Modern Retail Rundown: L’Oréal scoops up Aesop, American Eagles scales back supply chain investments & Chipotle vs. Sweetgreen

0:05Hello and welcome to the Modern Retail Rundown. I'm your host, senior reporter Gabby Barco, and I'm here with editor-in-chief Kale Guthrie-Weissman. Good morning, Kale. Hey, Gabby. It's good to chat with you again. So great job with Ana last week. I thought it was a great episode. Yeah, love having Ana on. Love her takes. So every week we break down the biggest headlines in the retail world. This week we have a lot of fun grounds to cover. First, we'll be discussing Aesop's acquisition, and then we'll be talking about American Eagle's supply chain arm, which had some shakeups. And finally, we'll be talking about Chipotle's fierce protection of its trademarked branding.

0:49All right. So first off, very, very intense stuff. First up, let's talk about the Aesop acquisition. This was a really big deal this week. L 'Oreal announced that it will be acquiring the skincare cosmetics brand for$2.5 billion. This is L 'Oreal's biggest acquisition ever, which put into context is, I think it exceeds even their last, YSL Beauty was their last one, and that was at$1.7 billion. So just to give you context into what everyone feels ASOP is worth. So yeah, Cale, shall we dive in and talk a little bit about how Aesop got here from a branding point of view, from a revenue point of view?

1:38Sure. So, I mean, Aesop was not an independent company before this. It was actually purchased by the Brazilian beauty giant Natura, which they own a bunch of other companies like The Body Shop and Avon. And so I think the story goes that Natra had purchased a 65 % stake in ASAP in 2012, and then in 2016 just formally acquired it to be part of its entire portfolio. It was really clearly a more luxury play because ASAP is, you know, that's the brand that you find in nice hotels. That's how you know it's a nice hotel, right? Or a bar. Or a bar or a gym, I guess. If you go to a gym and they have ASAP, that means it's a good gym.

2:21Yes, exactly. That's our barometer. So I think that like, it's an interesting, it points to two things. One thing, L 'Oreal is clearly trying to grow its portfolio and buy these finer companies. It also shows some difficulties at Natura because clearly they needed to offload one of its nicer brands and also probably make some money so that it could remain profitable. So there are a few things going on here that I think are super interesting. But yeah. And then I think just as far as L 'Oreal being interested in ASAP, you know, it's a brand, it's an Australian company that was founded in 1987. But, you know, I feel like if you ask any millennial, it was probably founded in, I don't know, the 2010s, just based on its trajectory, right?

3:12Because that is sort of, you know, at least here in the US, it really took off in the last 10 years or so. So, I mean, I think I was reading that their revenue went from about$28 million in 2012 to$537 million in 2022. So you don't get there by not being beloved by a certain cohort. Absolutely. And I think that ASOP as a brand fits into a bunch of very on-trend things right now, I guess you could say. Like it's part of wellness. You know, it's nicer soaps. It's nicer body products. And it also just taps into the whole, I guess you could say better for you, but also luxury branding that has been really resonating, which, you know, we at Modern Retail talk about things that are not necessarily inflation proof, but like maybe more inflation resistant.

4:05And it seems like a lot of these nicer types of wellness or body care companies are doing well, specifically in the funding space, in the acquisition space, but also just in what people are still buying, what they're willing to shell out for, even though economically times are tighter. Mm hmm. Yeah. And we should mention that, of course, a lot of that growth happened to come under Natura. You know, they helped them scale a lot over the last few years, opening a lot of new stores, really penetrating and doubling down on certain urban markets. So I think there's something to be said about working or trying to grow a brand like this under an umbrella company as opposed to independently, because at some point, if you're trying to be global, you probably need those resources.

4:54And so it seems like this transition to L 'Oreal is going to be building on that. I think, for example, China is a really big market that ASAP started to go into last year. They opened their first stores there on mainland China in 2022. And it looks like I think there was some hints that L 'Oreal will help them continue to push there because that's really a huge opportunity for them. Yeah, and I would say that ASAP was a really good asset for Natura. Like, I think that it was a profitable asset, Natura said. It contributed 7.5 % to its revenue and almost 25 % to its EBITDA last year. This is according to a recent S &P Global Ratings note.

