Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:01:56} I would love to understand a little bit more about your background both broadly and as it relates to Australian beauty and cosmetics and then Adore Beauty?

{audio:0:02:19} I have been in Australian beauty for over 12 years. I have predominantly worked at Mecca Brands from the merchandise side of the business within buying and supplier management. I have only worked at Mecca and am super familiar with the broader Australian beauty market as well as Adore being a major competitor and it being a relatively small market compared to the US.

{audio:0:03:08} What are some of the strengths and weaknesses of Adore?

{audio:0:03:20} Adore have obviously been around for a long time but have done a fantastic job over the past three years with their connection to the customer. The major beauty players have different marketing strategies. Mecca and David Jones go after that high-brow premium customer, whereas Adore try to connect to that every day customer. A lot of their content is about how to become the customer's best friend and producing it in low-fi ways such as iPhones. They demonstrated that in their free to wear TV campaign which ran for three days during Covid. Their content over the last 12 months has increased massively. They also did it through their podcasts where they have conversations about beauty, life and how people date on Tinder. All this gives them a long connection to the everyday person.

{audio:0:04:44} Any other strengths you care to mention?

{audio:0:04:49} They have a very strong trade calendar which is both a strength and a weakness. They run many promos, offer samples and regularly do 20% off deals, which drives sales.

{audio:0:05:13} Do you want to jump over to weaknesses, then we can dig more in depth?

{audio:0:05:21} Coming from a retailer which has predominantly dealt with exclusive brands, the issue is that you can access their brands elsewhere, so aside from that connecting to the customer, most of their brands are non-exclusive. They also lack a proposition, aside from the fact they have them all in one spot, which is obviously a strength. They do not have a unique point of view but they do have a connection to the customer, which is what will bring them back.

{audio:0:05:50} Competition in the retail space makes people give up the economics to get exclusives; is that a risk in the Australian beauty retail industry?

{audio:0:06:10} It depends which retailer. I am only privy to the contracts they had at Mecca, but the ability for Australian beauty retailers to access brands that are at their competition is low, for any of the exclusive brands. Any brand coming from the US to Australia – the big players like David Jones – will not be able to access them because they are already locked up in other agreements. In saying that, there are new and emerging brands which are changing over the past two years because of new trends.

{audio:0:07:08} There are brands which are not yet locked up in exclusive agreements which are opportunities, but the D2C channel, unlike bricks and mortar, is not the exciting channel which international brands are looking for.

{audio:0:07:25} Is Adore at a weak point because they lack other geographies that Sephora and Mecca do, and cannot ask XYZ country to do an exclusive with them in Australia?

{audio:0:07:42} To a degree yes, but the lack of physical stores is their biggest limitation. Adore are winning in skin care but do not have a super strong makeup brand or product offer. Their best sellers from a makeup point of view are mascaras and other things which need color matching.

{audio:0:08:10} Why is Australia under penetrated online in beauty compared to the US and UK which are similar demographic markets, in terms of income levels?

{audio:0:08:37} When you say less penetrated online, are you referring to the number of customers who are shopping beauty online?

{audio:0:08:43} The percentage of spend which is online versus bricks and mortar.

{audio:0:08:47} The US have an extremely sophisticated freight and transport system over a huge country, whereas Australia does not. Big US cities have same day couriers, in less than 15 minutes, delivered from one side of town to the other, super cheap, easily done in five seconds, whereas in Australia labor is expensive. Courier services in an immediate vicinity is possible but not across Australia which has nothing in the middle. To get from one end of the country to the other you need to have an expensive and sophisticated supply chain with warehouses in every state. Online is difficult in Australia because shipping is expensive.

{audio:0:10:15} Are large brick and mortar players well-established in Western Australia?

{audio:0:10:25} Yes, I would say so. When it comes to the bigger department stores, they are currently in a bad position. They are not investing in new stores and beautiful fit outs, definitely not on the West coast, but more broadly not in Australia outside of Melbourne and Sydney.

{audio:0:11:07} The competitive Australian landscape includes department stores such as David Jones, Mecca, Sephora and discount Adore; am I missing any other big players?

{audio:0:11:27} Not particularly. The only other player not within premium is K-Mart, which is different to the US version, and they currently bring out their own brand of skin care and makeup. David Jones is doing interesting things and Mecca is amazing and know what they are doing. Adore have a different proposition with mainstream customers spending less than $100 per transaction. David Jones are putting a lot of energy and money into marketing and have interesting messages and a new way of going to market.

