Celebrity Packaged Goods: Is this the death of traditional brands?

By Andrew Ross, Senior Advisor and Venture Partner at XRC Labs

VCs in beauty and consumer declared the ‘death of the traditional brand’ and that the future would be owned by celebrities and influencers. Now the backlash against inauthenticity, cash grabs, and floods of undifferentiated product is leading to the declaration of the death of the celebrity brand. What is the future of the beauty brand, and what is the path forward for new beauty brands to create sustainable equity and value?

Brand development cycles in beauty continue to accelerate, and the capabilities required to build a successful, sustainable brand are constantly evolving. A little over a year ago, Venture Capital and Private Equity firms were confidently declaring the death of the traditional beauty brand, and — by extension — the decline of large consumer and beauty portfolio companies. Now, with news of consumer backlash, bankruptcies, and delistings at Sephora, the celebrity/influencer brand is being declared dead. Are both these “deaths’’ permanent, or premature? Is there a way forward for brands and investors in today’s volatile marketplace?

VC and especially Silicon Valley’s thesis on the future of brands in 2020–21 was as follows: Influencers/creators and the products they create are the future national brands; current national brands will become extinct over time. Money poured into celebrity and influencer brands across beauty categories.

What was the logic underlying this thesis?

1. The future of brands, driven by e-commerce, requires content and engagement to be a core part of the offering. Consumers are not interested in purely transacting with a brand but also in the narrative and experience surrounding it.
2. Current national brands are terrible at creating content and creating communities of “loyalists” to the brand.
3. Influencers/creators have the skills and capabilities to generate the communities, engagement and therefore loyalty necessary to create nationally-loved brands.
4. Influencers have now moved from supporting existing brands to creating their own brands as they seek a bigger slice of the profit pool available in the market.
5. Historical barriers to competition are coming down along the value chain, e.g., 3rd party manufacturers, online marketplaces, reduction of “tastemakers” in media vs. direct engagement on social media.

In late 2022/early 2023, there has been a 180° pivot, prompted by consumer backlash against multiple entries viewed as cynical cash grabs by celebrities and content creators, a flood of undifferentiated product, and the changing economics of customer acquisition. Celebrity brands are over, or at least, on life support. Doctors and aestheticians are now the new stars, representing expertise, authenticity and differentiation.

As always, there are some things that are right, and some things that are wrong about both of these investment theses. Having a more nuanced perspective — particularly leveraging the lens of capabilities — should inform any investment strategy.

1. Barriers to entry are lower in many categories, and will continue to erode:

a. Amazon now has ~30% share of many consumer categories in N. America. It takes minutes to set up on their marketplace, or to create a Shopify brand.com vs. months/years for national brands historically to get shelf space at Target, Walmart, Sephora or ULTA.

b. Highly-capable third-party manufacturers/suppliers exist in many categories, e.g.,

i. In beauty companies like INTERCOS can create a turnkey range of quality products and packaging in both makeup and now skincare and get a new brand to market in 12 months.

ii. You can buy bulk vodka or tequila (no or short aging process required), focus on distinctive packaging and marketing, and be in the market within 12 months with an influencer/celebrity brand.

c. Incubator platforms like Maesa have established themselves as “one stop shops” for celebrities and influencers to create turnkey “brands” without the hassle of building a startup infrastructure

2. Creative content needs have exploded in terms of asset requirements. In beauty, for example, instead of one “perfect” image for the September issue of Vogue, brands need 10–12 pieces of visual content per country *per day* for brand.com and multiple social media feeds, both owned and sponsored — all of which have to be tailored by platform and specific voice.

3. Many traditional brands are too slow, and often lack the capabilities, processes, systems or culture to succeed in contemporary digital marketing and/or digital commerce. There are too many meetings, too many layers of approval, too much focus on risk management to be compatible with content needs for multiple Tiktok postings per day in an authentic, breakthrough brand voice.

4. Many brand managers and digital agencies lack the relevant experience and knowledge either to create content or to judge good digital content from agencies. Tiktok was launched in 2017, after 90% of today’s brand managers graduated from college or business school. Many traditional brand management companies are only just completing (re)training for Instagram 1.0!

