Carson gets a makeover: with an African American management team in control, hair care giant Carson Products has repositioned itself for growth.

With an African American management team in control, hair care giant Carson Products has repositioned itself for growth

It may seem a long and somewhat implausible road from the halls of academia to the chairman's seat of a company traded on Wall Street, but it took Leroy Keith just a little over a year to make the trip. In August 1995, the former president of Atlanta's esteemed Morehouse College executed a $96 million leveraged buyout of Savannah, Georgia-based Carson Inc., makers of Dark & Lovely, Excelle, Magic Shave, Beautiful Beginnings and Dark & Natural products.

Carson is one of the top producers of ethnic hair care products in the country, successfully competing against such companies as Soft Sheen, Luster and large general marker companies like Revlon and Clairol. It currently manufactures more than 70 products under five principal brand names, including the very popular Dark & Lovely line of hair coloring products and relaxers.

In spearheading the buyout, Keith became Carson's chairman and CEO--the first African American to sit at the helm of the company, whose history dates back to 1901. More impressive, however, is that in less than two years. Keith and his management ream have set in motion an aggressive growth plan, which includes global expansion, acquisitions and entree into the personal care and professional salon products markets. In addition, he has taken the company public on both U.S. and South African stock markets. According to Brad Creswell, Carson's former chief financial officer, since Keith's takeover the company's worth has grown from $80 million as a privately held concern to $230 million as a publicly traded company.

But how was Keith, a man with modest business management experience (he once owned 17 Pizza Hut franchises in South Carolina, but was not involved in their day-to-day management) able to successfully captain such an ambitious project? The wheels were set in motion in August 1994, when the Minis family, who then owned Carson and were looking to sell it, invited bids for the company through a coordinator they had appointed.

"I knew from the very beginning that Carson was an attractive company," says Keith, who also gained insight into the company's great potential as a member of Carson's board. "When the opportunity came to purchase it. I called on the people who I knew had experience in putting these kind of deals together." One of the first people Keith reached out to was venture capitalist Vincent Wasik, a principal in the Westport, Connecticut-based firm Morningside Capital Group L.L.C. Keith and Wasik met when both were serving on the board of One To One: The National Mentoring Project, an organization based in Washington, D.C., that works with at-risk youth.

Whenever Keith would speak at various board meetings, he'd talk about the importance of education, and stress the importance or economic empowerment among the black community, says Wasik, who is white. "We began to talk and I really felt he had an understanding of how people from different backgrounds can work together to generate wealth." The two began eyeing a number of businesses with the intention or doing acquisition deals together.

According to John Brown, Carson's vice president of strategic planning, there was a substantial amount of cash on the balance sheet. With a 20% share (the largest) of the nonprofessional relaxer market, an 82% share of the ethnic hair color market and the Dark & Lovely brand having name recognition among 97% of African American women, Keith and Wasik felt Carson was ripe for development and public offering.

A COMPANY TOO SWEET TO PASS UP

In 1995, the U.S. ethnic hair care market generated $1.2 billion and is estimated to be growing at an annual clip of 5%. In addition, African Americans spend up to three rimes as much of their disposable income on health and beauty products as whites.

Keith and his investors saw a great opportunity to capitalize on the projected domestic growth. And with more than 900 million people of African descent across the globe, they also recognized the opportunity for global expansion and brand consolidation of the ethnic personal care market.

Keith and the Morningside Capital investment group understood the value of Carson being extremely liquid and its strong brand identity, but there were other assets that made the company attractive. During the 1970s. Carson invested a significant amount of time and money in research and development. In 1972, it introduced the first line of hair color made specifically for black women, and in 1978, pioneered Dark & Lovely's "no-lye" relaxer formula, which significantly reduced skin injury and hair loss.