{audio:0:12:32} They might find their feet again soon because department stores do have a place. Myer are copying Mecca with their branded wall-based spaces but will lose to David Jones.

{audio:0:12:58} Of all the players, who have donated or gained the most market share?

{audio:0:13:12} Myer have donated lots and David Jones have stayed steady. They are definitely taking market share and over the next six to 12 months will gain online. They have grown massively and are the number one online retailer.

{audio:0:13:52} What is your opinion of Sephora in Australia?

{audio:0:13:56} Sephora in Australia differs to the big amazing Sephoras people know and love. Historically, Australians traveled to the US purely to go to Sephora. For over 10 years, people said there was an Australian beauty tax in that Clinique, Estée Lauder and L'Oréal charge 40% more. Sephora came to Australia and everyone was waiting for this amazing experience, but they are serviced out of their APAC region and Singapore controls how Sephora shows up in this market. It was a pretty disappointing experience when they first landed to be totally honest with you.

{audio:0:14:54} They have 17 stores and are opening stores again after an 18 to 24 month hiatus. Their biggest downfall goes back to that exclusive brand conversation. People knew them for their US brands and expected them to bring those to Australia. The brands they have been able to own and go after are the ones that have some form of connection to them, like Fendi from LVMH.

{audio:0:15:41} How focused are beauty specialists on increasing their online presence?

{audio:0:15:57} There is a huge focus but they are all at different stages. Adore and Mecca already have major advantages in their ecomm platform and website and have 20 years’ worth of data, whereas Sephora only entered the market six years ago with no data and started fresh. Adore and Mecca are in sophisticated territory bringing on data and CRM platforms and no longer rely on paid media to get people to their site and are focusing on improving their customer journey. Sephora have little data and their website is not as sexy or sophisticated. Adore and Mecca are elevating that experience to bring beauty to the forefront online, using AI for trying on colors of lipsticks and foundations. They are at very different stages.

{audio:0:17:31} Are you more bullish on Mecca and Adore versus Sephora?

{audio:0:17:43} Yes. The space of skin care clinics has been really fascinating. I often describe the US as a service culture and Americans are happy to pay for services and has a tipping culture. They are used to getting weekly facials and tipping at restaurants, whereas in Australia we do not tip and have a very different labor system. There has been a massive increase in clinic and spa treatments and, as a result, these clinics are building customer databases and have loyalty because they are changing people's skin. They are beginning to bring in some interesting brands. At first, those clinics in Australia were mainstream and avoided cosmeceutical brands, opting to use whatever was available from local wholesalers.

{audio:0:19:17} They are now using true cosmetic brands, better than Priceline, Mecca or Adore. They are not beautiful to look at but have the right ingredients. I think loyalty with skin clinics will be interesting over the next two to five years, and many are popping up. There are several brands who are talking about not going into any bricks and mortar without that one-to-one skin clinician, and the evolution of who that person in Australia will be is interesting. In the US it is very common to see your own esthetician once a month, but that noun and job does not exist in Australia.

{audio:0:20:31} It is the do-it-myself versus do-it-for-me; is there a retail-based startup?

{audio:0:20:48} Not particularly, which has been a bit of a fault. If I think of any, I will email you.

{audio:0:20:59} Are you aware of the loyalty program Adore announced a few months ago?

{audio:0:21:11} How does it compare to others you have seen in the industry?

{audio:0:21:17} It is similar to Mecca's three tier program and I cannot recall the spends of each. I think the third tier was $1,500. There are no discounts in the tiers but they regularly offer discounts including dollars off for birthdays. It is not a points program but gives you first rights to buy new products, invites to events and free shipping. It is more product than discount centric, which is a good way to play. They already give enough discounts and Sephora owns that market, whereas both Adore and Mecca have gone after spend tiers as opposed to points tiers.

{audio:0:22:27} Looking at their spend tiers on Google, they would be pushing their customers up. I do not know the exact ATV for every Adore Beauty transaction but I suspect it is under $80. That suggests customers would shop more than four times a year, and by having the mid-tier being over those four times a year shop would be interesting. They have used it more strategically to get their customers to purchase more, compared to Mecca who need to change their program. Their spend tiers are small compared to what customers are spending.

