In July 2003, Dead Sea Laboratories (DSL), the maker of Ahava brand cosmetics, sold a substantial bloc of shares to a group of US investors headed by George Schaeffer, the owner of US cosmetics company OPI Products. The investor group paid $8.5 million for 40.6% of DSL, reflecting a company value of $21 million.
The sellers were Hamashbir Holdings, controlled by Gaon Agro Industries (TASE:GAT) chairman Benjamin (Benny) Gaon, and the Livnat family, one of the owners of IDB Holding Corp. (TASE:IDBH).
Livnat and Gaon earned handsomely from their brief period of DSL ownership. The $21 million company value for Ahava was 75% higher than the $12 million company value at which they bought the holding two and a half years earlier.
Yaacov Ellis has been CEO of DSL for a year, after ten years at the company, which he joined soon after it was founded in 1988.
Ellis considers the entry of a strategic investor as a qualitative jump for Israel's cosmetics industry. DSL's strategic partnership makes it unusual - a foreign investor and a bunch of kibbutzniks. Once the sale is completed, ownership of DSL will be as follows: Schaeffer - 40.6%, with 50% voting rights; Kibbutz Mitzpeh Shalem - 40.6%, with 50% voting rights; and Kibbutz Ein Gedi and Kibbutz Kalia - 18.8%.
"Globes": Why would a major US company want to partner with DSL?
Ellis: "The Ahava brand has successfully positioned itself in recent years as a leading cosmetics brand in Israel and worldwide. The company has significantly increased its revenue and value, and has potential for further expansion in the future, with the help of new investors.
"For DSL, the acquisition is a qualitative jump. We always wanted to link up with a foreign concern as a strategic partner. This is also an honor for the company that a foreign strategic investor should be interested in its brand at such a time, given the Israeli economy and security situation.
"DSL was founded in 1988. The company develops, manufactures, and markets cosmetic products based on mud and naturally-occurring minerals in the Dead Sea. The Ahava brand is very strong in the North American market and is gaining ground in the UK as well. OPI can greatly strengthen DSL and increase its value through partnership and in-house development."
40 kibbutzniks out of 150 employees
How will the OPI partnership help you? OPI has a turnover of $300 million. How will that affect your business?
"OPI is a privately-owned US company that does not publish its precise sales turnover, although it's estimated at several hundred million dollars. OPI operates in sectors and products that complement Ahava products. We make cosmetics and OPI mainly makes nail lacquers and make-up colors. Their strength is in the professional beauty salon, hairdressers, and nail treatment market in the US, which use professional products.
"DSL currently exports 60% of its products and has $100 million in sales (shelf prices). Previously, 70% of its products were exported. The drop in exports was due to the growth of the domestic Israeli market. Israeli women bought fewer Dead Sea products in the past, but the brand is now considered a top quality cosmetics brand."
What kinds of collaboration are you planning?
"The combination of OPI and DSL in the beauty industry can increase our penetration of the US market. We can also penetrate other markets, partly because OPI has a leading sales platform in American markets. They'll also give us marketing know-how based on their knowledge of their markets.
"We probably won't collaborate on production, at least not in the near future. On the other hand, the collaboration is expected to expand DSL's activities. We once considered entering the make-up market, and we're still thinking about expanding into other cosmetic fields. We'll decide into which fields we'll expand based on each field's export potential. That is the critical factor determining the launch of product production. We also examine DSL's added value in each new sector."
Why would a major US company, with a sales turnover of hundreds of millions of dollars, want to acquire a stake in a young Israeli company at a company value of $21 million, let alone become a strategic partner?
"DSL's cosmetic products are based on naturally-occurring minerals and mud from the Dead Sea. They are marketed in world-famous chains, including Bloomingdale's, Saks Fifth Avenue, and Macy's in the US, and Boots and Selfridges in the UK. The products are marketed under the Ahava brand name and other private labels. Since Hamashbir Holdings acquired a stake in DSL in 2001, we've invested even more in R&D.
"We also expanded our exports, penetrating the Japanese market in addition to the US and UK markets. In Israel, our brand is one of the five most recognized brands at the major pharmacy chains. These factors helped determine the company value.
"As for management, DSL is a for-profit business with balance sheets and reports to shareholders. The old-style kibbutz management no longer exists. Only 40 of our 150 employees are kibbutzniks, and the rest are local residents."
Who founded the company?
"DSL was originally founded as a professional company. It began in 1989 in partnership with Mepro-Hagoshrim from Kibbutz Hagoshrim, which invented an electrical hair remover for women. This one product was a huge success at one time, with $100 million in annual exports.
