#139. Every week on the podcast we’ll challenge a recently-announced business strategy. This week we discuss Helen of Troy’s recent acquisition of Drybar’s product business and what drove the brand towards a sale.

Check out the full transcript below. 

Richie: [00:00:01] Welcome to the fourth episode of Espresso, a podcast from Loose Threads where we challenge a recently-announced business strategy to understand the upside and downside of a brand’s approach.

Richie: [00:00:11] I’m Richie Siegel, the founder of Loose Threads, which analyzes and advises next-generation consumer companies, and FaceLift by Loose Threads, a retail incubator and accelerator for leading brands and retailers. For our latest analysis and insights, check out our free weekly newsletter at LooseThreads.com.

Richie: [00:00:24] Joining me for our discussion this week is Rebekah Kondrat, a partner at FaceLift by Loose Threads, and Caroline Tibbetts, who leads our research at Loose Threads. This week, we analyze Drybar’s decision to sell its product, business and intellectual property to Helen of Troy for $255 million, while retaining the ability to operate its blowout salons. Drybar’s product business grossed $65 million in 2019, but only earned $5 million in profit—a sign that something was going awry. Here’s what we think went wrong.

Richie: [00:00:56] So, the unique part of this deal is—I think it was billed as an acquisition, but they really only acquired the rights to license the products. Drybar is a company that’s run by Alli Webb, it will continue to own—and whatever investors and private equity firms that she’s associated with—will continue to own all the salons themselves. So it’s really more of a license than an acquisition, but I guess they bought the permanent rights to that license, which is interesting. There’s no duration of it, there’s no break up on it. There’s just like, they own the license forever, which is I think why, for $250 million, it was such a big sum, because normally you wouldn’t do that.

Caroline: [00:01:29] Well, up until this point, you can buy Drybar products at Macy’s, Nordstrom, Sephora and Ulta. So, four locations, and then all the salons across the U.S. They’re expensive. They have lots of options. So I was not surprised by this deal, because over the break, actually, I was at TJ Mmaxx and I saw aisles of Drybar products and people were really excited by that. However, I’m not surprised, because I just feel like they inundated their product assortment. From my experience of using Drybar, a blow-dry is already expensive, and then you’re there and the stylist is trying to promote to you the products to buy, also. I never saw people buy them while I was there. I know some of my friends buy it but, again, it’s expensive and you don’t know what’s good because you have all of these options.

Richie: [00:02:19] Why would you buy one of their products over another?

Caroline: [00:02:22] I think, one, it’s a highly competitive market. But two, they have hair wax—I’m not sure what that is—texturizing spray. The average consumer, unless you’re a hairstylist, wouldn’t really know.

Richie: [00:02:34] Oh, interesting. So it’s almost like they’re too technical.

Caroline: [00:02:36] I think. And it seems like they’re constantly coming out with new products, and it’s like $40 or $50 per shampoo.

Richie: [00:02:43] That’s interesting, ’cause it doesn’t—again, from someone who’s never been there before—it doesn’t seem like their brand is predicated on technicality. It doesn’t seem they are, like, an innovation-forward brand. It seems like the simplest proposition.

Caroline: [00:02:56] That’s so funny you say that because I feel that they promote that. Of course, I don’t have their numbers, but I’m assuming one of their top-selling products is their blow dryer that they sell. It’s like $225, which is obviously expensive.

Richie: [00:03:08] A ton of money. Yeah.

Caroline: [00:03:09] It’s like, bright yellow.

Rebekah: [00:03:10] It’s famous for being bright yellow. Yes.

Caroline: [00:03:11] Yeah. And for like, its technicality. But for me, if I’m blow-drying my hair, I don’t care what I’m using. I just need it to be dry.

Richie: [00:03:19] Do they sell those, like, the ultimate blow dryer? ‘Cause like, I think of a Dyson. And maybe that’s a masculine thing, to think of that first, but I would think a Dyson would outperform a Drybar any day of the week…but maybe that’s not true. Or do you just get it because it’s the Drybar product?

Caroline: [00:03:35] And that’s what they’re using, and they’re obviously blow dry specialists, so you would trust—and I don’t mean to diminish women’s knowledge of Dyson, but I don’t think the average woman would know about Dyson.

Rebekah: [00:03:47] I think the other thing here, though, is that women will often use what their hairdressers use.

Caroline: [00:03:52] Exactly.

