Mark Constantine's earlier cosmetics company blew up. His latest effort is a smash.
The door of the Lush shop on Philadelphia's Walnut Street swings open and shoots a blast of intoxicating soap scents. Inside, wheels of handmade honey and lavender soaps, tubs of cocoa butter moisturizers and fizzy bath bombs are displayed raw in baskets as if at a farmer's market. Soap is cut at the counter like wedges of cheese, then wrapped deli-style in waxed paper. "Smell this," offers a tattooed saleswoman. "It's got real chocolate in it."
Lush is a funky cosmetics maker and retailer founded a dozen years ago in Poole, England by Mark Constantine, now 55. Privately held Lush is something of a knockoff of the Body Shop (a giant chain now owned by L'Oréal) and has created quite a lather of its own: In the fiscal year ended June 30, 462 Lush stores in 46 countries had combined revenue of $292 million, up 28% over fiscal 2006; licensees produced only $25 million of those sales. Constantine's success hangs on two things. First, he spends almost nothing on advertising. He relies, instead, on enthusiastic (and celebrity) customers to do his marketing, while creating constant demand by dropping one-third of his products every year, subbing wacky new launches like shower jellies and body butters. Second, he and his partners have learned to keep control of the business--from financing to formulas and stores.
Tough lessons to learn. Constantine's earlier business, Cosmetics To Go, was a series of stumbles, despite previous years of traveling along the road of hard knocks. Thrown out of his house, at age 16, by his mother and stepfather, he lived for a while in the woods before moving to London to learn the trade. During an early job at one renowned cosmetics retailer in the 1970s (where David Bowie came in for his Ziggy Stardust makeup) male bosses chased him around the furniture. "The sexual harassment was constant," he recalls. "Under the table, in the elevators. I left when I realized that was why they hired me." After a spell at a Knightsbridge salon and a trade school in Brixton, he moved back to Poole to raise a family and try his hand as a freelance creator of cosmetics.
Constantine had trouble paying his heating bills and scraping together train fare for meetings, until he read a short clip about Anita Roddick and her vegetarian-friendly store, the Body Shop. Constantine sent her some work, including a shampoo that "looked like poo," and she promptly gave him an order. Dame Anita, who died last month, had only two stores at the time, but for the next 15 years Constantine created a string of bestsellers for her fast-growing chain. In 1991, however, Roddick insisted the Body Shop had to own the intellectual property for its products. So she bought Constantine's company for $17 million, paid in three tranches, and got him to sign a three-year noncompete agreement.
With his hands thus tied, Constantine and his wife, Margaret, reinvested everything in a direct mail startup, Cosmetics To Go. His limits as a businessman quickly became apparent. He priced the products too cheaply, underestimating the cost of the customer service in the back room, but by the time he realized his error, it was too late. Cosmetics To Go filed for bankruptcy in 1994. "With every order, we lost money," he says. Worse yet: Constantine never saw the final $6 million payment from the Body Shop; the company receiver took it all. He and his wife were left with a tiny shop in Poole and the stock on the shelves. They had three young children and mortgages totaling $600,000.
But just then Constantine's unusual products caught the eye of Andrew Gerrie, a New Zealander in London working in real estate and hungry for new opportunities. Gerrie and Constantine: like chalk and cheese, as the Brits say. Constantine tapes birdcalls, hectors on the environment and cycles to work. Gerrie is a triathlon athlete who drives a gas-guzzling Jaguar E-Type. But Constantine wasn't going it alone. "I never wanted to be in the dark again without the proper finance guys," he says. "You have to have a little muscle behind you." In 1994 Gerrie and his partner paid $300,000 for 30% of the Constantines' holding company. Their first store in London quickly became a cult success, but they still needed capital to expand in the U.K. and abroad. Instead of selling more shares in the holding company, Gerrie cleverly created a subsidiary for the British retail operations, then sold U.K. investors a minority position, for $1 million, in that company only.
Constantine won't disclose profits, but his margins are likely near the top in his industry. Reason: Cosmetic firms' biggest costs are typically found in eye-catching packaging and ad campaigns--and Lush shuns both. Workers packing cartons for shipment to the stores don't use Styrofoam fillers to prevent bottles from rolling around but environmentally friendly and cost-effective popcorn. As for getting the word out, Lush relies on roughly 14,000 somewhat obsessed customers to dissect its products on the company Web "forum." Constantine routinely taps these soap junkies to descend on U.K. stores as clandestine inspectors who then file reports. (They're paid in gift certificates.) Stores can break even in as little as three months. That, plus a little financial engineering, has allowed Lush to enlarge its footprint over the last decade.
Despite all the growth, debt is close to zero, thanks to the company's habit of acquiring capital by selling minority stakes in regional subsidiaries. Example: Gerrie sold 47% of the Canadian operations to Mark and Karen Wolverton. Mark is a scion of the family that owns Wolverton Securities, a large brokerage in Vancouver, B.C. The Vancouver couple invested $260,000 in Lush Canada; Wolverton was made North America's chief executive. When Lush usa was launched in 2002, with a modest $300,000 in startup capital, the Constantines' holding company owned 51%, the Wolvertons 40%, and eight U.K. investors the remainder. As the U.S. stores quickly became cash-positive, Lush U.K. invested an additional $2.6 million, and the Wolvertons chipped in another $2 million to quicken the pace of expansion. Stores are now opening at the rate of three a month on prime real estate from New York City to Santa Monica, Calif. as Lush pushes to reach 102 outlets in North America by year's end.
"The key," says Constantine: "Don't give investors an exit you're not in charge of." In fact, don't let them corner square one.