Rundown: Beauty sales slow down, retailers late on vendor bills & food startup drama

0:05Hello, everyone. Welcome back to the Modern Retail Rundown, our weekly news recap show.

0:29I'm what we're going to be talking about, do a little detour to Trader Joe's, because we are going to be talking about it a little bit later in the show. And it's kind of going through a little bit of a transformation. Do you want to give your taste? Yeah, I saw a TikTok recently, and so many of my thoughts are predicated by me watching a TikTok, which is kind of embarrassing. But I guess, And this is maybe very, very local to New York, but they have refashioned their old Trader Joe's wine space, which was a very important part of the Trader Joe's brand in New York City. There were a couple of wine stores.

1:09They were very affordable. They're all gone now. But now there's a new Trader Joe's, I guess, like Grab and Go. I can't remember exactly what the name was, but they're taking the spot that was the Union Square wine store. and putting what it appears to be products that they've always sold in Trader Joe's. But the idea is that it's a beverage. It's a bag of chips. It's a sandwich and putting it in there. And so I don't know. There's a lot of stuff going on in convenience. There's a lot of focus on new types of store formats. And it seems like Trader Joe's is trying to do that. What are your thoughts?

1:45Do you think that's a good idea? Good idea? Maybe. Yeah. I mean, I think the first thing I think about is like their traffic flow might improve, but maybe not. Maybe, maybe not. But I do think like there is a cohort of their customers that maybe gravitate towards, yeah, those sort of snacky snacks that might go in there. But I don't know. It's right next to it. I don't know if that really makes a difference. I mean, I wonder, I think like for people who don't live in New York, going through Trader Joe's is awful. Like, like there's no other way to put it. Like you literally grab a basket and you get in line and shop while you're in line because it's so long.

2:28And so maybe this is the idea is if you're if you're someone who works in, you know, lower Manhattan, you can get your lunch there and hopefully the line will be less long. The TikTok made it look like there wasn't a very long line. So maybe that's the idea. I don't know. But new store formats, always have our eyes open for those. Yeah, the like grabbing a basket and your hazmat suit and your gas mask is sort of the dream. Yeah, especially because people don't have cars here, so you can't really do the big hauls. But we'll see. Yeah, I'm kind of curious about it. Yeah, the move has always been bring two people.

3:07So you have one person in line and then the other person like runs and grabs the tofu or whatever and then comes back. All right. Well, not all of us have two people. So take that. Yeah, I know. No, this was me and an old friend of mine. That was what we would do. Okay, I see. And then if I was alone, I just wouldn't go. Yeah, no, it's true. All right. Well, we can get into the context of our Trader Joe's talk. But first, this week, we're going to talk about a few different stories. The first one is the beauty sales seem to be finally decelerating, not by a lot, but, you know, beauty maybe is not as resilient as a lot of people thought.

3:48And then we're going to be talking about retailers that are late on paying their bills. Dun, dun, dun. Yes. It's an interesting phenomenon that's very common, but there is some data showing that it's actually becoming a little bit of a problem for a few different retailers. And then finally, we're going to get into some food startup drama this week. If you haven't heard, there is a chili crunch brand's beef happening. And tangentially, we're going to be talking about, you know, the sort of copycat culture in this CPG startup world and how Trader Joe's also plays a part in it. First, let's talk about beauty.

4:33So this week, Alta's CEO made some interesting comments about their sales slowing down. And he basically said that in 2024, it's just not going to be as big of a year as it has been the last few years where beauty is just, you know, has kind of continued to do well, despite other categories not doing well at all. It's like the lipstick index of it all. But, yeah, I think it sounds like Ulta. And then, of course, because Ulta carries a lot of different big beauty brands, they also are impacted by all of this. It's just slowing down. So this is what he said. CEO David Kimball, we've been seeing so far is a slowdown in the total category across price points and segments.

5:23It's a bit earlier and a bit bigger than we thought. And then he also mentioned, obviously, some, you know, credit card debt, geopolitical conflicts and the election, of course, as some of the factors that are maybe weighing on their shoppers. Although we'll get into it a little bit later. People are putting on makeup because they have to vote this year? Well, I don't know, because it's not the tweens, right? It's not the 13 year olds that are buying beauty products. Or maybe they are. I don't know. So, yeah, it just he said it just kind of creates this soup of activity in our consumers while they're trying to navigate through all of this.

