than other sectors.
Making a comeback
Mitigate risks and act early, experts advise. “The ones that are not going into administration are pivoting a lot quicker,” says Freeths’s Howlett.
A more consolidated market may emerge, predicts Foley Lardner’s Catanese. “The strong will survive, and they’re going to buy the weak, and we’re going to end up with new kinds of companies.” Caution is advised. “Don’t hire thousands of employees and grow all your product lines because of all the economic factors and the recession present. With increased interest rates, closing credit markets and ongoing supply chain issues, there are a lot of things that make it hard to do business.”
Beauty brands that have built strong customer loyalty will prevail, Freeths’s Howlett believes. “Mistakes do happen but it’s how you deal with them and move forward into the future.” She’s optimistic about Revlon’s future. The company emerged from bankruptcy in April, shedding $2 billion in debt. “[Younger consumers] won’t remember that they went into insolvency [if] they can identify with their customers and make them fall in love with them again.”
Product quality is crucial. “Becca Cosmetics had a lot of issues that went wrong, yet their client base continued to be loyal to them. But, when consumers found that the products were no longer what it used to be, that loyalty went out the window,” claims Howlett. Brands that have a second coming need to take stock of where their primary consumers are. “Maybe you don’t need bricks-and-mortar stores anymore if people are buying things online. By embracing digital, you can’t avoid expensive overheads and not build up a debt profile.”
A shakeup of the board is also advised as part of a brand’s comeback. Revlon’s recent board reshuffle, which brings on executives from various industries, including interim CEO Elizabeth A Smith, could help strengthen its future, Howlett believes. “Historically, brands would want people that are well experienced on their board to make decisions, but quite often, that’s going to be a man of a certain age telling people what to buy. They may not understand what customers want.”
Companies that emerge from bankruptcy may not have a say in their new owners, so the onus is on the buyer to “really understand the brand they’re acquiring, the risks and why it was troubled and then address those [factors] in the structuring and planning post-transaction”, advises Foley Lardner’s Simon. “A smart buyer can avoid a lot of the problems in the past and profit from a good sale that otherwise may have been a liquidated business.”
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