The Honest Company Waves Bye to China and the EU

While many brands and retailers continue to make big bets on China, Jessica Alba’s consumer packaged goods (CPG) company The Honest Company is exiting the market altogether along with Europe as it looks to double on key markets that the company is already thriving in. The company also noted that it would be moving away from low-margin product lines and SKUs.

According to the company’s Q1 2023 earnings call on Tuesday (May 9), it experienced a 21% rise in revenue, amounting to $83 million. This growth can be attributed to several factors, including robust retail consumption, an upsurge in the digital channel, distribution gains accomplished in 2022, new revenue generated from baby clothing, and the advantageous impact of price hikes.

“The strength of the Honest brand is reflected in our first quarter revenue growth of 21% and tracked channel consumption growth of 30%. With well-balanced growth across digital and retail channels, both up over 20% in the quarter, we remain confident about our omnichannel approach of making Honest products available when and where they are most convenient for consumers,” said CEO Carla Vernón.

In the first quarter of 2023, the company’s revenue was driven by growth across its various product categories. Revenue from diapers and wipes, which constituted 64% of the total revenue, rose by 23%. The increase was attributed to gains in retail consumption across diapers, wipes, and baby personal care, aided by new distribution and a wider assortment.

Similarly, revenue from skin and personal care, which constituted 27% of the total revenue, increased by 7%. This growth was supported by gains in retail consumption, a more focused assortment of best-selling “hero” items, and the launch of products such as the Daily Green Juice Antioxidant Super Serum in the first quarter of 2023. Meanwhile, revenue from household and wellness, which accounted for 9% of the total revenue, increased by 81%, primarily due to the incorporation of baby clothing into the product line.

Additionally, the company experienced a 22% increase in digital revenue, supported by double-digit growth in sales of diapers, wipes, and beauty products through a major digital retail partner. Nonetheless, the increase was partly offset by a decrease in revenue from Honest.com. On the other hand, eCommerce revenue grew by 21%, boosted by strong tracked channel consumption at major retailers and the expansion of retail distribution, which was launched in the latter half of 2022.

But has the CPG company looks to streamline its operations, the company is leaving China and Europe. The move is a rather different, as other retailers have maintained a positive outlook for the region.

Luxury, Beauty Bet on China

In February, PYMNTS reported that retailers like Starbucks and McDonald’s were looking to the region to reel in some cash, as all the mentioned opened up new locations within the area.

“I remain more confident than ever that we are still only in the early chapters of our growth story in China,” Howard Schultz, Starbucks’s interim chief executive, said at the time.

Premium label Ralph Lauren even disclosed its plans to open 55 new locations, mainly in China.

In January, Bernard Arnault, the chairman and CEO of LVMH, mentioned that the reopening of China would present fresh prospects to luxury brands that had already experienced a successful year.

In January, China lifted its international travel restrictions after three years of pandemic-related limitations. This change was warmly received by luxury retailers, given that Chinese shoppers accounted for approximately one-third of global luxury goods purchases in the pre-pandemic year of 2018.

See also: American Companies Like Starbucks, Ralph Lauren Bet on China’s Post-COVID Recovery

Estée Lauder also remains optimistic about the Chinese market. On Wednesday (May 3), Estée Lauder, the parent company of cosmetic brands like MAC and La Mer, stated that it expected a sales drop of 10% to 12% for the year, which is a more significant decline than the previously projected range of 5% to 7%.

Even so, Estée Lauder has indicated that it anticipates an improvement in consumer traffic in Asia, with sales expected to grow in the fourth quarter. At the same time, L’Oréal, the world’s biggest beauty company, has projected a revival in Chinese demand for the ongoing quarter.

But China Isn’t Ready to Spend

The expected boost in consumer spending in China after the lifting of COVID-19 restrictions did not occur, as reported by PYMNTS last month. In fact, according to statements made by the CEOs of eCommerce giants JD.com and Alibaba, China’s consumer spending has yet to bounce back.

See also: Retailers Say Chinese Consumer Spending Has Not Yet Recovered From COVID

The Chinese government announced on March 5 that it aims for a 5% economic growth rate this year, a move that CNBC deemed cautious. Officials also highlighted that consumption is expected to play a crucial role in driving growth, but it is still constrained.

With that in mind, The Honest Company is looking to focus on markets where it knows it has promise.

“We will focus on North America where we have scale and the ability to most cost efficiently drive growth” said The Honest Company’s CFO Kelly Kennedy during the call. “This decision will reduce complexity, inventory levels and associated costs, and give us greater focus on how we deploy our resources.”

While the move may seem counterintuitive for a company that has shown steady growth over the years, it’s a decision that could help the company cut costs on logistics — a move many companies have made, the most recent being Shopify, which offloaded its logistics and operations arm entirely.

See also: Shopify eCommerce Refocus Includes Recruiting Celebrity Brands like The Row

Amazon, H&M, and Zara are among the companies that have recently attempted to address their logistical challenges, but at the expense of their customers.

See also: What Zara and H&M Are Getting Wrong About Charging for Returns

The Honest Company is singing a similar tune like the rest: a return to its core offerings and a cohort of consumers that will spend with them.