Changes in management philosophy were also seen as key. Just months prior to the company's purchase, Carson moved from using commissioned sales brokers--who also represented competing products--to a full-time domestic and international sales staff, which provides dedicated support to brand marketing strategies. "A full-time staff makes us more competitive, especially as we focus on bringing new products into the market," explains Dennis Smith, Carson's executive vice president of sales. "The possible disadvantage is that if our sales dip, we still have the fixed cost of paying the salaries of our staff. The advantage, however, is that we have a staff that is totally dedicated to our brands. We can educate them and when they go into retail, they talk only about our brands. They are able to leverage the success of existing products to get shelf space for newer ones."

THE ACQUISITION

While Carson was an attractive company, the acquisition process was not without its challenges. To begin with, Keith and Wasik had to compete with a number of large companies that were also vying to acquire Carson. One such company was Alberto-Culver, makers of Alberto VO5. St. Ives Swiss Formula personal care products and owners of Sally's Beauty Supply. Added to the delicacy of the negotiations were specific concerns of the Minises, a prominent Savannah family that insisted the company maintain economic ties to their community. "In the end, I believe we made them a very good offer, which included maintaining the Savannah plant for the next 10 years," says Keith.

Financing the deal took all the creativity and diligence Keith and Morningside Capital could muster. "We had conversations with a number of financial institutions and some just weren't interested in financing the deal because it was highly leveraged," says Keith. Ultimately, the majority of the acquisition was paid for through debt--only $17 million of the $95 million purchase price was equity raised through venture capital. Even with the rapid expansion of the ethnic personal care products market, Keith says there was still a need to educate bank lenders about black consumers in order to convince them of Carson's growth potential.

"I've gone to investor meetings where I've had to stand up for 45 minutes and try to explain how essential these products are and that black women straighten their hair for more control," says Keith. "Part of the challenge was getting investors comfortable with the fact that we were marketing to an African-based consumer. The investors recognized that black and white disposable incomes are not equal. They were wondering how women of color were able to buy these products. We were able to show them statistics which prove that black women spend [a significant amount of money] on their hair and there's no correlation between income and hair care."

Once Keith and Morningside Capital convinced investors of Carson's growth potential and that its products could succeed on a global scale, questions arose about the company's management team and whether it could successfully lead Carson's growth.

"Strengthening the management capability of the company became a major issue with investors," admits Keith. In response, he assembled the core of Carson's current management team to assist in the acquisition process. The team included Dennis Smith, who was the only Carson veteran retained; Joyce Roche, president and CFO, who previously worked as Avon's vice president of global marketing; and Brad Creswell, executive vice president of finance and CFO, who had previously worked in Mergers & Acquisitions at Bankers Trust and was a financial consultant during Carson's acquisition process.

Following the acquisition, Miriam Muley, executive vice president of marketing, who had previously worked at Avon as general manager of irs African American Business Unit, was added to the staff. In addition, Creswell (who left Carson to head up his own Seattle-based firm, Northwest Capital Appreciation Inc.), will be replaced by Robert Pierce, who was previously executive vice president and CFO for Maybelline Cosmetics.

According to Sydney DeJongh of the Chicago-based venture capital firm Ark Capital Management, a new management team was a significant factor in Keith being able to pull off such a highly leveraged deal. "Their management team was well received on Wall Street," says DeJongh. "They took people from places such as Harvard and Avon who had the training. If Carson can get over the initial [expansion] hump, they can become an [ethnic personal care] institution."

On August 23, 1995, Carson was purchased for $95 million: $83.2 million in cash (raised through a combination of traditional bank debt, private institution funding and venture capital equity) and $11.8 million in junior subordinate promissory notes issued to the Minis family.

A STRATEGY FOR GROWTH

Focusing on the company's mission was the first order of business for Carson following the acquisition. "It was awfully important to broaden the scope of Carson's market," says Keith. Two months after the purchase, he and 41 other Carson employees--from the executive level to the mail room--convened for a week-long strategy meeting to define the new company's goals. According to Keith, some of the best ideas came from staff who worked in production or shipping.

