Gillian Franklin

This article first appeared August 17, 2011.

Gillian Franklin has some good news to share – she’s brought in new investors to her cosmetics business Heat Group, including former Reserve Bank board member and Business Council head Hugh Morgan.

Franklin, who founded the business 11 years ago after time with Myer and cosmetics giant Revlon, is also feeling upbeat about Heat’s ability to maintain sales during weakened economic growth, with the company’s cheaper offering expected to sell as women “trade down” rather than give up on buying make-up altogether.

Franklin also details her international expansion plans, and the necessity of offering equity to sought-after directors.

Congratulations on your appointments.

Thank you.

So it’s quite a shakeup. How did this all come about?

Well, it really wasn’t anything dramatic. I started the company 11 years ago and I was able to attract some really wonderful shareholders at the time and as you would know they would normally stay with someone for five years and then exit.

But Geoff [Morgan] and Carol [Schwarz] were fantastic partners and had been with me for 10 years, and then I was just looking at what the next 10 years will bring. And I thought, “It’s good corporate discipline to have a change of board” and today you really can’t get a board unless they’re shareholders, because they’re quite unwilling to give up their charm to be directors unless they’ve got some sort of stake in the business.

So I approached Geoff and Carol and said I’d like to buy their shares and bring in some fresh skills to the board and they agreed. I then set about that challenging task of saying, “Who would I like and what expertise was I looking for?”

And I’m absolutely thrilled with the diversity that I’ve been able to attract because we’ve had our first board meeting just a week ago and I could already see the value that that diverse expertise is bringing to the business, just with the different questions that I was asked and the different way of looking at things.

It’s very, very exciting for our business.

So how did you get Hugh Morgan to agree to invest in your company and what skills in particular do you think he will bring?

Well I approached him, so the first thing is to ask, much to everyone’ surprise.

I remember coming home saying to my husband, “I’m going to go and ask Hugh Morgan” and he said, “Why would he invest?”

I said, “Well, he’s a professional investor and he may be interested in doing something a bit different.”

So I just made an appointment, went and saw him and presented my business to him and he then asked me lots of questions and came and had another couple of meetings with me, met my senior team, went for walks through the business, wanted to get a sense of the place. And then after sort of a couple of weeks of backwards and forwards he said yes, he would be willing to invest.

So that’s how I got him; I asked.

What do I think he’ll bring? Clearly financial expertise, and that came through very strongly in our first board meeting. He was the one more than most really drilling me on the numbers, and looking at the future – a much bigger picture.

We look at our business and focus on our business but he was much more focused on the external environment and the impact that the external environment could by default have on our business and how we could manage those risks. So really big-picture thinking.

Now I understand he took just under 10%. Could you give us a ballpark figure of that amount?

No, he’s not making that public but the shareholding across the board was worth millions of dollars.

Okay, and what percentage do you have at the moment?

46.2%.

So where are you taking the business now? I understand you’ll be launching a new European cosmetics brand to Australia.

We’re launching Essence, but I think the most important thing for me is what we can now do to obviously optimise the Procter & Gamble brands Max Factor and Cover Girl because we’ve got $100 million potential on those two brands. Cover Girl is currently three, and Max Factor is five, so the gap between three and five and one and two is more than $100 million. So that’s a priority for our business: how do we increase the sales on Proctor & Gamble brands?

And who are one and two?

Revlon’s one and Maybelline’s two, so that’s where we’ve got a lot of attention. And then secondly our two own brands Ulta and NYC, we’ve got significant export opportunity as well as local expansion plans.

Ulta is now the number one nail polish in Australia but it’s only sold in 20% of the retail channels. It’s only sold in pharmacy so it’s really proven itself and I think we can take that into other markets.

We’re about to appoint an export manager which is a first for us as a company and we’re starting to slowly and carefully build our export business.

And which markets will you be targeting for exports?

Europe firstly because we’ve got a natural entree into the Procter & Gamble distributors who we’ve had a long relationship with over the last 10 years, and they’re looking for a low retail price brand.

We’re already selling in New Zealand but that’s obviously small in the scheme of things, and I think throughout Asia we’ll have a few opportunities as well with our two low end brands.

Before you were talking about the broader picture, how do you see the slowing growth affecting your company?

Look, I’m taking this on as an opportunity because women will always buy cosmetics but as they feel the pinch, they move down in prices so we cover this, the bottom end the price. You don’t go any lower than our lowest brand so I think of it as an opportunity and clearly communicate the value of our cosmetics and that we work very closely with our retailers to meet their requirements.

But the essential thing in times like this is to make sure that you’re always in stock and you don’t lose a sale. And unfortunately a lot of retailers are not paying enough attention to that right now because it’s very desponding when you walk around stores and you see gaps on stands everywhere and I just think, “Gosh we should all be fighting for every basic sale right now and making sure we’re in stock.” That’s what we’ll be focusing our attention on; being in stock and communicate the value because I think we could take market share.

So that idea of lipstick sales shining in a recession, it’s true but at a lower price point?

Yes if you say there are five price points in the Australian market, we cover the bottom three.

What’s the value there?

Now Max Factor and Bourjois lipsticks, we use lipstick prices as the benchmark, they’re around sort of $20, and then Cover Girl is around $15 and then our Ulta and NYC and Essence will be around $4 and $2.

That’s cheap.

And that’s why Ulta’s number one in the nail polish market in Australia today because it’s $2 for a nail polish which is really amazing quality and the key for it is we always have the latest colours. So if bright yellow is in, you can always go to the Ulta and find the bright yellow or green or black or whatever you want.

Thank you very much, we appreciate your time.