A beautiful life
Listed@ASX Winter 2021
This online cosmetics retailer perfectly timed its IPO.
In the tried and true entrepreneurial tradition of launching a company, Adore Beauty co-founders Kate Morris and James Height started the enterprise as an online cosmetic website in the garage of their Melbourne home in 2000.
A university job on cosmetic counters had led Morris to realise many women found department stores intimidating and unpleasant. This inspired her to create a disruptive beauty shopping experience designed from a blank page to empower consumers. When it launched – with the help of a $12,000 loan from family – adorebeauty.com.au stocked two cosmetics brands and made one sale a week.
Fast-forward 21 years, and Adore Beauty is Australia’s number one pure-play online beauty retailer, stocking more than 11,000 products from 260 leading beauty and personal care brands, generating more than $121 million in annual sales revenue, and a net profit of $2.5 million in the 2020 financial year.
Tennealle O’Shannessy, chief executive officer of Adore Beauty
Last year, Adore Beauty counted more than 18.5 million users across its Australian and New Zealand websites, and had more than 590,000 active customers, which it defines as customers who have bought a product from it over the last 12 months.
The customer base has grown by more than 278 per cent over the past four years.
To fuel its growth, Adore Beauty has taken outside investment several times. In May 2015, Morris and Height sold a 25 per cent stake in the business to Woolworths, but bought back this equity in February 2017. In September 2019, the pair sold a 60 per cent stake to heavyweight Quadrant Private Equity. Then, in the middle of last year, Adore and Quadrant started testing the water with investment banks for an initial public offering (IPO) of the business.
It was a COVID-affected stock market, and the IPO pipeline had dwindled to a trickle, but Adore had a contrarian story to tell. “As soon as people really started to understand the pandemic, Australians increased their online buying,” says Tennealle O’Shannessy, chief executive officer of Adore Beauty.
“Having an online-only model helped us thrive – we saw sales rises across the platform of 100 per cent-plus in some sub-categories. We knew the pandemic was giving us the opportunity to acquire a whole lot of new customers, and we were thrilled to welcome half a million new customers to the platform in 2020. Given masks and working-from-home it is no surprise colour makeup product sales may have been slightly down, however beauty is a self-care category, so demand for personal care products such as shampoo and conditioner, moisturisers and serums – and even scented candles – was booming on our platform.”
With the lift in web site traffic, Adore Beauty was able to talk to potential investors about two of its great strengths: customer behaviour and the relatively low online penetration rate of the beauty and personal care market in Australia.
“We were able to show investors meaningful trends in the statistics that are at the heart of online retail, such as the number of active customers, increases in customer order value and frequency, increases in customer satisfaction, retention and lifetime value of our customer cohorts,” says O’Shannessy.
“Our customers spend more on our platform the more they use it – and they’re very loyal. Returning customer revenues represent 64 per cent of the business and we are doing everything we can to ensure their ongoing loyalty.”
The other number that appealed to investors, she adds, is that the online penetration rate of the beauty and personal care market in Australia in 2020 is 11.4 per cent, which lags international markets such as the US and the UK, with estimated pre-COVID online penetration levels of 15.4 per cent and 12.7 per cent respectively.
“We believe online penetration of the beauty and personal care market in Australia will only continue to increase, and that COVID has accelerated the structural trend of online shopping,” O’Shannessy says.
US fund managers understood this quickly, O’Shannessy says. “What really attracted them to the story once they took a look at it was where the Australian e-commerce landscape is. They could appreciate Australia is about five to seven years behind the US and UK in terms of online penetration. With our clear market leadership position, and our defined roadmap for growth in terms of our strategic priorities, they could see the opportunity in front of us as Australia moves towards the penetration levels of those more mature markets.”
Initial roadshow meetings with local fund managers turned up some interesting comments. O’Shannessy and Morris were quizzed by fund managers why if no-one was going out, people needed beauty products.
“We’ve built a market-leading position and a really sustainable, defensive business model by investing in things like our data-driven personalisation and content capability.”
“It’s fair to say there was quite an education piece as part of the roadshow,” O’Shannessy laughs. “Those kinds of comments actually created a really interesting opportunity for us, in that we were able to encourage the fund managers to understand the customer value proposition, in terms of how our customers think about us. I am happy to say a number of them and their families are now our customers.
“Beauty is a highly personal category, it’s an emotive purchase, and our customers are very loyal and engaged. We were able to explain how we’ve built a market-leading position and a really sustainable defensive business model by investing in things like our data-driven personalisation and content capability that really allows us to drive engagement and retention. It helps us understand how customers behave as they ‘age’ as Adore shoppers,” she says.
Institutional investors could see a business that had really strong foundations and a strong track record, O’Shannessy says. “This is a business that’s been grown carefully and sustainably and profitably for 20 years. We could show them really strong performance in all of our operational metrics, strong and growing levels of customer satisfaction, of retention, of repeat purchases of our cohorts going back many years.”
Adore could also tell institutional portfolio managers a story about values that resonated strongly, O’Shannessy says. “Adore is very much a values-driven business. It’s all about bringing the very best brand partners to our customers and empowering them so they feel confident and fabulous. That creates loyal and passionate shoppers.
“The culture we’ve created, the company’s values and our customer focus, really drive all of our decision making. We were able to attract investors that really identified with that particular story. And we had lots of women approaching us, telling us they were investing in shares for the first time – they understood the business and they got behind the company. They liked the fact our IPO was the first offering of such a size brought to the ASX by a female founder and a female CEO.
That makes us take our responsibilities as a listed company very seriously,” O’Shannessy says.
This connection with shareholders may come in handy to mollify any disappointment caused by a share price of $6.75 at IPO, a nine per cent share price rise on debut and a subsequent retraction.
It was reported at the time of the IPO some investors considered the valuation to be too steep, a common refrain when a private equity firm such as Quadrant Private Equity is involved as a vendor. But O’Shannessy says she hasn’t received any specific feedback with respect to the share price and has not lost any investors because of disappointment with the share price.
“The market will do what the market does. Our job, very clearly, is to make sure we keep delivering on what we promised. In that regard, we were really proud of the results we delivered in the first half of this financial year, our first set of results as a publicly listed company. We outperformed every metric in our prospectus. We’ve committed to continue to do what we’ve done for the first 20 years, which is to focus on sustainable growth, and on building a high-quality business over the long term. That’s the best way to add value for our shareholders.”
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