A Cosmetics Brand Defies Inflation With Its $3 Lipstick

A Cosmetics Brand Defies Inflation With Its $3 Lipstick

e.l.f. has kept prices low on its bestsellers while raising prices on two-thirds of its lineup

e.l.f. generally sells cosmetics at prices below those of brands that are sold in department stores and specialty shops. (Photo: Reuters)
e.l.f. generally sells cosmetics at prices below those of brands that are sold in department stores and specialty shops. (Photo: Reuters)

E.l.f. Beauty Inc., known for selling cheap-but-trendy makeup in drugstores, raised prices and rolled out higher-end products this spring when fast-rising costs threatened profits.

Left untouched: $3 lipstick.

Chief executive Tarang Amin said he made a bet amid escalating inflation to leave prices unchanged on e.l.f.'s cheapest items.

"We didn't touch a third of our items," Mr. Amin said in an interview, including bestsellers such as lipsticks, eyelash wands and mascara that cost just a few dollars.

Inflation in the U.S. is hovering near four-decade highs. Setting prices is among the thorniest issues facing CEOs today, particularly in the consumer-products industry, where relatively small price increases can send shoppers fleeing to rival products.

e.l.f., which stands for eyes, lips and face, generally sells cosmetics at prices below those of brands that are sold in department stores and specialty shops such as Sephora.

The low-price offerings draw in new buyers, Mr. Amin said.

"We wanted to be sure there was an entry into e.l.f. if someone was on a budget constraint," he said.

The Oakland, California-based company plans to stick with the strategy even if inflation doesn't abate, Mr. Amin said.

The company, which outsources manufacturing to China-based suppliers, says it makes money on even its lowest-priced items. It is also adding higher-priced items such as skin care to its lineup.

The 18-year-old company is in a winning streak even by the standards of the beauty business.

The industry has fared relatively well amid high inflation, buoyed by stronger demand for makeup, perfume and skin creams as Americans venture out more.

Budget drugstore brands such as e.l.f., L'Oreal SA's Maybelline, and Coty Inc.'s Cover Girl have especially benefited as shoppers feel comfortable splurging on a low-cost pick-me-up.

e.l.f., with about $400 million in annual revenue, posted a 26% sales gain in the most recent quarter, more than twice analysts' estimates.

Its share price is up more than 50% from a year ago, and the company recently passed Revlon Inc. as the fourth-biggest mass-market beauty brand in the U.S.

In July, Revlon filed for bankruptcy protection, squeezed by a hefty debt load.

The leaders of some retailers and consumer brands are starting to see signs of consumer stress after years of being able to raise prices without denting demand.

Executives at Kroger Co. and Walmart Inc. in recent weeks have said consumers are trading down to cheaper brands or cutting back on how much they buy.

"e.l.f.'s low prices and round numbers make price increases especially noticeable,'' said Scott Rick, who studies behavioral decision making at the University of Michigan's business school.

"People might not notice a difference between $15.99 and $16.99, because that's less memorable of a price," he said. "But on the smaller-ticket items that can draw people in, you don't want to draw attention to increases."

"Less-affluent consumers, particularly, don't seem to be in an overly forgiving mood, when it comes to price increase,'' Mr. Rick said.

Other companies have protected notably cheap offerings. Costco Wholesale Corp., for instance, opts to take a loss on its popular $1.50 hot dog and soda combo rather than raise prices.

Many haven't. Dollar Tree Inc., which sold most everything for a dollar in its namesake chain, last fall said it would start selling products at $1.25 or $1.50. McDonald's Corp. earlier this year began letting franchisees sell sodas for higher prices, after all sizes of the drinks were promoted nationally for $1 for several years.

e.l.f., one of the few major mass beauty brands with a loyalty program, took the unusual step of communicating details of price increases directly to consumers.

In March, the company said in an Instagram post that it would raise prices by $1 on most of its products, explaining to consumers that costs were rising and some product prices would stay the same.

While the lipstick is still $3, the company has been able to recoup added costs both through the price increases on other products and by adding higher-end offerings such as skin-care products, like a three-piece hydration set for $34 -- pricey by e.l.f.'s standards.

Prices on average are up nearly 10% across the company. It has ramped up spending on advertising in recent months and is seeing growth across a range of demographic groups, Mr. Amin said.

"Their operations are so different from their mass competitors," said Bank of America analyst Anna Lizzul.

With the pricing moves, she said, "They did several things that were unique and make them especially well-positioned with consumers."

The company's presence in China has proved an advantage, Ms. Lizzul said. About 80 of e.l.f.'s 300 employees are stationed there and have deep relationships with suppliers, while avoiding long-term contracts that tie them to any vendor.

The result, Ms. Lizzul said, is a more flexible operation that has been able to adjust to demand shifts and supply-chain snags that have hurt rivals. Other big mass-market brands do more of their own manufacturing.

The company in August raised sales and profit growth estimates for the fiscal year ending March 31.

Industry analysts expect e.l.f.'s sales growth for the period will be double that of the overall industry. Meantime profitability has grown and margins have improved in recent quarters.

Standing in the makeup aisle of a Manhattan CVS, Bindi Sawant was drawn to the e.l.f. display's wide variety of makeup brushes.

An image consultant visiting New York for the summer from Mumbai, Ms. Sawant, 44 years old, has an extensive makeup regimen and is considering adding e.l.f. after seeing its $7 eye shadow palette.

"Wow," she said. "The pricing is really good."

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