6:03And, yeah, of course, as expected, it did send Alta's shares tumbling and then a few others, even Elf Beauty, Cody and Estee Lauder. What are your thoughts? What was happening here? I mean, in some ways, a slowdown of this category was bound to happen. This has been the one category that has been sort of going up and to the right. Ulta and Sephora have been the leaders in the space. And also, because they have been doing so well and have been building out their partnerships, as well as locking big, you know, getting new brands there. If you talk to a beauty brand, if they say that they are going to be selling an Ulta and Sephora, that is essentially them saying, we're doing really well and our sales are going to grow for the next few years to come.

6:56And I'll also add, you write a lot about the VC ecosystem and how brands are doing, whether or not they can raise money or not. And the one outlier for most consumer brands are not doing very well, but VCs seem to be pretty okay on some beauty brands, specifically because the demand has been so high. But demand can only continue accelerating for so long. And so this isn't shocking, but I do think it is kind of a right sizing of the overall industry. And I mean, like Ulta is one of the major players. I will be interested to see what happens with Sephora. Like, I feel like that's the other end of this coin.

7:34And like if Sephora says something similar, then I believe that that's something that more analysts and more industry onlookers should be paying attention to. But definitely interesting and not, you know, not the narrative that has been said for the last many, many months. Yeah, well, we will get into Sephora because they're in a little bit of an interesting spot, too. But I do want to clarify that when he says slowing down, it means the sales are going to increase at a, air quotes, moderate rate in the mid single digit range. So it's not like they're declining really at all. It's just that they're not as strong as they have been.

8:11But I think that that is what, to my point earlier, I think when someone is doing amazingly, they would just want not only sales to continue growing, but sales to continue accelerating. And that is not a forever phenomenon. Sales have to, you know, you do want sales to grow year over year, but they can't keep growing at a heightened rate every year, especially in the climate we're in now. And so all of this is to say is that this isn't what he's saying is nowhere near a doomsday sentence for Ulta or for the beauty category. but it sort of had to hit this point at some time. And so it's not shocking that it's now.

8:46Yeah. And for Ulta specifically, I thought it was interesting that he mentioned they do have really stiff competition in specific categories, prestige makeup, which obviously is on the higher end and hair care. And that makes sense because if you kind of connect the dots, obviously Sephora is a really big player in this. They've really upped their hair care assortments in the last couple of years. And so whereas Alta really was known as just like the bigger assortment, sort of like they would, you know, they carry both drugstore type of brands and prestige. And so I thought that was kind of interesting.

9:22And then also, you know, their margins are being squeezed because they have just higher supply chain costs. And they've been doing a lot of promos, if anyone's noticed. It's very, very promo heavy this year. I have not. Well, you don't have the Alta app on your phone. I don't think I've ever stepped foot in an old tough, I'm going to be honest. But that's a me thing, not an overall consumer thing. No, I mean, and of course, it's just like such a major American beauty retailer. But for fiscal year 2024, the range they're expecting is$11.7 to$11.8 billion in sales versus$11.2 billion in 2023. So, you know, still growth.

10:05And I think your point is interesting from my, you know, from what I understand about the competitive landscape is that Ulta has been much more of a mid-range player, sort of like it will have the lower end and some of the higher end. And I think Sephora has been able to really get its niche thanks to, and correct me if I'm wrong, but like, it seems like, A, it's tapped into, like, it's very big on TikTok. A lot of people talk about their Sephora hauls. They probably talk about their Ulta hauls too. But also, like, I think it has some, it is known for maybe carrying some higher end brands. And similarly, like, you know, you look at other retailers that are flailing, but they're pointing to their sort of higher end beauty area, like Macy's not doing well, but it's trying to double down on Blue Mercury.

10:52And so I think maybe it's like Ulta, this is not to say Ulta is doing poorly, but it is also a very, very big retailer that represents a wide range of brands and isn't necessarily as specialized, especially with the other retailers that are focused on more higher end or have a certain type of brand connotation. That's my read, but you know it better than me. Do you think I'm wrong? I actually, I think that's a pretty popular notion. I will say, though, like I think Sephora has that sort of like LVMH sheen that makes it feel that way. It's French, obviously. But like, for example, which I found this out recently, Sephora doesn't carry Chanel Beauty, but Ulta does.