Rebekah: [00:03:52] So you go and use the cream that the masseuse uses or whatever. So, I know what hair wax is, because I have curly textured hair, so any woman who has kind of this textured hair knows that you have to put some sort of product in it so that it’s not frizzy, and then they’re gonna use whatever their hairdresser uses. I think it has become known as a, I don’t know, higher-end ? I mean, I think about who compares to Drybar products from, like a brand-level standpoint, probably like Bumble and Bumble. So, Revlon isn’t really known for its hair products. These other brands that Helen of Troy has, this kind of gives it a much more elevated customer for its hair care lines.

Caroline: [00:04:34] Right. I feel like part of the problem that Drybar ran into was women getting the blow dries. I think there is a sect that get it as like, a special treat, and then they may be apt to buy a product. But then I think that there’s a larger group of women who go once a week or twice a week, or don’t even wash their hair and just go there. So why would they purchase the product?

Richie: [00:04:58] It seems that there is some agreement that obviously product sales are key to this business. Why would you sell the right to sell the products? That’s what’s weird about this. Sure, take $250 million. The last public revenue number I could find was from 2016, it was a $100 million business, just collectively. Let’s assume Drybar’s a $200 to $300 million dollar business at this point. Why would you sell out the right to make products ever again? It’s kind of weird. Maybe in the agreement they can still sell them wholesale or get a commission off of them, but there’s something fishy about why they would have to do this now, versus continue to license their name and go through all the very traditional stuff that they probably were already doing.

Rebekah: [00:05:34] Well, I think that there is a lot of competition in hair care right now. I mean, you have like, Prose, that will give you personalized shampoo based on your zip code and what the water hardness is and all of that. It gets very, very technical. So I think that maybe there’s just too much competition and they decided to stick with what they are good at.

Caroline: [00:05:54] Right. Leave it to the experts to take care of it.

Rebekah: [00:05:56] Right?

Richie: [00:05:57] It’s interesting, though, in the context of like, we talk so much about private labels and the ability to monetize an audience you already have. And, in a sense, this looks like they’re selling out their right to run a private label. Which, from everything we know, goes totally against, I guess, the logic of the easiest way to build brands today, which is to build them with an existing audience, ’cause Drybar is literally that. I just wonder what went wrong, in a sense, because if this thing was actually making money for you, you wouldn’t do that.

Caroline: [00:06:26] And you know what’s interesting, too? That I receive promotions almost every day for the products, but never for a blow-dry. And I’ll see the email coming through and be excited and thinking it’ll be for a blow-dry, but it’s just always about the product. So it leads me to believe that they can’t manage their inventory, and that they just have an excess. And they’re always introducing new things, thus having to get rid of the old’s product lines.

Richie: [00:06:53] Which is so ironic, ’cause again, you can go back to the core of the business. The reason it worked is [because] it was one thing.

Caroline: [00:06:57] Exactly.

Richie: [00:06:58] It was the simplest thing. And so that’s why in the beginning I’m saying, “Okay, it’s kind of weird that every week, two weeks, three weeks, they’re introducing a new thing,” because their business is built on the simplest permanent thing.

Caroline: [00:07:09] Right. So if they just stuck to selling one shampoo, one conditioner and one blow dryer, it would have been easy to manage.

Richie: [00:07:17] So is this like a private label gone wrong, in a sense? ‘Cause it reminds me of like, old-school salons, of like, you look behind the counter or wherever the cash register [is] and they have like, that whole wall of stuff.

Rebekah: [00:07:26] So many.

Richie: [00:07:26] It seems almost like they took that strategy when, in a sense, they could have done it with three or four SKUs. Another interesting example is, Prose had three SKUs for the first two years, and the last four months they’ve doubled the SKU count. They went from a shampoo, conditioner, hair mask to a hair oil, a hair brush, a dry shampoo. And they’ve also actually very much ratcheted up their own email communications. Like, every two days you get an email from them now, which is interesting. There is something fishy about the whole thing if the premise of private label, captive audience, whatever is true.

Rebekah: [00:08:01] Yeah, I think the train maybe jumped off the tracks and they just couldn’t get it under control, and so, like you said, decided to return to what they knew.

Richie: [00:08:09] Would you have sold out the right to sell your own branded product for that much money at that point in the business, even if you knew you were terrible at running a product business?

Rebekah: [00:08:18] I mean, if it was affecting my life and well-being and someone wanted to hand me $255 million to do it, maybe? I mean, ’cause then can’t they like, go and start another business?