"After a few years, when copy-cat products entered the market, the company went bankrupt. Dead Sea and other local kibbutzim then became partners in the company, converting it into a cosmetics company," says Ellis.
Suitable for the Japanese
Japanese women are willing to buy Israeli products. What about the legends concerning their different consumer behavior?
"Ahava products cost 30-40% more overseas than in Israel. They are most expensive in North America and the Far East. In the US, this is because the positioning of Ahava is very strong, and many products are bought as gifts. In the Far East, the reason is the nature of the market. In Europe, the prices are similar to those in Israel.
"Japanese women are not deterred by the high prices. Japan was unaffected by the drop in consumer spending this year in Southeast Asia, due to the SARS epidemic. SARS also led to the suspension of negotiations with a Chinese company to found a joint venture for the Chinese market. We'll now resume them."
How do you operate in Japan?
"We have the leading private label in Japan, in partnership with Nikken Sohonsha. The product line combines Ahava products with dunaliella algae (Dead Sea seaweed), which is in very high demand in Japan. the products are marketed under the Nikken Ahava Dunaliella Cosmetics brand name.
"Because of Japanese consumer behavior, a picture of the seaweed appears on the packaging, which looks like an amoeba to an Israeli consumer. The packaging design in Japan is very different than in Israel, colored in bright orange, pink, and gold, and the picture of an amoeba. No Israeli would buy such a skincare product. Israelis think it's weird to put something like that on your face. We began collaborating with the Japanese company 18 months ago, and we've had $2 million in sales in Japan since then."
DSL was thoroughly restructured in the past year, which you called 'a strategic market change'. What did this entail, and what were the results?
"Until a year ago, we used all kinds of local distributors overseas, and our connection with the consumer was very weak. Distributors handled the marketing, while we provided support through display packaging, information and the like. In the past year, we thoroughly changed our strategy, including charting our export markets, marking the ones worth pursuing, and began our own distribution, through subsidiaries. The subsidiaries handle advertising, ongoing relations with retailers, local PR firms, etc. We wanted to distribute independently in countries where the cosmetics market was more concentrated.
"In Israeli market also became highly concentrated after the collapse of Hamashbir Lazarchan, which controlled 25% of domestic cosmetic sales. Today, if you're not on the shelves in Super-Pharm, it's as if you're not in the market at all."
What about other overseas markets?
"The UK market is similar. We entered the UK with Boots, which has 1,300 stores and controls 60-70% of the [cosmetics] market. The UK retail market structure meant that there was no need to open other points of sale to achieve significant market penetration.
"In the same manner, we're in advanced negotiations to enter the Spanish market with a leading chain El Corte Inglés that dominates the market through chains of department stores, clothing stores, gas stations, etc.
"Entering an overseas market through an independent distribution network is designed to promote the brand. Women around the world won't buy Ahava because it's cheap, but only because they'll recognize the brand. It's now possible to assert definitively that we've long since gone beyond the stage of Dead Sea souvenirs, and we're now a cosmetics brand sold in the most prestigious supermarkets alongside bodycare, candles, oils, and other products."
We'll be pleased when the tourists return
How has the tourism crisis affected you? It's well-known that many Ahava products are sold to tourists through duty free shops in Israel and around the world.
"In the past, most of our domestic sales were to tourists. Following the plunge in tourism, sales to tourists, including at duty free sales at Ben Gurion Airport, now account for only 20% of total sales. The worst blow was three years ago. Naturally, we'll be very pleased with the tourists return, although we've meanwhile suspended our investments toward this target audience, reducing the amount of tourist shops at hotels and tourist-directed advertising.
"Nevertheless, we've been able to maintain our domestic sales. Total sales have declined by only a few million shekels. We did this by focusing on new audiences and strengthening previously small audiences in Israel, such as the haredi (ultra-orthodox) and Russian markets. Ahava now carries haredi kashrut certification.
"Like the other cosmetics companies, we've been able to maintain our domestic sales by lowering prices in the past two years in order to compete. Competition intensifies during recessions. We're lowering prices while attempting to avoid harming the brand's value."
What are your goals for 2004? Are there new plans in the offing?
"We now have four lines of cosmetics: Ahava Advanced, Dermud, Time-Line, and Ein Gedi. Ein Gedi is mainly a low-end, mass-market product line for the Israeli and tourism markets. Next year, we plan to expand our product range and enter new trendy cosmetics fields, in addition to the global trend for organic, natural products, which is our current business.
"For instance, we'll develop creams for youths, bath creams and related products, and bodycare products. We'll also continue to invest in development, R&D, examining export markets, and develop new products and strengthen markets through strategic partnerships."
Published by Globes [online] - www.globes.co.il - on September 23, 2003