This is Part I of an ongoing series on the rise and evolution of Kylie Cosmetics. Read Part II, Part III, Part IV, Part VPart VI ,Part VII and Part VIII.

Forbes recently put Kylie Jenner—member of the Kardashian clan and founder of Kylie Cosmetics, one of the fastest growing beauty brands ever—on the cover of its America’s Women Billionaires issue. The feature, which came with an accompanying article on the brand and its founder, triggered a range of reactions across the internet, both inside and outside of the beauty industry—from admiration of her accomplishments to disgust at her privilege.

Yet the Forbes article only scratched the surface of analyzing Kylie Cosmetics, further confusing readers and analysts alike. This piece aims to fill in the holes, exploring how Kylie and her partners built one of the fastest growing beauty brands ever, as well as how—and what—she might sell to a potential acquirer, an outcome the brand has been openly exploring.

But before diving in, it’s important to get something out of the way: Kylie Jenner deserves a lot of credit for turning Kylie Cosmetics into the profit-generating sensation that it is. Celebrity-driven brands are often, paradoxically, a trap. One would think that anyone with an audience can find a manufacturer, make a product and then reap millions. But, as we’ve previously detailed in the most in-depth report on celebrity brand-building, success is far from guaranteed. Various elements can make or break these brands, as we’re about to see. So what follows is a discussion about strategy, not credit.

A deal made in the dark

Walter Spatz, who invented the propel and repel version of the ballpoint pen, founded SPATZ Laboratories in 1955. Throughout the 20th century, the company continued to focus on formula and manufacturing innovation, specializing in vertical integration and fast turnaround times, which it used to offer “turnkey” manufacturing to clients. In 1989, the Nelson family bought the company, which was based in California. In 2007, the company opened up SPATZ China, to serve global customers.

Laura and John Nelson are a brother and sister team who inherited the family business in recent years. But they didn’t just keep it running as usual. In 2014, they launched Seed Beauty as a brand incubator adjacent to SPATZ, which aimed to use all of their product development, manufacturing and capital resources to create a fast fashion-like supply chain for beauty, which the pair could develop brands on top of.

Seed Beauty’s first brand was ColourPop, the influencer-heavy, marketing-light brand that went from concept to launch in just three months in 2014. The brand had no real origin story—this, as well as the founders’ relative anonymity, was suspect to many internet sleuths, which led some to believe Laura and John did not exist (they do). Regardless, the brand brought rather accessible-priced products to market, launching hundreds of SKUs in the first year. Since Seed Beauty is vertically integrated, it, like Zara and its fast-fashion ilk, can bring products to market for its brands in as little as five days, which is radically quick.     

Sometime in 2014 as ColourPop was breaking out, Kylie Jenner met the Nelson siblings and they decided to go into business together. Seed Beauty even stopped working with L’Oreal to work on ColourPop and with Kylie—quite a statement of what’s to come.

Launching with lip

The Kylie Lip Kit ($29) was introduced on Kylie’s Instagram in November 2015. The initial release of 15,000 units sold out in less than a minute, earning her $435,000. Then, on February 5, 2016, Kylie launched six new shades of the Lip Kits and rebranded as Kylie Cosmetics. The 500,000 units sold out in ten minutes, generating $14.5 million in sales. It was clear Kylie and Seed realized they had a business on their hands, not just a single product.

In November of the same year, Kylie launched the 2016 Kylie Cosmetics Holiday Edition, which featured an expanded range of products: Lip Kit Ornament ($30), Holiday Kyshadow Palette ($42), a 4-piece Full Size Kit ($45), Creme Shadows ($20), Mini Matte Kit ($36), Gloss Ornament ($15), Metal Ornament ($18), Kyliner ($26), a makeup bag ($36), and the Big Box, which includes every holiday-edition product ($290). She made another $19 million in the 24 hours before these products sold out. Soon after, she launched a range of merch, including phone cases, t-shirts, pins, buttons and more. According to Forbes, Kylie Cosmetics had over 50 SKUs by the end of 2016 and revenue of $307 million. It had also done a number of pop-ups, which have attracted tens of thousands of customers.