The chairman and CEO remembers one defining moment in particular. "I was in a breakout group when a woman named Virginia Stephens, from shipping, came up with an idea that changed the entire focus of our company," he says. "Our mission statement had been for the new company to become the leader in ethnic hair care, but this woman suggested that, with Carson's brand name and history, we should broaden our scope to become the leader in ethnic personal care."

From that one suggestion, Keith and the other employees were able to develop a five-point growth strategy. The plan calls for Carson to increase its share of existing markers by upgrading products like its Dark & Lovely and Excelle relaxers; increase global expansion by broadening its presence in Africa, Europe. South America and the Caribbean: create new products categories, such as cosmetics and bath items to be sold under the existing brand labels (e.g., Dark & Lovely make-up); develop a salon-exclusive product line for the U.S. market; and acquire production facilities and other ethnic personal care product brands.

Much of the company's growth strategy has already been put into effect and is being financed through existing cash assets and capital generated by the South African and U.S. stock offerings. Last year, in order to attract buyers to existing products, Carson repackaged and upgraded products for its Dark & Lovely, Excelle and Magic Shave lines. The company researched and developed a relaxer process that significantly reduces the chance of error and overprocessing, which was added to both the Dark & Lovely and Excelle relaxers. As a result of these improvements and the hiring of a dedicated sales staff, Carson increased its 1996 fourth-quarter sales by 33% over the previous year's fourth-quarter sales.

In August, Carson began selling its new line of Dark & Lovely cosmetics (which includes lipsticks, powders, eyeshadows, blushes, foundations and nail polishes) through drugstores and retail chains such as Wal-Mart and Kmart. The company expects m reach first-year sales of $5 million. With the ethnic cosmetics market projected m grow 15% this year, beauty consultant Alfred Fornay, former beauty editor for Ebony magazine, says that Carson could indeed reach its goal.

"They're really dealing with making a quality product for their price point," says Fornay, who explains chat Dark & Lovely cosmetics will be competing with other drugstore lines like Posner, Maybelline's Shades of You, and Black Opal. "Their foundation colors are good, and that's still an issue with women of color." Fornay notes, however, that Carson is not quite on the cutting edge in terms of cosmetic product development. While he believes char Dark & Lovely's Creme-to-Powder foundation--the line's centerpiece product--will appeal to women, he says that the company is late in getting this particular type of product to market. "Cosmetic consumers are trend conscious, but it's not necessarily a bad thing chat [Carson] waited, because [if the trend was not successful], it could keep them from losing their shirt."

Other products that Carson plans to launch by the end of this year include Compositions by Carson, a line of salon professional products, a bubble bath under its Beautiful Beginnings product line for pre-teens and a female depilatory called Naturally Soft by Cutex.

Most significantly, however, Carson has aggressively expanded its global market presence and made a number of important acquisitions both domestically and internationally. In 1995, Carson dispatched an in-house sales staff and launched a major marketing campaign in the Caribbean. As a result, sales rose as much as 67% on islands such as Jamaica. In Brazil, Carson recently secured a license to distribute products, and in March, the company exported its first shipment. Though the initial shipment consisted solely of four shiploads of Dark & Lovely hair products, which are salon-exclusive in Brazil, the company has plans to export its other product lines.

Carson also bought a $1 million South African production facility, which became operational in March 1996, as well as a $1 million plant in Ghana, which has been up and running since June of this year. According to John Brown, both plants will produce regionally-specific Dark & Lovely products (which are also salon-exclusive in Africa) as well as country-specific brands such as the recently acquired South African line of skin care products called Nu-Me and a budget relaxer product called Restore Plus.

Prior to purchasing the planes, Carson had contracted a South African-based facility to produce all of its products sold in Africa. But when the company began to expand into new countries, production capabilities and quality control became a concern. "We wanted to gun control over our products," says Brown. "Also, the economic value far outweighed our continued use of a contractor," he adds, noting that Carson also plans to purchase production facilities in eastern Africa by early 1998.