5:38But it's clear that on the Natura front, that wasn't enough and that it needed to probably get a lot of money and quick. And so I think its debt stood at$1.4 billion. And so selling something for more than that was going to help its debt. But yeah, it seems like if you're in this space and you're especially a bigger umbrella player, you're looking for a brand like Aesop that's resonating well, that can sell in many different markets, that is growing and has a certain type of brand cachet, which Aesop definitely has. personally i've noticed this a lot in the last decade where you know big beauty or cosmetics conglomerate wants to have one of these you know really you know a brand that resonates with of course there's like more of the high-end luxury or high fashion set um at the same time it's growing among mainstream or uh mass market uh customers because of course if you could upsell someone why not you know from the the i mean of course l 'oreal also owns brands like maybelline which was more of a drugstore brand.

6:40But I think about the parallels of Estee Lauder really taking La Labo to the next level. That was also an independent brand, but only for a couple of years. They have a really interesting history of just being this like artisanal French brand that now is part of this giant international conglomerate. Yeah. And I would say that also with L 'Oreal specifically, I'm looking right now at his last earnings. I don't know if it's the last earnings, but what was posted in October of 2022. And it's, you know, L 'Oreal Lux, which is some of its nicer players like Lancome and Kiehl's. They grew, they grew 4.6%, but it was way below what people thought it was going to grow at 9%.

7:21And so it seems like L 'Oreal is trying to sort of put some juice into this area of the business so that it can see the growth that it really wants to see from these nicer products. And so it makes sense whether or not it'll be a panacea for L 'Oreal remains to be seen, of course. Yeah. Yeah, we'll see. And of course, as the biggest cosmetics company in the world, they're sort of a leader on this front. So it'll be interesting to see where they take Aesop next. I actually just want to make one more note, which I think is really interesting, with Natura. I think Natura is in a really big bind because if you look at the other two brands that are its biggest brands, they're The Body Shop and Avon.

8:03And it purchased Avon. I'm trying to remember when, but not that long ago. It was sort of a weird – oh, it purchased it in 2019 in a stock deal for$2 billion. And like, who thinks about Avon anymore? Which isn't – I mean, maybe in the South – you know, Natra's Brazilian-based, maybe in South America it resonates. But analysts that Modern Retail actually spoke to for a story about this pretty much are like, that was a huge mistake. Why would you invest in this brand and spend that much money in what was a huge company in the 80s and 90s, maybe early 2000s, but clearly does not have the force it did today that it did before.

8:45And that's what they're putting all of their marbles in. I don't know. It's an interesting thing that that's the asset they're keeping, though I imagine they wouldn't be able to sell it for as much as they sold ASOP. Yeah, and of course, Avon has a very different business model than these other brands. Yeah, a little bit of a question mark there. But so on to, you know, less glamorous news. I want to talk about some. Yeah, some news coming out of American Eagle Outfitters. They have, you know, I feel like for a few months there in 2021, we really saw them investing really heavily in supply chain, sort of first party and, you know, a platform that could be licensed to other retailers.

9:35this was through an acquisition of Quiet Platforms that really has helped them actually ramp up their fulfillment and help shorten delivery times and all that. So all good things for their e-commerce business. But of course, like other retailers, this is a space that's slowing down. So yeah, Kale, do you want to give us a little insight on what happened there at Quiet Platforms? Sure. So first, quiet platforms, nay, quiet logistics, which if you want to really go deep into the annals of modern retail, I wrote a profile of them in 2019. I'm fascinated by this entire space. They were really an early player in the logistics fulfillment space that we're focusing on robotics and pretty much saying you can automate a lot of it and that will save a lot of your bottom line.

10:24They were bought in 2021 by American Eagle for$350 million. And the idea was this would both help American Eagle with doing e-com fulfillment, doing quick delivery. I'm pretty sure micro fulfillment is a big thing with Quiet and also these very tech forward spaces that make it easy to fulfill products in a quicker span of time. The news is that this week, a bunch of their executives have stepped down. So the president of Quiet Platforms, who is also American Eagle's chief supply chain officer, is exiting immediately due to, quote, changes within the Quiet Platforms organization. And then the chief operating officer of Quiet Platforms left the company last month.

