Beauty’s next investment boom: Facials, waxing and injectables

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By Daniela Morosini

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Beauty services, such as facials, waxing and tanning, offer a foot in the door of the beauty space, a scalable business model and good repeat business — as a result, clinics and salons have started to catch the eye of Wall Street investors. While the economic downturn is squeezing many consumer wallets, investors remain bullish about the resilience of services.

"Consumers are spending a lot more money and time on beauty services, especially millennials and Gen Z," says Lauren Leibrandt, a director in investment bank Baird's consumer division. Baird was the bookrunner on European Wax Center's IPO, which valued the company at $180 million in 2021. Research from consulting group McKinsey & Co indicates that the US beauty services sector is expected to grow by 7 per cent per year up to 2027, per pre-pandemic levels.

Fast facial clinic Heyday closed a $12 million Series B extension round in December of 2022, having already raised $20 million in 2021. Private equity behemoths L Catterton announced in January that their portfolio company Fyihealth Group had completed a merger with the Functionalab Group, with the resulting merged company becoming the largest aesthetic medicine network in Canada with 68 clinics. Also in 2022, private equity giants KKR took a minority stake in SkinSpirit, a chain specialising in injectables. However, the boom is resulting in a marketplace that gets more saturated by day, leaving companies with a bigger challenge: differentiating their offering and services enough to lure in guests without starting a race to the bottom in terms of price.

By Rachel Cernansky

By Maliha Shoaib

Danny Kenny, a principal at growth equity company L5 Capital Partners who led Heyday's 2022 funding round, says he expects some pressure on the market as people rein in some discretionary spend, but that he expects beauty services to be well-cushioned. "People don't give up their habits," he notes. "They’ll wait a year or two for a new car or another big-ticket item, but not the little luxuries."

When there's a proven concept, Leibrandt, Kenny and Nadia Pelaez, a director at investment bank RBC Capital Markets who leads beauty and wellness, all noted that beauty services businesses can be straightforward to scale and thus easy to demonstrate to investors. "Unlike beauty products, wherein investors have to really bet on a specific brand and hope that it can beat out the competition, once a clinic has a proven concept, it can be much more predictable in terms of how quickly the business can grow," says Baird's Leibrandt. "You start with a certain number of units open, and then you can more easily predict that you can maybe open five to 10 more in a year, as long as you’ve proven portability, and that your facial bar that's popular in New York will also work in Texas or Florida."

"It comes down to profitability and repeatability," says L5 Capital's Kenny, noting that a single clinic led by a master aesthetician may struggle to grow as all the expertise is concentrated around one individual. With Heyday, a standard flat-rate 50-minute facial is offered, which is customised based on the customer's needs, with the option to pay for add-ons such as microdermabrasion and light therapy. Kenny says Heyday plans to open 20 more doors this year, having opened 10 last year, and the 10 they originally launched in. "They’ll have four times the footprint they did when we invested within about two and half years," he adds.

Courtney Claghorn, president and co-founder of Sugared + Bronzed, a tanning and hair removal chain, said that she and her husband and co-founder waited until they had 10 locations before looking for external funding. "At 10, we felt like we could really say we had a proven concept and not just a handful of locations," she explains. After vetting 12 private equity firms, Claghorn selected Main Post Partners in 2019, a consumer-focused firm that has also invested in beauty brands such as Milk Makeup and Too Faced. "The investment helped buffer us through the unexpected difficulties of the pandemic. Now, our focus is opening 50 stores within five years," says Claghorn. Sugared + Bronzed also received funding from Starbucks former chairman and CEO Howard Schultz's family office, Schultz Capital Partners, while Barry's Bootcamp chief executive Joey Gonzalez sits on the company board.

By Rachel Cernansky

By Maliha Shoaib

Dr David Jack, founder of the eponymous skincare brand that also runs clinics offering facials and injectables, says he is open to taking on external investment for subsequent future clinics, with a goal to have more doors to offer both medical-grade facials and injectables throughout the UK. "There aren't many doctor-led chains in this market," he notes about his point of difference. "There are facial bars, but they don't have the backing of a doctor to give that level of service." In his new Belgravia clinic, Dr David Jack has hired four doctors with a minimum of five years experience in cosmetic practice to carry out injectable treatments, while facialists will need ten years of experience. The cheapest treatment is £70 for an LED light therapy facial.