11:35So there is and Ulta has done a pretty good job with, you know, kind of bringing on these sort of DTC brands and more prestige brands. It's just that and that's been pretty recent, obviously, in the last few years. So that's why it's been able to really compete so well with Sephora on that front. And so, you know, when they say competition, they mean that there's also all of these retailers. And like you said, the department stores, I mean, Sephora, their Kohl's business is doing really well. So that's a big indicator. So yeah, why don't we actually, maybe you can give us a little Sephora check-in on that because it does seem to be kind of the opposite of what's happening at Alta right now.

12:17I mean, Sephora, it broke record sales in North America at its most recent earnings. And so, I mean, Sephora is doing very, very well, or at least up until now it has been doing very well. And as you mentioned earlier, a lot of that has been partnerships. So it's Kohl's Shop Within Shops. has been a very big thing that has also risen Kohl's, like been a very, like a good thing for Kohl's, but also been a very good thing for Sephora. And so I think that maybe it's those strategic areas that have been helping it continue accelerating growth, but I don't know. Yeah. Yeah, it makes sense. And like we said, I think, you know, with Ulta, they are still going to keep opening a lot of stores, new stores in Target because they have that partnership.

13:02So I'm sure it'll still continue to grow. So it's just like you said, it's just kind of bound to happen like it did in every other category. But who knows? Maybe I think the one thing that kind of wrap up the thing that beauty has and like wellness, whatever, all of that, all of those categories under this umbrella is that the trends tend to kind of re-up every couple months or weeks, it feels like, because of social media. You know, like you just mentioned, TikTok and Instagram hauls. And so there seems to always be something fueling those sales. It's kind of fascinating to watch. On to other retailers that are struggling right now.

13:47We mentioned that there are some companies that are late on their bills. So who is guilty? You know, let's bring it up. So there's this data from this intelligence firm called CreditSafe, which essentially monitors payments, trade payments from across the globe. They mentioned that companies like Peloton, Sex, Express, Bath & Body Works have all routinely failed to pay their vendors on time. in the last few months, Bed Bath & Beyond, of course, as we know, filed for bankruptcy about a year ago. But in the lead up to that, it was missing a lot of payments. And that's when you start to notice shelves are empty in a retailer.

14:34It's a very big indicator. I always mention Rite Aid just now got ice cream back, but for about six months did not have ice cream. It didn't pay its ice cream vendors? Yeah. And like on a personal note, maybe for maybe it was a good thing for me because, you know, those 10 p.m. ice cream runs were not happening. But yeah, I think, you know, we saw we see it's a pretty, pretty popular pattern. Actually, maybe you can tell us a little bit, Kale, about like being, you know, 10 days, 15, whatever. The net 30 thing kind of nobody really respects in a lot of industries. So it's common. I would say a retailer missing vendor payments is not that surprising.

15:17And I would say probably most retailers or really big brands miss vendor payments in some capacity. All this to say it's not a new phenomenon. But I do think when you are seeing it happen consistently for a certain subset of brands and retailers, like the fact that Express is missing its vendor payments and also Express is reportedly preparing to file for bankruptcy, that should send up some little red flags. You know what I mean? But and I also think that, you know, even if a company is profitable, they still have a lot. For them to catch up on payments and figure out how to do it, it is it is a very difficult dance or tightrope to walk.

16:02And so this is all of this to say is that, like, it is not necessarily shocking if you learn that a company is missing its vendor payments. likely they'll be able to catch up on those late ones, but then miss new ones. And that's just the cycle of how a lot of these businesses work. But when you're seeing it repeatedly for certain types of companies that don't seem to be growing their sales or figuring out a path to recovery, that is when it's not looking great for them. Yeah. And then, of course, in this case, the timing happened to be the last maybe four or five months, which coincided with the holiday season.

16:37So it's sort of like kind of buying time a little bit. And they really, a lot of the retailers, of course, were really counting on strong holiday sales to be able to bring that cash flow back. I mean, that's the whole reason, you know, you kind of put off paying those bills. But that did not, I think like we've ran a lot about this past holiday season, it was okay. It wasn't, you know, mind blowing, but we can maybe take like Peloton, I thought was an interesting example of one of the companies that's been behind. And I should say that I think a couple of the companies that CNBC asked for comments, including Peloton, said that this data is inaccurate and your numbers are wrong.

17:18So it's kind of like taking people at their word at this point. But Peloton has yo-yoed according to the data. Basically, they paid most of their bills for the most part until November. And then they had late payments in December, and then that dipped in January, and then it spiked again in February. So kind of like a little bit of a yo-yo pattern. And like Peloton, of course, right now is being closely watched. Like you mentioned, It's one of the companies that is trying to figure out its financial situation. Yeah. And I mean, as you mentioned earlier with Q4, the yo-yoing kind of fits with that, the peaks and troughs of the last quarter where, you know, you're doing okay in November.

