Wednesday, Jan. 04, 2012

How an Upstart Beauty Company Broke into the Big Leagues

Like the wrinkles and blemishes that its pricey potions mask, the inner-workings of the $8 billion high-end beauty business in the U.S. were once the closely-guarded secret of a few industry empires, including L'Oreal, Estée Lauder, Chanel, LVMH, and Procter & Gamble.

But the retail beauty business recently began embracing independent brands, partly in response to consumer demand for variety and personalization in everything from iPhone cases to designer jeans. Now, even the mainstream retailer Macy's has begun showcasing quirky, boutique brands in a big way with its new Impulse Beauty departments, which launched in 2010 and are now in 85 stores across the country.

That sea change has opened the door for bootstrapping startups like Lavanila Laboratories, which got its big break in 2007, when the retail chain Sephora began carrying the company's all-natural, vanilla-based fragrances. "We are very selective," notes Priya Venkatesh, Sephora's vice president of merchandising for skincare and haircare, who says she receives hundreds of pitches from new brands every year but typically adds just five or six to the company's line-up.

Owned by the French conglomerate LVMH, Sephora opened its first U.S. store in 1998 and now has more than 300 here. Named specialty retailer of the year in 2011 by Women's Wear Daily, Sephora built its reputation as a destination for adventurous shoppers seeking out smaller labels, like Bare Escentuals mineral-based makeup and Sachajuan hair serums, which appeal to a younger, hipper crowd than department-store stalwarts like Lancôme and Dior. About a third of the store's inventory comes from smaller brands.

Venkatesh decided to take a chance on Lavanila, which was founded by two beauty industry consultants, because it offered something that was missing from Sephora's existing portfolio: an all-natural offering based on vanilla, one of the most popular fragrances in the U.S. It didn't hurt that one of Lavanila's founders, Danielle Raynor, had already worked closely with Sephora as a consultant for brands like Jessica Simpson's Dessert beauty line, which the chain once carried.

That's how the 36-year-old Raynor, who grew up in Middletown, N.J., worked at the Gap after school as a teenager, and earned her MBA from Bucknell University in Pennsylvania, knew who to email at Sephora when she first pitched the company. "We had gotten the prototypes ready, and I sent an email. They called me back and said, 'This sounds really interesting,'" recalls Raynor, who flew out to San Francisco to meet with Sephora in May of 2006.

Getting the prototypes right was one of the Raynor's biggest challenges. Unable to wear most perfumes because they gave her headaches, Raynor had decided to create an all-natural fragrance free of chemicals like phthalates, which were once commonly added to make scents last longer, but have been linked to liver cancer and are now widely banned in the U.S. "I found a chemist who specialized in natural fragrances," says Raynor.

All-natural shampoos, lotions and deodorants were becoming more popular as health concerns grew about common additives like parabens, phthalates, sulfates and formaldehyde. But there were few perfumes in the all-natural space five years ago. "They took on non-traditional categories," notes Sephora merchandiser Venkatesh. "You don't think of fragrance as natural and chemical free." Adds Raynor, "I was launching the world's first healthy fragrance. It was a category breakthrough."

Finding such underserved and fast-growing niches has been a key facet of Raynor's business strategy as the company has grown from selling just three products in 2007 to its current stable of some 70 offerings, including body butters, lip balms, sunscreens, deodorants, fragrance oils, candles and baby lotions. In addition to Sephora, the brand is now available at Nordstrom, Urban Outfitters, Amazon, QVC, and, as well as on the company's own website,, which is run by Raynor's husband, Scott. Raynor projects that Lavanila, which has just ten employees and no outside investors, will bring in between $8 and $10 million in revenue in 2012. "We have grown 100% every year," says Raynor, who declined to divulge her company's current annual sales.

Now in its fifth year of product sales, Lavanila's most prominent claim — that its products are "healthy" — has all but lost its distinction. Between 2008 and 2011, the number of paraben-free beauty products in the global beauty market increased by nearly 800%, according to the research firm Mintel. Whereas in January 2008, there were just 19 paraben-free perfumes on the market, as of November 2011 there were 204. "We ask customers whether they read labels, and the answer is not very much. Most consumers have got other concerns that they feel are more important like price and efficacy, and they are not willing to pay more for organic and natural products," says Mintel analyst Vivienne Rudd. "The consumer is less green than we would think," adds NPD Group beauty analyst Karen Grant.

Raynor admits that the brand's healthy claims aren't enough to get customers to buy anymore: "It doesn't matter what's in it or what's not in it. If it doesn't work, no one is going to buy it." So she is focusing growth plans on breaking into new markets instead: For example, her line of baby lotions, launched in 2010, are the only baby products carried by Sephora. Some other attempts at novelty have flopped: Sephora carried Lavanila's paraben-free candles only briefly in 2008 because they didn't sell well. "The customer didn't want to buy candles at Sephora. It just didn't work," says Sephora merchandiser Venkatesh.

Despite a few misses, Lavanila appears to be riding the tide of increased beauty sales this year. While the prestige beauty industry took a hit along with the rest of the economy in 2008 and 2009 — sales sank 3% and 6% respectively, according to The NPD Group — it has been one of the fastest retail categories to rebound, with sales increasing by 4% in 2010 and by 11% through September of 2011, as more consumers allow themselves small luxuries. "That is the strongest growth we have seen in 15 years," notes NPD Group beauty analyst Karen Grant.

With sales on the upswing, "it is actually a great time to be a startup in the beauty industry. People are looking for smaller brands, and a smaller brand can be quicker to market," notes NPD Group analyst Grant. Skincare is a particularly good niche as sales have surged in recent years, adds Mintel analyst Rudd.

Raynor cites her newest scent, vanilla blackberry, as an example of how quickly she can turn an idea into a real product. Conceived last spring, the deep, fruity fragrance was on store shelves by October, just in time for the 2011 holiday shopping season. Turning ideas into breakthrough products is Raynor's favorite part of the job, she says, and being her own boss means she can do that every day.