Further research from McKinsey indicates that profit margins for services can be anywhere from 5 to 20 per cent, whereas for beauty products, they can reach from 55 to 80 per cent. This disparity has led many businesses, including Dr David Jack's, Sugared + Bronzed and Heyday to also sell products, be that own-brand or third-party.

By Rachel Cernansky

By Maliha Shoaib

HydraFacial, which went public via a SPAC in 2021 that valued the company at over $1 billion, announced in 2022 a three-year plan to double sales and at least triple profit. The company, which makes a patented facial system which uses a proprietary system to deep-cleanse the skin without the common side effects of irritation, sells both the delivery system and consumables to clinics and spas. Businesses must purchase a HydraFacial machine, and then buy consumables in the form of cartridges and other parts of the system to be able to offer HydraFacials.

"When we train aestheticians on the system, they typically go back and buy double-digit levels of consumables," says chief executive Andrew Stanleick. "If they already have one system in their practice, they’re about 50 per cent quicker to buy a second or third system." Stanleick adds that their brand awareness is currently at less than 10 per cent as the company has historically focussed more on B2B marketing. "Sixty per cent of our business today is with doctors and plastic surgeons," explains Stanleick. The company has now owned consumer-facing "experience centres" in London and New York where consumers can come and have a complementary treatment to learn more about the brand. Further expansion into EMEA and APAC regions is slated to help bolster growth.

By Rachel Cernansky

By Maliha Shoaib

Offering subscriptions or membership-based plans often helps a chain's bottom line, as they have loyalty baked in. Sugared + Bronzed say their membership has increased 91 per cent since December 2019, while Heyday offer membership plans at $114 a month that gives participants one facial a month, plus 50 per cent off add-ons and a discount on retail products.

While beauty brand founders have to navigate a saturated market place and fight for consumer attention on social media, beauty services companies have to negotiate real estate, hiring specialist staff and the potential for disgruntled customers, or in extreme cases, medical malpractice lawsuits. Dr Corey L Hartman, a board-certified dermatologist based in Alabama, says when dermatology clinics — often popular with private equity — face unsustainable pressure to grow, patient safety can be compromised.

"Injectables are medical treatments and they can affect the muscles or blood vessels and have unintended consequences when not carried out with the correct expertise or supervision," cautions Dr Hartman, noting that salaries tend to be the biggest outlays for clinics, hence why outside investors may be keen to employ more of or maximise the time of lower-paid staff members such as nurse practitioners rather than physicians to carry out treatments. Doctors and other healthcare professionals in the sector have begun to draw attention to the dangers caused by aggressive financiers, highlighting that patient safety can be at risk.

By Rachel Cernansky

By Maliha Shoaib

Clinics are also left exposed by the popularity — or lack thereof — of the services that they carry. The supermodel Linda Evangelista sued Zeltiq Healthcare in 2021 for $50 million after suffering a rare side effect following Coolsculpting treatment, a Zeltiq Healthcare procedure. An FDA-approved "cryolipolysis" (fat freezing) procedure, Coolsculpting is a popular and widely-available treatment. Evangelista, who settled the lawsuit with Zeltiq Aesthetics last year on undisclosed terms, claimed the treatment left her "brutally disfigured" and made her unable to work.

Sourcing new locations can also be time and cost-intensive, says Baird's Leibrandt. "These chains have to be very selective and ensure that the markets and neighbourhoods they pick can support a successful store." As she notes, there are only so many markets that can have the right population density and demographic to support such a clinic, hotting up competition between brands. As such, and against high customer acquisition costs, investors and founders alike may worry about a race to the bottom in terms of price, as chains look to undercut one another to recruit and retain customers.

What's more, the price point of most chains sits somewhere between an Upper East Side dermatologist and that of a strip mall value chain, with treatments usually starting in the high double digits. Straddling the divide between affordable enough to recruit new customers in a downturn and premium enough to convince them to keep spending on a perceived luxury service is no mean feat.

RBC's Pelaez's advice? Consistency is key. "Even if you’re operating a value chain, really great customer service from the check-in through to check out is vital," she says. "From there, ensure that you have a consistent customer experience across all your locations so that a customer who maybe visits multiple locations always feels taken care of."

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