2016 IPO Prospects: The Honest Company Makes the Online to Offline Model Work

According to a report by Grand View Research, the market for global organic personal care products was estimated at $8.43 billion in 2013. Driven by increasing customer awareness about organic products, this market is expected to grow rapidly in the coming years. In North America, the organic personal care product market was estimated to be worth more than $2.5 billion in 2012 and is expected to grow to nearly $5.5 billion by the year 2020. Jessica Alba’s The Honest Company is an IPO prospect from this market.

The Honest Company’s Beginnings

Santa Monica, California-based Honest Company was founded in 2011 by Hollywood star Jessica Alba, Brian Lee, Sean Kane, and Christopher Gavigan. The idea for the company came about when a pregnant Jessica used baby detergent to pre-wash onesies and broke out into hives. Jessica had always been allergic and the realization that she could be using harmful allergens on her children’s products had her worried. After several hours of Google searches, she realized that most everyday household products were loaded with chemicals. She also ended up with several failed experiments at making her own cleaning products out of baking soda, vinegar, and essential oils. It was while searching for a better product that she met Christopher Gavigan, the former leader of a nonprofit – Healthy Child Healthy World.

During discussions, the two realized that while there were several independent companies manufacturing organic and safe products, there wasn’t an “umbrella brand” selling non-toxic products. They agreed that they wanted a company that would be honest about what is in their products so that consumers could make cleaner and more informed choices about products. They dabbled with the idea of creating a company, but with Jessica’s busy Hollywood career, it was not to be.

Despite her work, Jessica kept herself informed of the quality of consumer products. In 2011, she finally decided to take the plunge. She, along with Christopher, joined hands with Legal Zoom co-founder Brian Lee and Pricegrabber.com alumnus Sean Kane to set up The Honest Company. The company began by retailing diapers that were not only made of organic products, but also looked pretty.

Unlike traditional consumer product retailers, The Honest Company began life as an e-commerce company. Its products were sold only through the Internet. The management also realized that the nature of its products enabled them to leverage a subscription-based model. They also focused their initial advertising on Facebook and other social media channels instead of traditional advertising.

Within a few months of the launch though, the company’s brand attracted a big following. Soon, boutique stores along with bigger retail stores lined up to sell its products. Today the company has expanded beyond diapers to other baby and mother needs along with household essentials like dish soap, kitchen cleaner, detergent, and feminine care products. Its products are no longer available online only and can be purchased through retail chains like Target and Whole Foods. It is now looking to expand to international markets of South Korea and China after recently beginning to ship products to Canada.

The Honest Company’s Financials

Besides physical stores, The Honest Company still sells its products through an online subscription. Consumers can open an account with the company and sign up for a free trial for either diapers and wipes or for a package containing non-toxic personal care and home grooming products. The company charges customers $5.95 for shipping the bundle and automatically enrolls them in a subscription service that can be customized for frequency and content.

The Honest Company does not disclose its detailed financials. Analysts estimate that revenues have grown from $60 million in 2013 to $170 million in 2014. Nearly 30% of the company’s revenues are attributed to the brick-and-mortar stores and the remaining 70% from online sales. Recurring monthly deliveries account for 60% of the digital sales.

It has been venture funded so far with $222 million coming from investors including Glade Brook Capital Partners, Wellington Management, Institutional Venture Partners, General Catalyst Partners, AllianceBernstein, Fidelity Management and Research Company, Iconiq Capital, and Pritzker Group Venture Capital. Its last round of funding was held in August 2015 when it raised $100 million in a round led by Glade Brook Capital Partners that valued it at $1.7 billion. It is now rumored to be planning an IPO.

The Honest Company has shown how to successfully implement a hybrid model that relies effectively both on online and offline store sales. But its hybrid nature makes it difficult for analysts to agree on its valuation model. Some believe that it is more a brick and mortar retailer than an online company whereas others tend to believe that it is an online retailer.

This segment is a part in the series : 2016 IPO Prospects