But in 2017, Forbes estimated (with no citation) that the brand only increased revenue 7% to $330 million, despite its 30 new SKUs. This contradicts the 25% growth cited in a WWD piece in August 2017, which would equate to $386 million for the year, although it’s possible the brand didn’t hit these projections. Another explanation for slowing sales is Kylie’s pregnancy, which compelled her to take approximately six months off of social media and could very well cause a brand so dependent on these channels to suffer.

However, Kris Jenner, Kylie’s mom and manager, said revenue is up “considerably” in the first six months of 2018 compared to the same period last year, although there is no way to verify this claim. Forbes said the “taper off” of revenue is because of falling Lip Kit sales, but it cited unverifiable estimates to back up its claim.

Either way, Kylie has built something impressive in only three years. But how does the composition of the brand affect its longevity?

Celebrities owning their own distribution

The most compelling and high-level justification for Kylie Cosmetics’ success is the audience that its founder has access to, both directly—111 million people on Instagram, 25 million on Twitter and some more on Snapchat—and indirectly—the millions upon millions of additional press pieces and impressions she garners as a member of the Kardashian/Jenner family. Her name pops up in dozens of articles every hour, ensuring she has an audience of hundreds of millions of people at her fingertips at all times. 

If building a brand is about monetizing an audience, then Kylie is in the most enviable position. Though the Federal Trade Commission began cracking down on social media influencers in 2017 who must now disclose their paid partnerships with brands, full ownership over her makeup line allows Kylie to evade these regulations altogether, which in turn raises the authenticity of Kylie Cosmetics’ online presence. She spends nearly nothing on marketing but has the reach of someone who is spending everything on marketing. This is especially important in an age where most digitally-native brands, who built their businesses on the backs of digital marketing, are seeing exponentially rising customer acquisitions costs. Those that don’t need to pay to build and keep their audiences are far ahead of the rest.

As a result, Kylie Cosmetics has not and likely will not sell in any wholesale channels, which diverges from many other brands, including Seed Beauty’s ColourPop, which sells in Sephora and Ulta. This is a stark contrast to Kendo, which is Sephora’s brand incubator and is the powerhouse behind Rihanna’s Fenty Beauty and Kat Von D’s eponymous brand, both of which are exclusively sold through Sephora, as well as a few select department stores. These brands leverage the Sephora’s massive online and offline audience, acting like private labels that provide better control and margins while keeping everything “in the family” and giving the celebrities a massive engine to build on.  

Yet on the surface, it’s interesting that Rihanna, who has 64 million Instagram followers and 86 million on Twitter—an abnormal ratio for image-driven celebrities—choose to work with Kendo and Sephora, which comes with its own channel, versus a company like Seed Beauty, which relies on the celebrity’s own channel to drive all of the sales. This decision has a significant impact on the economic arrangement as well, as Kylie owns 100% of her company and Rihanna likely gets royalties on her products, but probably does not have anywhere near full equity ownership in her brand. Rihanna does own the trademark for her name while Fenty the company (which Kendo owns) possesses many of the trademarks for the product names.

It’s not only celebrities’ own accounts that act as the distribution channel for these brands—their brands themselves also have built their own social followings. Kylie Cosmetics has almost 17 million followers on Instagram and almost 700,000 on Twitter, while Fenty has just over four million followers on Instagram and 300,000 on Twitter. It makes sense that Kylie would see more social resonance for her brand, which trickles down from her own personal following and existence, given Rihanna’s smaller following.