{audio:0:23:20} From the cohort data Adore publish in their prospectus, it seems like each customer spends more with them annually.

{audio:0:23:43} That is evident in how they are trying to be their customer's biggie best friend. Their podcast is hilarious and has such a strong connection being quintessentially Australian. There are so many things people laugh about they are building many celebrities out of their staff. They have three of four staff who are a hybrid of content creator, marketing manager and influencer. They have their own following here in Australia and people love them.

{audio:0:24:25} They are number 11 beauty podcast in the UK where they do not even sell.

{audio:0:24:35} Exactly, that is simply fascinating. They discuss beauty but also the most hilarious things which should not be spoken about on the podcast; they are great.

{audio:0:25:16} What do you think about their recent move into men's?

{audio:0:25:27} I think it is a strong move. Adore Beauty do not air on the side of feminine or masculine and it will be a comfortable space for men to shop. Women love buying for their partners and will probably add that on to their purchase. The only thing to call out which is something I have learned over time, is that men's first purchase into beauty is typically through fragrance. It will be interesting to see how or if they are targeting men when it comes to beauty and, if so, will they target fragrance first, then get them into skin care, or will they simply stock men's products so that their partners can buy it for them and increase their basket size.

{audio:0:26:20} Are they weaker in fragrance than skin care overall?

{audio:0:26:28} Yes, skin care will certainly be their number one. But saying that, I think one of the things they are doing well from a fragrance point of view is candles, again because of that mass customer and brand. Their candle portfolio is considered lux to the everyday person. They have many $60 candles so if they can transition people from candles into fragrance, they have a good business there. It has a great ASP and is a good opportunity for them to retain customers because they do not have that makeup customer and, typically, you see loyalty from foundation in makeup. If they can get that through fragrance, it will mean a higher ASP. They will get more margin dollars that way and it is a good opportunity for them in the online space.

{audio:0:27:24} Why is makeup less penetrated online?

{audio:0:27:37} Ultimately, because of color matching. It is difficult to find a foundation that matches your skin tone, especially from one brand but there are 50 brands and online color swatches are never accurate. Foundation is picky but they utilize tools to match foundations better. Adore can leverage their e-composition in fast shipping which is a very low threshold for customers who are already buying foundation from departments which have rubbish online experiences. They need to somehow connect with the customer who buying Estée Lauder from Myer or David Jones; that is where they will win most from a makeup point of view. Skin care has dominated everyone over the past 12 to 18 months and has solidified their position within the category. They could look after their weaknesses by going after makeup or double down on what they already good at instead because it is expensive to stock makeup brands. An entire brand has 200 SKUs, making it a big investment to buy into a makeup brand with a big enough offer to service everyone.

{audio:0:29:23} Getting the foundation right the first time is hard but once you know what you like, people at Mecca would first buy it in store then continue fulfillment online.

{audio:0:30:15} What do beauty brands think of Adore as a partner? You may not have much experience in this, but by word of mouth are they considered a good partner by brands?

{audio:0:30:34} I have only heard one account and they are considered a good partner. They have good relationships with their suppliers and staff and a strong ethic which is really fantastic. In the Australian market they are a strong partner for their suppliers.

{audio:0:30:58} What is the workplace culture at Adore?

{audio:0:31:15} I do not know anyone there but from what I hear it is very good. It is hard to recruit anyone from Adore because they love it so much and they have several programs which support their team members. Some staff members have created their own brands and run side hustles and Adore supported them. They have a good ability to support from within and a strong growth culture and recognition of what is working in a beauty company in 2021. They do not have the baggage of 90s style distributors who have a different way of doing business. Things are changing and Adore is moving quickly.

{audio:0:32:20} Adore seems to have a relationship with its customers from their NPS score and Google reviews and also their employees. Most people who interact with Adore love them. Is that a fair assessment?

{audio:0:32:42} Yes. I tried to bring someone over from Adore and they were not leaving for anything which was shocking. I am the biggest and best retailer, but they were not interested.

{audio:0:33:03} What do you think about Kate the founder and Tennealle the new CEO?