5. Big influencers/creators are no longer satisfied with sponsorship deals where they trade their awareness and reach for one-time fees. They want participation in upside at minimum or more likely equity

All this created significant and unprecedented disruption in consumer goods and retail, with incumbents being challenged, and new businesses and brands rising quickly. For example, in Beauty, “indie” brands have gained 3–4 points of share from incumbent/historical brands and some big traditional names are struggling, e.g., Revlon. New brands broke through with disruptive models leveraging new media/engagement and distribution models, e.g., Fenty, Rare Beauty, Kylie Cosmetics, The Ordinary, Drunk Elephant. Snacks and beverages are also being disrupted, e.g., White Claw is estimated to have created/gained more than 50% share of the hard seltzer market, driven by a viral online campaign heavily leveraging influencers.

Now, the momentum has drained from the celebrity/creator brands with negative consumer reactions to a number of high-profile launches, e.g., Le Domaine founded by Brad Pitt created significant consumer backlash as inauthentic. Forma Brands/Morphe closed all its US retail stores and entered Chapter 11 reorganization, as well as dealing with some tricky PR issues with its stable of influencers. Sephora has de-listied Addison Rae’s MERIT beauty brand. Selfless by Hyram is changing channel strategies. In general consumers may still want to own a piece of their favorite celebrity or creator, but they want that product to perform, or they will not buy it again. And the flood of new brands and products had become overwhelming.

The truth is that despite all the hype about disruption, many tried and tested principles of strategy and branding remain true:

1. Barriers to entry vary significantly by (sub)category, leaving more traditional branded companies holding on to “moats” for one or more of the following reasons:

a. Some categories are much more difficult to build a products that is differentiated or truly competitive; for example

i. Razors and fragrance need access to capital and specialized R&D and sourcing expertise

ii. In contrast to Makeup, Skincare and haircare increasingly need to demonstrate a formulation/ functional justification for trial and repeat

iii. Scotch whisky needs to be aged for a minimum time vs. vodka, creating time-based and cash-flow barriers to entry for anything distinctive

b. The higher the price the greater the need for product quality and differentiation and the more difficult it is to disrupt with just marketing content, e.g., in true luxury goods there is no INTERCOS for handbags, but rather a complex combination of small artisans with unique specialized skills. During the COVID online shopping boom Luxury brands’ TSR grew 3–5x that of value and mass brands in the apparel, footwear and accessories sector, according to recent McKinsey research

c. Some (sub)categories just don’t have the same level of engagement with creator content as others. Do you really need an influencer-led jar of mayonnaise or detergent?

2. As consumers have discovered, just because formulation, manufacturing and selling barriers have come down, that does not guarantee a distinctive product that performs and that you want to buy again. Consumers are smart, and they know a “white label” moisturizer or eyeshadow palette when they see and use one. They also see and know when a celebrity “founder” is present for launch and initial media push, and then disappears to focus on their “real job” or other personal priorities, like spending the money you just gave them

3. Influencer/creator brands are not new, and come with their own risks to manage

a. Companies have been leveraging the awareness power of celebrities forever; for example

i. Roy Rogers restaurants in the 1960s and 70s

ii. Elizabeth Taylor fragrances in the 1980s, which remain global best sellers today

iii. The George Foreman grill was a phenomenon in the 1990s, leveraging the power of Foreman’s affable persona in the “disruptive medium” of infomercials and shopping TV

b. However, influencers/creators get tired, move on to a new life stage, and make mistakes that can undermine their awareness and engagement — and their brands’ equities — overnight

i. Roy Rogers restaurants have declined from over 600 nationwide to 41, with most being converted to Hardee’s after the purchase of the company in 1990

ii. Joan Rivers had a successful line of clothing and jewelry on QVC that could not transcend her death in 2014

iii. Kat Von D makeup severed ties with its namesake creator after controversy over her stances on vaccination and remarks made on social media. The brand rebranded and retrenched as KVD makeup but shrank significantly