18:08In December is when you're selling a lot of things, but you're not going to be able, like most of those profits won't come until the end of the month. And so in January, you're sitting on more of that cash than you can pay. Then you see a dip in January. You know, it just shows that a lot of these companies are dependent on these sales cycles that are not continuous throughout the year, but also, you know, probably dependent on highly promotional activity. Like I'm sure a lot of a lot of these companies lower their prices for holiday sales. And you can't have that be a full on strategy for the entire year.

18:43And you can't rely on that for, you know, 10 of the 12 months. So, yeah. Yeah. And like the analyst said, they mentioned like this is normal, you know, vendors wait to get paid. But when it's happening this often and this consistently at this rate, that's usually a sign that, yeah, there's sort of cash flow issues, which a lot of retailers are seeing right now. It's just that these are the ones that were singled out. all right well next up let's talk grocery startup drama i'm gonna let you take i'm gonna let you lay this out or set the table on this camera all right this is one i'm very excited about because i love drama there there were two stories this week they are not the same they talk about different phenomena but i think they get at a certain thing going on and a lot of it relates to more powerful players are allegedly trying to bully the smaller players or use some kind of shady tactics, I would say.

19:47And so first, The Guardian came out with a story, really interesting story about how Momofuku. Momofuku is the company that first began as a restaurant from celebrity chef David Chang. And it's expanded into a very big grocery business. The business makes instant ramen noodles. It makes a lot of condiments, sauces, that type of stuff. And one of its most popular products is its chili crunch, which some people know it as chili crunch. Some people know it as chili crisp. It's a spicy, salty, umami condiment, whatever. I'll stop giving all of this context. But anyway, I guess Momofuku has begun sending cease and desist letters to other much smaller startups who are also trying to get shelf space in different grocery stores because they use the word, the words, I should say, chili crunch.

20:42And Momofuku is claiming that it is its trademark and that they are in violation of using the trademark when they put that on their packaging. And it brings up a lot of different things. For one, I don't believe Momofuku was the company that invented the term chili crunch. one you know some I don't I should mention and I'm sure you know about this Gabby but like chili crisp or chili crust chili crisp or chili crunch which has been around for a while like there's a Chinese company that has been making chili crisp for literally 30 years and it's what I think many people consider to be the OG of that space but also like a a hot pepper condiment that includes chilies and is crunchy is not a new phenomenon and it certainly was not invented by Momofuku.

21:31And, you know, there are other things, which is, you know, you've written a lot about how it's difficult for a lot of these grocery startups, these, you know, condiment startups, how they are trying to grow, how they're trying to raise money. It's been a pretty chilly VC atmosphere, but Momofuku has been doing very well. From the Guardian article, you know, over the last year alone in 2023, it's raised nearly$30 million. It has gone on the record saying that it has made$50 million annually in sales. It brings up a lot of issues. One is just like, can you actually trademark Chili Crunch? Which, you know, I'm not an IP lawyer, so I won't go into the nuts and bolts of it.

22:10You can kind of trademark anything. But this is a new trademark. I believe Momofuku got this trademark in 2023. So only last year it received it and then started sending these cease and desist letters. But it also said, and this is what I found really interesting, that even Trademark notwithstanding, in its common law rights, it has the ability to claim that it is the maker of Chili Crunch, not any other company out there. That when people think of Chili Crunch, they are talking about Momofuku. And this is from the Guardian article, the proof Momofuku gives for its Chili Crunch distinctiveness and fame, thus its common law rights, is quantified by the product's popularity, media coverage, Amazon reviews and its average 4.7 star reviews on its own website.

22:59So it's pretty much saying because we got some press and people really like our product, we are the ones who everyone thinks of as chili crunch, which I think is a shaky argument. But there's the other end, which a lot of these companies are going after are small. They've not raised$30 million and they don't have the ability to pay for lawyer fees to fight this. So a lot of them have stood down. Others are fighting back. Anyway, that's that one thing. What are your thoughts? Are you shocked by this, Gabby? Shocked? Yeah. I mean, not really. Although, I mean, I think that a lot of the sentiment in the article was just like disappointment by the other brands.