{audio:0:33:13} I do not know much about Tennealle but I follow what Kate is doing and she is amazing for several reasons. She is super supportive of her team and her customers. She has an empathetic approach to leading, from what you can see from an outside perspective. Their headquarters absolutely love and follow her as a leader. She also dedicates a lot of her time to supporting female startups in the form of Startmate, which is unique for a founder within beauty in Australia. She is the only beauty founder publicly putting time and effort into supporting other female startups in particular.

{audio:0:34:17} She is also not afraid to say what she thinks in really strong and empathetic ways. She demonstrated that through her campaign on global shades for foundation in makeup. They stocked global shades and made a lot of market noise which was fairly interesting. That campaign was not about selling products because they are effectively admitting they do not have enough shades and need brands to help. Kate was happy to share that the business was not doing good enough and therefore they wanted to go out loud and proud with that message, which again is reflective of her leadership style.

{audio:0:35:19} I follow her on Twitter where she speaks her mind about many topics and the office hours concept with startups is useful. Do you have experience with Tennealle?

{audio:0:35:43} She is from Seek but I do not know too much about her.

{audio:0:35:51} If Adore failed five years from now, what logical reason could be to blame?

{audio:0:36:03} Discounting which becomes a profit issue; but their customers will not disappear any time soon because they have a strong connection. They are also continually investing in their website and have recently launched their own app and have the loyalty program. They need to get off that discounting and GWP drug because it is nasty and unnecessary. With such a loyal customer base, they should focus on growing brands more as opposed to discounting.

{audio:0:36:50} I know they are making some moves into their own private label.

{audio:0:37:00} I am not aware of that but have seen they have new ancillary products but no doubt they would go into skin care.

{audio:0:37:11} Given what you know about their brand position, is that a logical extension?

{audio:0:37:24} Yes, I think it is logical. The success of it will be interesting because one of their best-selling skin care brands is the Ordinary, which is owned by Estée Lauder and is a $15 skin care brand which is cheap and accessible. If they launch Adore Beauty connected to the podcast team – members Hannah and Joanna being the key ambassadors for that skin care – it will be successful because they have driven those two team members as influencers.

{audio:0:38:10} I see a lot of media and press from traditional sources but not from younger influencers in the influencer space or social media. That could be an opportunity for them because they have exclusive products and will have an exclusive brand worthy of influencer investment.

{audio:0:38:46} That makes sense whether they pay that for the private label.

{audio:0:38:53} They could use that to explore untested strategies because any advertising and PR you do for non-exclusive brands can obviously be shopped elsewhere.

{audio:0:39:03} If you were the CEO of Adore, what changes would you make to drive the most value over the next five years?

{audio:0:39:17} Two things I would change are the trade calendar and their GWP stance. It is hard to cycle every year and you find yourself scrambling last minute to try to find something to cycle such as your moisturizer promo from the prior year. A three to five year strategy of getting off that would be right, and/or tying it closely to the loyalty program as opposed to it being available to everybody else. Whilst they have an ecommerce platform which works perfectly well and has all the required functionality, their website is not that beautiful, so I would work on that to elevate their brand proposition. I have not looked at their app but I suspect if they have recently gone live with a sophisticated app, they would probably pause website development for some time.

{audio:0:40:31} Their goal is to move marketing spend away from performance-based advertising to broader brand-based advertising; could that increase their brand spend?

{audio:0:40:50} That makes a lot of sense because Adore is still not hugely well-known. There is opportunity for them to be discovered and they definitely have customers interested in beauty. They have that price line similar to Duane Reade for US customers, but they can also access that low hanging entry customer because of their mainstream proposition. They could probably do a bit of work there when it comes to awareness because many entry customers are unaware of beauty. Both 18 to 20 and over 50-year-old cohorts do not wear makeup and haven't wanted to look after their skin and are now hearing that everyone does these days. The awareness piece will be interesting and I am unsure whether that comes with a creative execution change when it comes to the Adore Beauty brand, but it remains important for them to be as mainstream as possible.

{audio:0:42:28} Logistics can be a large challenge in Australia; how is Adore positioned?

{audio:0:42:37} They are online only which means they only have one central source of stock and do not have availability issues that come from in-store retailing compared to Sephora who have horrific in-store availability. Adore, in my experience, has always been in stock of a product I bought. They are very quick and ship same day, and it always arrives end of the day or the next morning. I have not purchased from Western Australia yet so I will let you know how that goes, but they have a great returns policy. You can return within two months and easily swap things if you want. 18 months ago, they changed how they packaged products for customers to minimize on the plastic and cardboard used, which was a fantastic way to go to market with a sustainability message. It did not have to be crazy or sexy, because customers simply requested they use less packaging, and the brought in a machine which allowed them to do that. As a part of their packages, they have a Tim Tam in every product.