iv. Morphe/Forma leveraged 2014–2019 Youtube/Instagram celebrities like Jeffree Star and Jaclyn Hill to build a mass-tige color cosmetics platform (funded in a big bet by private equity) but could not manage controversies generated by key celebrities like Star; nor could they adapt their model for Tiktok/UGC influencers vs. Instagram/Youtube

c. Influencer/creator brands create their own consumer fatigue when they don’t deliver beyond initial trial, e.g., the “glut” of celebrity fragrances in the mid-1990s (Jennifer Lopez had 5!). This is already happening in masstige beauty and spirits. Hailey Beiber — who one might argue has had a very successful launch with Rhode — highlighted, “People are so tired of celebrity brands and I’m like, honestly, I get that”

d. Celebrity brands are so far mainly a North American phenomenon. Of the top 10 global biggest “earned media” brands in 2022 , only one — Fenty — was a “celebrity” brand. Other global brands continue to leverage celebrities as part of their portfolio of marketing tactics, e.g., Dior/Jisoo Kim

4. Awareness and media savvy are only a part of the suite of capabilities required to build a sustainable, profitable brand, and create value. “Old School” national branded companies retain capabilities needed to ensure that product design and execution of experience at point of sale is distinctive and creates loyalty/repeat and emotional connection that transcends any celebrity:

a. A brand and sustainable business model is built on loyalty and repeat. You do not make money on trial. The vast majority of profit, free cash flow and value creation come from repeat purchases and loyal consumers

b. Creators/influencers’ “superpower” is in their built-in reach and awareness that can dramatically reduce the cost of initial customer acquisition, e.g., Kylie Jenner created an “instant” $250MM business from her 144MM instagram followers from a highly-focused assortment of lip kits, but struggled to remain in stock, which undermined her growth trajectory

c. A true powerful brand delivers distinctive product benefits and creates an emotional connection with the purchase, usage and ownership that goes deeper than social media engagement. This still needs many capabilities that traditional branded companies are very good at: consumer and competitive research, R&D, quality control, supply chain, point of sale execution and consumer service

d. Building powerful, sustainable brands takes time, patience and investment, e.g., Hermès is arguably the most valuable standalone brand in the world, but has taken 185 years to reach $124B in market cap. Even Lululemon has taken 24 years to get to $42B.

1. Disruption in branded consumer goods and retail will continue given the underlying forces from the consumer and changes to industry structure
2. Level of disruption will vary significantly by subcategory based on three factors

a. Barriers of complexity/scale to create a distinctive product

b. Price and service experience

c. Consumer engagement with content in that subcategory

3. Creators/influencers will continue to play a greater role in the value chain, and capture a greater share of profit pool, as they have capabilities that traditional branded companies and business models lack and struggle to replicate and evolve with the shifting media landscape

4. Creators/influencers strengths are in awareness and trial. Value creation remains with brands that generate loyalty and repeat. Traditional branded companies retain key capabilities that support brand equity and value creation: quality, service, consumer insights, R&D, supply chain execution

5. Traditional brands can evolve their marketing and engagement strategies, especially by harnessing the insights and skills of their youngest workers, e.g., “reverse mentors” For example, L’Oreal has harnessed Tiktok micro-influencers and Reddit to accelerate the growth of CeraVe to become a powerful derma-skincare brand

6. Winners will recognize and harness disruptive forces through creative partnerships with creators and influencers that leverage the best of each other’s strengths and capabilities, creatively sharing risk and reward. Though old now, the way LVMH built a $1B+ beauty brand with FENTY remains the best example of this playbook

a. Leveraging Rihanna’s 136MM followers on Instagram — both for initial awareness and trial, and then as micro-influencers/UGC content so that the brand transcended one person and felt like a genuine community and movement

b. Brand equity was more than just the celebrity — core was emotional connection to a brand that stood for female empowerment, expression and inclusion that was aligned with the creator’s persona

c. Leveraging LVMH capabilities in makeup formulation (Kendo) and distribution (Sephora)

d. Creating high-quality products with distinctive benefits in terms of performance: coverage and shade range/matching