11:11And this was a really big thing for American Eagle. You know, this was about quickening their fulfillment, but also the fact that they were investing in this invisible but important part that they could work with other companies on. And they were touting it as a really big thing. A year ago, I want to say in 2021, or beginning of 2022, they called their acquisition of Quiet an anti-Amazon move, that it helped them, quote, do more with less, and that it would help them contribute an approximately 35 % reduction in delivery times. All great things. Let's go forward to a year now. Now it's not doing as well.

11:49American Eagles chief operating officer, Michael Rempel, he said that quiet platforms grew nearly 40%. Great, but its margins also grew. And so like, if you are in the 3PL, the fulfillment logistics business, that requires a lot of investment. So even if your business is growing, so too are all of the investments around with it. And so the margins of the business, he said, were below what we expected. I don't know. I think that it's a, we've been covering a lot of the shakeups in the 3PL and fulfillment space here at Modern Retail. And I think that this is a really great example of what's going on where a lot of companies invested a lot in these types of platforms were trying, thought that this would be the way to save their business, but it's requiring a lot more of an investment and they're not seeing the return they thought they would see.

12:36And that's happening this year specifically when we're in the midst of an economic downturn. So there are a lot of different things at play that I find super interesting. But the fact that this huge shakeup for one of the most vaunted acquisitions in this space, I think, tells a greater story about what's going on in the overall e-com fulfillment space. Mm hmm. Yeah, it was a three hundred and fifty million dollar acquisition not too long ago. And so this, you know, I think it to me always speaks to, you know, the changes that are happening so quickly, the scaling back in these investments happening just speaks to where we are economically and the fact that maybe that's going to be taking a backseat.

13:17They did say that they want to grow this segment profitably. So I wonder if that means more so having other retailers use it or, yeah, sort of working on the third party. Because, you know, they also work with retailers like Kohl's and Peloton. So it seems like they're trying to grow that side in order to, you know, improve those margins. It's true. But in order to grow this type of thing, you have to grow the actual fulfillment centers and the technology underlying them. And so that costs a lot of money. And I would love to know exactly what it was. Was it that they weren't making enough deals to grow apace with these?

13:56Or the economics just didn't work out from the beginning? I don't know. I wrote a few weeks ago about just overall issues in the 3PL space, about how there are a lot of companies that claim to be tech-enabled and are very venture-backed. But brands, especially small to medium-sized brands, are still having a lot of problems. And they seem to be running into the same issues that they would if they were using just any fulfillment platform. And so it seems like there's a lot of innovation happening on the press release pages. But then when you get down to the economics and you see what's actually happening, it's yet to hit where it needs to be.

14:38And I think that's being exacerbated because e-com sales are not growing at the same rate that they were a year ago. Because people are tightening their spend, more people are going into stores than they are buying online. There are a lot of different things that are making it so that what was once a really smart investment a year ago that they thought would be a great way to save money as long as these businesses were able to scale that aren't being proven out right now. And it'll be interesting to see where it will go in the next year or so as, you know, maybe some of those factors will impact some retailers even further.

15:18her. I want to move on next to our last story of the day, which is revolved around Chipotle. This is an interesting one. I, you know, I love a trademark story, but you want to, you want to tell us about why Chipotle took out the pitchforks and went to court. They took out the pitchforks and they went to court. I love this. I love Chipotle. You know, I love sweet green. I love it all. But we love it all. We are not biased here. If it's fast casual, Gabby and Kale are getting it. So sweet green, for those who don't know, the fast casual salad player, if you want a$16 salad, do I have a place for you?

16:02They unveiled a new product. I think last week or the week before, it's a really new product. And it was called Chipotle Chicken Burrito Bowl. And then Chipotle was like, what? And so Chipotle sued Sweetgreen for trademark infringement. According, this is from CNBC, I'm quoting it, Chipotle's lawsuit claims that Sweetgreen advertisements for the menu feature Chipotle in a font similar to the burrito chain's stylized logo and sometimes uses a shade of red similar to Chipotle's trademark adobo red. Sweetgreen's website features the product name larger than any other identifying feature that it ties back to Sweetgreen.

16:41Chipotle argues in the complaint. The complaint also notes multiple times that Chipotle and Sweetgreen are both competitors in the fast casual sector, which is very, very true. I mean, I would say that, you know, they definitely have overlapping customers. I would say their branding and their price points are, one could argue, slightly different. But I don't know. Maybe I'm wrong about that. Maybe I'm, you know, splitting hairs. But I think it's really interesting that Sweetgreen had a Chipotle chicken burrito bowl, which does sound essentially like something you would get from Chipotle. It has, I will say, already been settled.

