CosmeticsDesign spoke with Jennifer Palmer, CEO of eCapital Assets Based Lending about what cosmetics and personal care financing may look like going into a tumultuous economic climate.
The interview originally focused on the natural personal care market but branched out to the industry more broadly.
To start out, can you give me a rundown on what the cosmetics personal care financing market looks like in 2022?
We certainly should talk about the trends that are affecting the market first. This industry is obviously not immune to all of the challenges that so many companies are facing. The industry is facing inflation, higher cost to produce and ship goods, labor shortages, supply chain issues and the ongoing pandemic, which all effects the world of financing.
It was an exciting time last year, and there were a lot of exciting deals. On the consumer side, we saw consumers increasingly looking for natural and organic products. But this year is very different than last year.
It has become much more difficult to get money into a company, whether that be on the debt or the equity side. On the equity side, there's greater scrutiny for profitability. The private equity firms are certainly demanding that clients be profitable.
Whereas previously, it was all about top-line growth, now it's about the bottom line. As a result of that, we're seeing lower yields and lower valuations.
On the debt side, you're having much tighter credit standards and a higher cost of capital. It's becoming difficult to raise money on the equity side, and from the debt side, it's also becoming more difficult to secure financing, which then trickles down into the secondary market.
Capital is at a higher cost, interest rates are rising and the cost of financing is rising. It's becoming very difficult for companies to continue to grow if they don't already have the money lined up.
What change in the value of natural and organic cosmetics companies are financing organizations seeing that's causing the shift?
Some companies in CPG felt that maybe their companies were overvalued and they were not seeing the valuation come through. Companies are looking to those unicorns from the past. They're looking to those valuations that they've heard about, and they're using that as their benchmark.
Those days are over. We are either in a recession or heading to a recession. The private equity folks are admitting that many times they overvalued companies. When you are heading into these uncertain times, people, investors, financiers, banks, everyone's going to become more cautious.
Do you see any commonalities between personal care brands that have turned out to be overvalued in the past couple of years?
Those companies were all about the top line. They were taking the approach that top line cures all and they were running their business for an exit, rather than running the business for the long term. The growth was very impressive, but when you looked at the margins, they were less impressive and there was no positive bottom line.
What is important for cosmetics professionals to know about this financing market going forward?
It's important for many entrepreneurs to understand that the valuations of 2021 are behind us, and will be behind us for the next five years. It's going to be a really difficult five years ahead, and the next 24 months will be the most difficult. The sooner that you can secure financing or bring capital, the better.
If you're bringing in capital or debt, make sure that it's the right partner, somebody who will get you through the ups and the downs over the next 24 months, because there will be highs and lows.
These companies will have difficulties running their business and they need a partner that can be open and transparent, have proactive conversations and will stand by them.
At the end of the day, it really comes down to making sure that management is doing everything they possibly can to manage the business proactively through these difficult times.
What do you see as things that personal care companies should focus on if they're looking to get financing soon?
You've got to control the burn, the spending because that capital companies thought was going to be there may not be there. Reduce whatever spending that you can possibly reduce, move marketing to variable spending and stay on top of forecasting.
Make sure that you are forecasting and you are comparing performance to projections on a monthly basis. You've got to run various scenarios that show the highs and the lows that can happen during this period of time.
Make sure that you have strategies to deal with the lows, and that you have a plan B. Finance partners are going to be coming in and saying “okay, that's quite a projection, but what if…” and you want to make sure that you can proactively say “this is what it would look like.”
Get ahead, be realistic, and definitely plan for the worst case, best case and middle of the ground.
Is there anything else that you want to add or anything important that you feel like we've missed?
I've certainly seen a lot of companies frontloading inventory. A lot of companies want to avoid what happened in 2021, which was they missed out because they didn't have the inventory that they needed to fulfill. Supply chain issues continue to affect this industry.
Companies have been overstocking inventory. Unfortunately, the volumes are declining and these companies are finding they are now carrying way too much inventory. That's causing cash flow pressure.
My advice to companies that are looking to bring in additional inventory is to be very careful about doing that. You have to take into account the additional cost of financing that inventory.
But if you are going to do it, because you feel really strongly about it, I would just suggest making sure those SKUs have a long shelf life and make sure those are a staple to your business, not just the hot product of the moment.