23:40We should mention this brand launched, the CPG brand launched in 2021. We did write about it. It's essentially really meant to subsidize the restaurant business and it's doing well, obviously, but there has already, there were already chili crunch brands, even startup brands in this, in this space. In, in grocery stores, I mean, we know a couple of them and yeah, you could, you could read the article obviously, if you want to get into the nitty gritty, but it's not shocking. I think it kind of has like a little bit of like, it's like a little bit of like a Taylor Swift vibe is what I'm getting.

24:20I don't want the Swifties to come after me, but you know, the idea of like, you're going to trademark, I mean, you can't trademark recipes, actually. I think that's one of the issues, but trademarking a word that or a phrase that has been in use for decades and decades. I mean, this is obviously like Chili Crunch, you know, Chinese recipes have been around for a really long time. Momofuku didn't invent it, like you said. So to trademark it means that it's like these smaller startups are obviously going to have to either figure out a rebrand or be maybe squashed out. And just to add to that, there are two things that I find so fascinating.

25:03One, as you mentioned, Chili Crunch was not a new phenomenon. And the way that Momofuku allegedly got this trademark last year was that there was another company out there that I believe did Mexican condiments like salsa matcha, and it had a product called Chili Crunch, C-H-I-L-E, as opposed to C-H-I-L-I. And it sued Momofuku because Momofuku was saying Chili Crunch. And then ultimately, Momofuku got the trademark in the end. But these are two different products. They're two different ethnicities. But then now Momofuku is claiming that it claims the rights to it as a whole. um and i don't know it it just one of the other thing that i wanted to bring up is that someone brought up in the article that this is a case of what's called a trademark bully which is just someone who is more powerful is able to sort of go against the smaller players and i think that that you know that that's not an incorrect way to describe it and it's surprising coming from as you mentioned a relatively new brand it is bigger it gets a lot of press because of the prestige behind its restaurants.

26:10But also, this is not a great way to portray yourself in the very, very difficult and competitive world of CPG startups. So yeah. Yeah. So I think with that, maybe we can talk a little bit about where Trader Joe's fits into this a little tangentially. So Momofuku is not the only company that's receiving flack. Trader Joe's has become sort of known for this little bit of shady practice when it comes to bringing on or talking to some of these sort of startup brands under the guise of carrying them in the stores. But as a lot of us know, most of Trader Joe's products are private label. And so what's been happening pretty consistently the last few years is that Trader Joe's, after a few months of, you know, kind of ghosting these brands end up releasing their own version, you know, of, and a lot of it is targeting like ethnic type of foods, you know, Asian, you know, Indian, all of these types of startups that are kind of trying to grow these like niche lanes for themselves in the grocery aisles.

27:25Yeah. So maybe you can talk a little bit about Brooklyn Deli, Kale, since you've spoken to them on the podcast previously. Yeah, you should listen to the Modern Retail Podcast. I think it was a few years ago she mentioned this. And so pretty much, and I'll be less verbose about this than I was with the last thing, but in a new article in the digital food magazine Taste, a bunch of startups are claiming that they had been reached out to by Trader Joe's about potentially having Trader Joe's sell their product. A lot of them were condiments, usually mostly ethnic. Trader Joe's would ask for samples.

28:03Sometimes Trader Joe's would even say, can you slightly change your recipe? Would you be willing to do that? The companies, because they want to work with Trader Joe's, would probably be like, yeah, sure, we can figure that out. And then it would go radio silent. And then a few months later, a new product would come out that looked very similar to what these companies were making. Sometimes they had very similar branding. Sometimes they even had similar names. And Brooklyn Deli, the founder, Chitra Agrawal, she had this firsthand where she makes a few kinds of products, including simmer sauces and garlic achar, which is a kind of relish, I guess you could say.

28:41Trader Joe's did not have either of these before. And then Brooklyn Deli started talking with Trader Joe's, and then Trader Joe's went silent, according to Agrawal. And then after that, it came out with its own, and the branding looked really similar. These were new products entirely. Trader Joe's did not have an achar, And then it suddenly had this relish that was very similar to hers. And that was one of its, you know, Brooklyn Deli's most unique products and also these simmer sauces for Indian food, something also the company had not had before. And so, you know, to bring it back to the Momofuku, it just is it seems like a lot of these smaller startups that don't have much power are looking for any way in they can, don't have many resources, are being kind of bullied or seeing shady tactics thrown their way from these bigger players that do hold the power.