17:15Chipotle has changed the name. But I think it's a really interesting, I would love to know what the idea was behind it and how no one saw this coming. right um yeah i mean again like we're we're just sort of analyzing this in uh hindsight but i came across this ad and i did not really think about chipotle to be honest what i said it doesn't it doesn't it's not you know it doesn't have the same obviously the logo or anything and of course just even the colorway and the aesthetic is very different as sweet green so you know it just kind of it looks more honestly it just looks more like a salad than it does even a bowl to me at least so So I just thought it was interesting that, I mean, like, does Chipotle have a team that just looks out for any sort of likeness out there?

18:01And I think it just speaks to how serious they are about the fact that, I don't know, I guess like they've cornered the market on Chipotle sauce. You know, you can't know what else is allowed to use it. Yeah, I mean, I will say it does make an interesting question about the word Chipotle. Like Chipotle is an ingredient. I use Chipotle peppers in a lot of my cooking at night. And so what specifically made this trademark infringement compared to other things, I guess it has to do with the fact that it led with the word Chipotle because the new name is now Chicken Plus Chipotle Pepper Bowl. So it's more explaining it as an ingredient and not a branding.

18:38That is my, you know, non – I did not go to law school, but I imagine that is what they changed. But I'm sure Chipotle is keeping an active eye out on all of its perceived competitors. And I think Chipotle is doing pretty well when it comes to sales. It would be interesting to see. I think that the fast casual segment is a difficult one because they go up, they go down. They're very, very competitive. They're all vying for the same type of commuter market. So I imagine they are all keeping very, very heavy tabs on each other to see what the others are doing. And if they think one is encroaching on the other's space, they will act very, very swiftly.

19:21Mm hmm. Yeah. And I think it's it's interesting. I just want to touch on this for a little bit, but it is interesting that we talk about price points the same way we did a few years ago, because if you actually look closely at menu items, at least in big cities where I feel like you can't really get a Chipotle bowl in New York for less than ten dollars that are not tried lately. But it is interesting to think about in the last few years, especially with, you know, raising menu prices, I do think Chipotle positions itself as more of a premium brand these days. They think of themselves as very digitally focused with digital orders and online orders.

20:03I wonder if some of that is maybe giving them more... There's a little bit more of an overlap with places like Sweetgreen than maybe a fast food place. Yeah, I think that's very right. I also think that they all a lot of these companies, both Chipotle and Sweetgreen are early entrants into the digital ordering space. They, you know, everyone knows about, or not everyone, but if you're in New York and you worked at an office in 2019, you knew about the Sweetgreen app. And that was the only way so you didn't have to wait in line. Chipotle also was, you know, one of the early players where you could order online and pick it up.

20:38You know, I think both of them are not seeing the gains that they wanted to see, especially recently. So I'm looking at Chipotle's earnings. They, you know, They saw same-store sales rise, but they didn't hit. They rose 5.6 % as opposed to estimates of around 7%. And they've been launching a lot of new higher-end products. I know that one of the new ones is Chicken Al Pastor, I think. I just saw it because I went to Chipotle the other day. They had a new garlic guajillo steak menu. It seems like they're trying to show themselves as a nicer place that has finer products as opposed to just being the quick place where you get a quick burrito bowl.

21:18Similarly, I think Sweetgreen did not miss its revenue targets. I'm trying to scan it right now, but it did not look great. I think net sales climbed 29 % to$124 million, which was not the$129.4 million that Wall Street wanted them to. So I think that they're both trying to launch new products. They both are trying to reach different types of lunch and dinner eaters, but also they both are scrambling to hit the growth that their investors want them to hit. So it's a gnarly time for fast casual. So that's all we have for you this week. Don't forget to rate and give us a review on Apple Podcasts, Spotify, or wherever you're listening to us.

22:04Also, don't forget to subscribe to the Modern Retail Podcast to hear interviews with industry leaders every Thursday and come back every Saturday for the Modern Retail Rundown. Gil, do you want to give us a preview of who you have on next week? Sure. I'm talking with the founder and CEO of Argent Workwear, Sally Christensen. I'm excited to talk with her about the state of workwear, the state of apparel, all that jazz. So tune in and listen. Great. Exciting. All right. See you soon.