Richie: [00:08:29] But it’s not like she exited the business, right? Like, they still have however many bars.

Caroline: [00:08:34] But I think they need to get back to their roots and really perfect the blow-drying aspect of the business, because that too isn’t perfect. They need to scale it, open more locations, perhaps globally there’s some opportunity. And I think that’s where the focus should be.

Richie: [00:08:50] If you have a 140 locations, you have millions of customers coming into your locations. You don’t really need to go sell on a Sephora, TJ Maxx, whatever, unless you have too much inventory, you’re trying to grow really quickly or it’s marketing to get more people into your existing locations. If they did that. But now, TJ Maxx has all this product. Something went wrong in that equation, of either there was too much inventory depth in a marketing channel when they gave away too much than they should have, whether they actually were reliant on those channels for sales, and shouldn’t have, because they have 140 locations. There’s something just weird about the puzzle that doesn’t add up. Because, again, if those channels are working, why are you selling away the right to make product? If you’re making $50 million in Sephora, why would you give up that money, just for a fixed sum of cash?

Rebekah: [00:09:32] Maybe she just wanted an exit.

Richie: [00:09:34] It’s such a weird exit.

Rebekah: [00:09:36] Agreed. Maybe it was the only one she could get.

Richie: [00:09:39] Can anyone argue that the product business was working and that this is a good thing? ‘Cause I can’t find a reason to make that argument.

Rebekah: [00:09:46] No. I mean, that’s the only logical conclusion, is the product business just wasn’t working.

Caroline: [00:09:51] Because it was over expanded. It could have worked, if they were just less things. And if they didn’t expand in Sephora and Ulta and Macy’s, because then it would have kept to the novelty of, “Okay, if you’re a true fan and you want to buy the shampoo, you have to go to a Drybar to go buy it, or order it online.” Instead, Ulta, how many stores does Ulta have, or Sephora?

Richie: [00:10:14] Thousands. I wonder if that was the fatal move, ’cause it ruined the margins, right? ‘Cause you’re now in wholesale. And then you’re, as you said, getting rid of the reason to go to the Drybar. Like, I wonder if actually the product backfired, because, did people say, “Look, I can just buy this stuff. I don’t even need to go into the store anymore. I don’t even need to go into the bars anymore. And I don’t even need to buy this stuff from them anymore. So now I’m just a Macy’s or an Ulta customer, which I already was, and I go to Drybar less. And maybe I don’t even need those products.”

Richie: [00:10:42] Also, what’s weird is, in a Drybar, I have no competition for product beyond Drybar’s products. If I put myself in Ulta, I’m now competing against everything.

Rebekah: [00:10:52] But you get way more eyeballs, which I know is why it looks appealing.

Richie: [00:10:56] But if you have 140 stores, you already have eyeballs.

Rebekah: [00:10:59] Yeah, that’s 140 stores, but I’m not sure how many states they’re in. I mean, there are multiple stores in just Texas.

Caroline: [00:11:04] Right. But a Sephora customer might not have ever been to a Drybar or heard of it.

Rebekah: [00:11:09] Right.

Caroline: [00:11:09] So it really means absolutely nothing to them.

Richie: [00:11:11] Is an Ulta shopper a Drybar customer? I feel Sephora customers are Drybar customers.

Caroline: [00:11:16] Who is the customer? That’s the question, too.

Rebekah: [00:11:19] I almost wonder if they—I don’t know, this might be a little bit backwards—but were they trying to figure out where to put more salons? And so, let’s release our products everywhere and figure out where they sell, and then it just ran away from them. I don’t know.

Richie: [00:11:33] But also through that logic, I would assume, their stuff sells more when their own technicians or workers show you how to use it.

Rebekah: [00:11:40] That’s true.

Richie: [00:11:40] This goes back to the technicality. Why do I care if it’s technical if no one tells me the technical benefits of it? ‘Cause no one’s telling you that in an Ulta or Sephora, to the degree that Drybar’s own associates could.

Caroline: [00:11:51] Or, unless you know the name. So, when I was in TJ Maxx, which obviously was a close-out sale that they were there, I knew it, and I saw it was for $150 versus $250. So I wanted to buy it.

Richie: [00:12:04] The hairdryer?

Caroline: [00:12:05] Exactly.

Richie: [00:12:06] Interesting.