Manufacturing speed and scale

Having an audience means a brand has solved the demand question. Now it has to solve the supply question. For this, Kylie turned to Seed Beauty, which seems to have done quite a good job at that. Seed’s vertical integration, from development to production, has allowed Kylie Cosmetics to grow with a very small team: seven full-time and five part-time employees, who likely handle design, customer support and other back office functions. But this business would not function with only these people, since Seed Beauty is doing the bulk of the work. Forbes said Seed Beauty has “more than 500 people just to work on Kylie Cosmetics.” This is an absurdly high number for a single account, and the only logical justification is that it includes people on the factory floor, although they likely also work on on Seed’s other brands too.  

Either way, Seed Beauty gives Kylie unparalleled global reach, scale and pricing power that she would not be able to access alone. Forbes estimated that Kylie Cosmetics paid Seed Beauty 55% of sales throughout its partnership, which would equate to $180 million in 2017 alone, though the brand disputed this figure. Still, the numbers can’t be far off, since Kylie Cosmetics either pays Seed Beauty for its products at wholesale (which would be at least a 40-50% margin) and/or with some sort of royalty attached.

The Forbes article also somewhat condescendingly remarked in multiple places that this deal allows Kylie “to be a mogul while sitting at home, posting pictures and pondering new looks.” She is clearly involved in the brand, and likely does as much, if not more, work than most celebrities do on theirs.

Competition is accelerating

Forbes said that Kylie Cosmetics’ revenue only grew 7% in 2017. While there are a range of factors that might have contributed to decreased growth, there’s one that is hard to deny: on September 8, 2017, Rihanna launched Fenty Beauty, with an industry-breaking 40 different shades of foundation for dozens of different skin tones.

Fenty Beauty was a massive hit on social media: The brand pulled in a whopping $72 million in earned media value during its first month, according to Tribe Dynamics—$45 million from Instagram and almost $11 million from YouTube. The brand’s first-month sales were five times higher than those of Kylie Cosmetics in that same month, and Fenty Beauty is on track to outpace both Kylie Cosmetics and KKW Beauty in 2018 sales. LVMH also singled out Fenty Beauty as a big reason behind its 2017 revenue numbers, which improved 11% and its profit from recurring operations rose 17%—even though the brand was only on sale in the last month of the third quarter and the full fourth quarter of 2017. Fenty also helped Sephora continue to gain market share, particularly in North America and Asia.

Even though Kylie has more than double the direct audience of Rihanna, Fenty will likely become a bigger brand than Kylie Cosmetics, thanks to Sephora’s global distribution and the brand’s diverse appeal. Has Kylie finally met her match?

The challenges of selling a celebrity brand  

Kylie owns 100% of the equity in her business, while Seed Beauty owns none. Forbes values the business at $900 million to date. Reaching a $1 billion valuation took Bobbi Brown Beauty 25 years, and L’Oréal’s Lancôme 80 years, while it will likely take Kylie and Fenty less than five. On the surface, the Kylie/Seed relationship conveys how much leverage Kylie has over Seed: she brings the audience and Seed brings the products, but surely Kylie could go work with another manufacturer if she pleases.

But what would a potential acquirer actually be buying, and, by extension, what is Kylie Cosmetics, actually? An acquirer can’t buy Kylie’s personal audience of hundreds of millions of people. Instead, they would have to settle for buying the Kylie Cosmetics social accounts, which have a fraction of the following—and, since they’re for a brand rather than a person, they likely have a fraction of the engagement.

If Kylie sold her brand, she would spend much less time working on it, and the association between the brand and its founder would start to fade. Since the brand is named after her, she probably would license rather than sell the trademarks for her first name, since selling it would likely bar her from entering the cosmetics space ever again, and she isn’t even 21-years-old yet. She currently owns the trademark for her name across many beauty categories, but a potential acquirer would want a guarantee that Kylie won’t start a new brand with the same name to compete with the one she is potentially selling. Naming something after yourself is a huge challenge that has plagued the fashion and beauty industries for decades and shows no signs of letting up.