{audio:0:44:44} I know that but have never had a Tim Tam so it is not that visceral to me.

{audio:0:44:53} It is a quintessentially Australian biscuit which is delicious and people love that it is free in every package. They also utilize their ecommerce orders to market other brands and products. ASOS also does this where they put other brand's coupons and sales in there. They probably have an opportunity there to commercialize it as I am unsure if they charge brands to participate in that or if it is a startup support partnership angle.

{audio:0:45:43} An online first company would be interested in Adore's customer base. There were recent comments about the April Fool’s Day Tim Tam joke a few years ago where they said they were replacing them and everyone panicked.

{audio:0:46:10} You have to try a Tim Tam if you can get your hands on one; they are delicious.

{audio:0:46:18} I am aware they matter a lot but have never had one though. If you were to think about Adore's market share in a few years versus today, is it significantly higher or a little higher, the same, a little lower or significantly lower?

{audio:0:46:48} It is a little higher because they lack the bricks and mortar presence. It will be difficult to grow market share in beauty and not just online beauty.

{audio:0:47:03} Mecca and Sephora will take share and department stores and drug stores will probably donate share?

{audio:0:47:23} Yes, exactly; Myer will donate share and might not exist at some point in five years. Mecca will definitely gain share. David Jones will either stabilize or change slightly but will probably drop and become more specialized. It will definitely be an Adore Beauty and Mecca battle and Sephora might grow, but it depends on which brands they land in coming years. They will probably grow more through bricks and mortar than online and it will be slow growth.

{audio:0:48:56} They had a fun communication SNAFU in May where they presented a customer number for the previous nine months with one for the trailing 12 months, so people panicked and thought they had lost a bunch of customers. That was one of those hiccups of being a newly public company. Is there anything I am not paying attention to about Adore that I should be thinking more about?

{audio:0:49:35} They have a strong supporting women feel to the business. That is not uncommon but from their market presence it seems like you are shopping from a local business, even though they are doing 100 million a year. You made the point earlier about the Adore Beauty podcast being number 11 in the UK, because they love that local Australian banter and vibe. I am unsure if that will resonate in the US which has a very different humor, so that Australian feel could help or hinder them. In the UK they could capitalize on it and if they expanded to the US, they would have to go down another route.

{audio:0:52:28} Are there any major differences between the two market structures?

{audio:0:52:35} Not particularly. Beauty is dominated by Mecca and when it comes to online, Adore only started shipping to New Zealand in the last two to three years. I am unsure how they have performed in New Zealand but it is new for them.

{audio:0:52:02} Do Mecca have local warehousing in New Zealand?

{audio:0:52:08} The inventory comes over from Australia.

{audio:0:52:12} That is the same for Adore and has been suggested as a weakness. They lack the logistics network in New Zealand that they have in Australia.

{audio:0:52:25} Sorry, I made that up. Mecca does have a warehouse in New Zealand but only for their online orders, not for their stores.

{audio:0:52:36} Is Sephora active in New Zealand?

{audio:0:52:43} They have three stores in New Zealand which is a much smaller country. Their Sephora stores in New Zealand are better than the ones in Australia because they opened them later, so they are next generation style concept.

{audio:0:53:13} Obviously, New Zealand is a significantly smaller market than Australia.

{audio:0:53:25} Interestingly New Zealand and Australia have similar propositions but the two things that New Zealanders love when it comes to Adore and how they could potentially win as well is they love things that are New Zealand, just like Aussies love Aussie things. They also have a strong affinity for sustainability, the highest globally and up there with Sweden. That could also be something where Adore could win.

{audio:0:54:05} The good thing is that is where Adore is coming from, not from big bad America. Thank you so much for the time, this has been helpful and I appreciate all your knowledge of the industry and Adore.

Adore Beauty & The Australian Beauty Market

Former Merchandising Manager at MECCA Brands

inpractise.com/articles/adore-beauty-and-australian-beauty-market

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Adore Beauty & The Australian Beauty Market(July 22, 2021)

Former Merchandising Manager

Former Merchandising Manager at MECCA Brands

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