Caroline: [00:12:06] But I was with a friend from New Hampshire—I don’t know where there are Drybars. She’s never used it, and I told her it was good. And she was like, “Oh, yeah. Is it? Should I get it?” I was like, “Yeah, probably.” But otherwise you wouldn’t know.

Rebekah: [00:12:19] If you wouldn’t have been there, she wouldn’t even…

Caroline: [00:12:20] Exactly.

Rebekah: [00:12:21] Yeah.

Richie: [00:12:21] It reminds me in a sense of Apple, in terms of like—’cause Apple sold through third-party distribution for a long time before the Apple stores really took over. And they realized, like, “We are the best people to sell you our stuff.” Right? “We’re gonna give you the education, create the environment and so forth that you will buy the most of our stuff. It’s not gonna be in Best Buy. It’s not going to be in Comp USA or Circuit City, whatever those other places were.” And there was a somewhat similar technicality to what Drybar’s doing, even though they actually do a really good job, I think, simplifying it that it doesn’t feel that technical. But they went into all these avenues that have worse education, worse margins, more inventory requirements. It almost feels like they had that opportunity and then they tried to go too big, too fast.

Richie: [00:13:04] Look, $250 million dollars, great, but I wonder what the five-to-ten year implication of that is. I would say that business is now actually worth a lot less, right? ‘Cause they just sold out a huge revenue line. You’re now trading as a retail business—you were kind of before, but you had private label. So it’s interesting, the long term implications, both from a revenue perspective but also from a valuation perspective. They’re now just a 140-door chain.

Rebekah: [00:13:30] Because also if the economy tanks, women who blow-dry their hair are probably still gonna blow-dry their hair, they’re just gonna do it themselves now. It’s a lot more risky to just keep the retail store portion. It feels like it should’ve been the reverse. Like, sell the stores, keep the products licensing, sell the stores to—

Richie: [00:13:49] Or go license the stores.

Rebekah: [00:13:51] Or that, or license the stores.

Caroline: [00:13:53] I also wonder, though, how long can the product be relevant and important? It’s just watering down the brand. Like, me seeing the product in TJ Maxx waters down [the brand].

Richie: [00:14:05] That is like the artifact of the problem. Did they strike an official partnership with them?

Caroline: [00:14:09] No. Right. Okay, so TJ Maxx, definitely, but also Macy’s to me.

Richie: [00:14:13] Right.

Caroline: [00:14:13] Seeing it there just disenchants me with the product. I’m no longer feeling excited about this.

Richie: [00:14:21] And I think underneath this was this quest to be bigger in middle America, in a sense, and that’s how you end up in a Macy’s, in a TJ [Maxx] and so forth. But there is a classic, “Did they push well beyond who they’re for?” Is this a coastal 1%, 2%, top 5% household income game, and they’re trying to play the middle America game and they’re just not winning?

Rebekah: [00:14:44] Right.

Caroline: [00:14:44] Well, I think they thought of it as, “Okay, maybe you can’t afford the $50 dollar blow-dry,” which is really $60 or $70 because you have to pay the tip. Does that person want a piece of Drybar? So are they going to buy the shampoo?

Richie: [00:14:56] Similar to, we talked about Ferrari. Like, is this an aspirational brand thing? But I think what I would counter with is, that product is only worth something to you after you’ve had the experience.

Rebekah: [00:15:05] Right. Because if you want your hair to look the same as it did after you walked out—it’s not going to, P.S., by the way. I’ve never been able to get my hair to look like it looks after I leave the salon.

Caroline: [00:15:16] Oh, absolutely not.

Rebekah: [00:15:17] But you think that if you use the same products as the hairdresser did, then maybe you can pull it off. So, yes, you’re gonna buy it after the experience.

Richie: [00:15:26] The key there is you need a reference point.

Rebekah: [00:15:27] Of course.

Richie: [00:15:28] And without the reference point, it’s just another product in an aisle next to another product in an aisle.

Rebekah: [00:15:32] Yes. So it just became a yellow bottle or whatever. A yellow blow dryer in an aisle that your friend from New Hampshire had never heard of.

Richie: [00:15:44] Thanks for listening to Espresso, a Loose Threads Podcast. You can read full transcripts of the podcast and join the newsletter at LooseThreads.com. Feel free to leave a review on iTunes, we always appreciate it, and thanks to George Drake, Jr. for editing this episode. We’ll be back in a few weeks with more.