How Aesop chief executive Michael O’Keeffe helped craft a $250 million business model

Australian luxury skincare brand Aesop’s plain brown bottles are famous worldwide for their quality. Perhaps more famous are the Aesop stores, which are known for their unique aesthetic and customer service.

Melbournian Dennis Paphitis founded Aesop in 1987, with the business starting out initially as a hairdressing salon that sold products. The business grew slowly until 2003, where a change in direction vastly accelerated the brand’s growth. In 2010 Aesop brought in private equity investors and then in 2012 it was bought by cosmetics giant Natura for $68 million.

Aesop chief executive Michael O’Keeffe, who joined the brand in 2003, spoke to attendees at the Australian Private Equity and Venture Capital Association’s alpha conference last week and detailed how he and the rest of the Aesop team took the brand from being “product centric to retail centric”.

“Early on, Aesop was a unique product with an early adopter customer base. No one really knew about it, and we were never going to gain any scale unless we could reach out and touch people,” O’Keeffe said.

“Over the past 13 years we’ve transformed into a business with a product that’s highly differentiated, and a business model that’s highly differentiated.”

O’Keeffe told listeners about the early days of Aesop, and the difficulties involved with transforming a business model while still rapidly expanding the business.

The early days

In 2003 Aesop was still relatively small, turning over around $3 million each year, despite being sold in departments stores around the world. The company’s stores were based on a typical retail model and O’Keeffe described the business as “a wholesaler selling products off the shelf”.

This business model is what O’Keeffe calls a “product centric” model, which many brands in the cosmetics industry employ successfully and profitably.

“Many of our competitors, L’Oreal, Estée Lauder et cetera, this is predominantly their model,” O’Keeffe said.

“It’s a push model with advertisements and celebrity endorsement, and they try to push customers into the wholesale stores.”

But Aesop’s product design is what O’Keeffe calls “ugly ducklings” as each product is found in a plain brown glass container.

“On a set of shelves our products didn’t really do anything,” he said.

“We know we had great products that were really different, but through this model we were never able to expand out to the customers.”

Plans to transform the business

O’Keeffe and the Aesop team looked back to the early days of the brand when it was still run out of Paphitis’s salon in Melbourne. Analysing the design and aesthetic of the salon, the team realised there was something there.

“We were faced with two potential paths for the business: either take it back to its roots as a spa treatment brand, or integrate our current product with a stronger retail experience,” O’Keeffe said.

“We took the latter course, but we quickly found out we knew nothing about retail.”

Aesop’s first store was the down ramp of an old car park at the Prince Hotel in St Kilda, which O’Keeffe frankly said “shouldn’t have worked from a retail perspective”.

However, within months of opening the company began to see the store’s benefit, noticing a better connection to customers and how they perceived the brand.

“It was important for us to be okay with having these ugly brown glass jars, and we found out putting them in the right place with the right context can really achieve something,” O’Keeffe said.

“This was really about transforming from a product centric business to a retail centric business.”

O’Keeffe noted Aesop’s competitors were still stuck on the product centric method, and high end cosmetics had not been done seriously in a retail centric capacity.

Making the switch

“As a small start-up, in 2003 we were stuck in an operational track of just trying to become a real business,” O’Keeffe said.

“We had an existing business model, and we were focused on upping our penetration and building our scale, but we had some constraints.”

Aesop was finding customers weren’t “getting” the brand, and the company’s business model was quite narrow and not open to further channel expansion. What was needed was a complete transformation of business model.

The transformation to a retail centric model took nine months, and during that period O’Keeffe said it was a struggle to keep the business going.

“At that time we were all about 70 percent focused on the reinvention, and the rest of it was just cuddling the business along so we didn’t go down during the interim,” he said.

After opening the first two retail stores, the company stuck with them for two years while getting the business model right, before turning its attention to wider expansion.

O’Keeffe said as a niche premium brand, the number of Aesop customers internationally exceeded the number in Australia. Investing into markets the company did not currently serve was a top priority.

“We achieved this in two ways. Firstly, we focused on offshore distributers, mostly in Asia. It was a good low-cost way to get external parties to set up stores and penetrate the market,” he said.

“The second way was direct market entry. This was more costly and difficult, so initially it was a just a focus on the distributors.”

Choosing the right partner and advice

While expanding Aesop, O’Keeffe believes one of the reasons the brand was so successful was getting the right partner “when the business needed it”.

“In 2009 Harbert Private Equity invested in the company, and having that partnership was very important to us. One of the things I’m focused on as a CEO is how to stretch our current resources as far as they can go, and getting the right partner is key for that,” O’Keeffe said.

“As a CEO you don’t realise sometimes how restricted your thinking becomes.”

As the business began to pick up steam in recent years, O’Keeffe said he and his senior management team have struggled with splitting their focus across multiple areas.

“If I was to give any advice, it would be that in a high-growth phase the fewer areas that CEOs and senior management can split their attention the better,” he said.

O’Keeffe also believes companies should keep the founder on board for as long as possible or until they “become too disruptive.”

“The knowledge they have about the values of the company is just irreplaceable. When you get that balance right between the creative and the commercial, I think it’s incredibly valuable,” he said.

Today, and the future for Aesop

At the end of the 2015-16 financial year, Aesop had 160 stores around the world, and its products are stocked in more than 100 different department stores.

The company has grown 40% year-on-year, said O’Keeffe, and is projecting turnover of $250 million for this coming financial year.

“We know we’ve got a great product, and thankfully cosmetics is the same product in every country. We have another 50 stores planned to open this year, and we opened 50 last year,” O’Keeffe said.

“Ten years ago, I would have just said ‘drop everything, lets focus on expanding stores’. These days you just can’t do that because it’s the digital era.”

Looking forward, O’Keeffe believes Aesop will have to reinvent its business model again to stay relevant, but his goal is for the company to hit $1 billion in sales by 2025.

“I think our next move is an engagement centric model, where you can connect to a customer at every touch point,” O’Keeffe said.

“All my competitors are still in a product centric world, so hopefully we can get a bit of distance.”