While it’s definitely impressive that the brand has only seven full-time employees, there is a point at which such extreme outsourcing can seriously hurt the prospects of selling a brand. Because Seed Beauty controls everything from sampling to production, Kylie Cosmetics doesn’t have any of these capabilities internally, which would go along with a sale and are attractive to potential acquirers. Sure, an Estée Lauder could slot in its own supply chain, but it wouldn’t make much sense to pay a such a high valuation for the company then.

This conundrum showcases how building a celebrity brand on such a centralized channel can backfire, if an acquisition is the goal. Kylie can’t sell her audience, doesn’t own her supply chain, and named the thing after herself. This takes the three big important elements of a brand—name, distribution, supply chain—and renders them somewhat unsellable. Kris Jenner has said in multiple interviews that selling is “always something that we’re willing to explore” but it doesn’t seem like they have many options for an all-out acquisition, at least at a price they would be happy with. Selling a majority stake would be more likely, since Kylie needs to stay involved (and incentivized) for the brand to continue humming.

Finally, the Forbes piece quoted an analyst who said that celebrity-driven brands can’t command the same multiples that less personified brands can because “of the volatility of relying on one name to sell a product” and the celebrity losing focus in the venture. Instead of selling for six times revenue, a valuation that the best beauty brands can command, which would make Kylie Cosmetics worth over $3.7 billion, the analyst and Forbes thought three times revenue was more likely, which would place its valuation at $1.9 billion (this contradicts Forbes valuing the company at $800 million today with a 20% discount). While it makes sense these brands should sell for less, attention loss isn’t the main justification. Instead, it’s because the actual makeup of these brands looks very different than most other brands, which aim to control and own a larger swath of their distribution, operations and supply chain.  

Kylie can get the most economic upside by continuing to build the brand as it stands for the foreseeable future. Forbes estimates she has already generated over $230 million in net profit, which, again, is impossible to verify. Rihanna, similarly, doesn’t have a company to sell, since she doesn’t control her brand—Kendo does—but has more freedom since the brand is not named directly after the name she is famous for, even though Fenty is her real last name. Regardless, Rihanna still has an immense amount of economic upside for the foreseeable future.

Celebrity brands and defensibility

Finally comes the question of defensibility, a topic we have long considered crucial yet misunderstood. Product, brand and distribution—the traditional moats for physicals goods brands—are no longer impenetrable. Launching new products is getting easier, building a brand is too, and buying it on the internet or in a store is possible with a few clicks and a credit card.

Instead, we’ve witnessed a bifurcation between having distribution and having an audience. In the old days, if you had distribution in Macy’s, that meant you had access to the Macy’s audience. But today, while anyone can open up a Shopify site and have the ability to distribute, not everyone can grow and keep an audience at their fingertips. The Shopify site itself also doesn’t come with an audience.

This is where celebrities like Kylie and Rihanna can excel and have some level of defensibility, since they will continue to build their audiences both directly through social and indirectly through the media, remaining tabloid fodder for the foreseeable future. This relationship is mutable, but the Kardashian/Jenner family does not seem to be going anywhere.

What’s interesting, however, is this speaks more to the defensibility of celebrity itself rather than that of the celebrity brand. As described above, Kylie owns her audience and Kylie Cosmetics doesn’t, which is an important difference. Kylie has a defensible audience that the brand can tap into as long as she is involved. If she sells it, this could go away. But as Rihanna shows, it isn’t just about who has the biggest audience, but who has the audience with the largest propensity to purchase. Rihanna might have a smaller audience but is building her company to attract customers who are historically underserved and ready to spend.

Going forward

For the .01% of celebrities at the top of their field, there is real money to make building their own brands with the right partners. But paradoxically, given the dynamic of building brands with celebrity founders, the best way for them to realize the value is to hold onto their companies, not sell them. Otherwise, they risk unraveling the fortresses they’ve built.