Other Carson acquisitions include the $41 million purchase of Cutex, a well-known nail care produces company in April 1997. Cutex generated $27.5 million in sales last year and also made a $3 million investment in AM Cosmetics, a New York City-based company that agreed to produce the Dark & Lovely Cosmetic line In addition, Carson acquired Let's Jam, a hair styling company, for over $5 million in March 1997.

NEW AND IMPROVED COMPANY GOES PUBLIC

When Carson's stock went public in South Africa in July 1996, it had an initial offering price of 2.00 rend and generated 20 million rend ($4.6 million) in capital. It has since traded as high as 16.00 rend and the stock's earnings are financing a $700,000 expansion that will double the production capacity of Carson's South African plant. Similarly, Carson's U.S. initial public offering (IPO) in October generated approximately $43.5 million in company proceeds (another $23.8 million was earned by the Minis family from the public sale of their shares) and allowed Carson to pay off all the company s junior debt, half of the senior debt and refinance the balance of the debt it incurred during the leveraged buyout. In addition, the company is using the proceeds to finance both irs expansion into new markets and the purchase and development of new products. Carson's current debt load stands at about $80 million.

Unlike its South African stock, however, Carson's U.S. stock has not experienced the same type of dramatic price increase. In fact, the stock recently experienced a decline that concerns some on Wall Street. Though the U.S. stock opened at $14 a share and traded as high as $17, it recently dropped as low as $7, and in early June sold at around $10. According to Jonathan Hudson Webb, a principal in the Chicago-based securities firm Hudson Knight (which, along with Merrill Lynch and DLJ Securities, was involved in the U.S. IPO of Carson stock), the recent sharp drop in the company s stock can be attributed to a shortfall in its sales and resulting earnings during the first quarter of 1997. "We had initially forecast earnings at 12 cents per share in the quarter but lowered our estimate w hen management indicated the shortfall." Webb notes that Carson stock actually earned 5 cents a share during the first quarter.

Carson s director of special investor relations, Skip Porter, says the company's decreased profits were the result of both flat domestic sales during the first quarter and increased spending on new product line preparation. According to Porter, Carson launched a promotional campaign in conjunction with the Dark & Lovely product line's 25th anniversary, and higher volumes of product were shipped during the fourth quarter of 1996 and first quarter of 1997.

"The promotion took off quicker than we anticipated, and December sales were phenomenal. We were up 32%," says Porter, explaining that Carson projected the sales increases would be spread out over a two-quarter period. "We ended up with some excess inventory at retail during the first quarter, but it was off the shelves by April."

Porter also notes that during that same period, Carson spent a significant amount of money hiring staff end preparing for the August launch of its Dark & Lovely Cosmetics line--expenditures which dipped into profits.

THE FUTURE

To a great extent, Carson's rapid expansion into the global market fueled its successful public offering on both the Johannesburg and U.S. stock exchanges. It is this aspect of the company's growth that appears to be generating the largest amounts of interests from investors, "investors are clearly looking at [ethnic products] as a growth area," says DeJongh of Ark Capital Management. "Maybelline, Procter & Gamble and Revlon, they all recognize the strength of the global market. It is growing faster than any other."

Webb, of Hudson Knight Securities, predicts Carson's international growth should expand at twice the rate of its domestic growth over the next five years. "Our research department is optimistic about Carson's future growth and we have a buy recommendation on the stock right now," says Webb, who offers that his company contributes a fair amount of its view to Carson's international prospects.

Carson itself predicts thee at lease 45% of its sales will be generated on the international market by the year 2001, and already $90 million of the company's $230 million worth rests in its South African market alone.

Webb warns, however, that Carson must keep a sharp eye on its domestic expansion goals, with special focus on getting its products to market on time. Late last year, fuse as retail demand for the company's products increased due to the Dark & Lovely 25th anniversary marketing strategy, the company had difficulty meeting orders. Though the company was initially successful in getting larger amounts of product shipped, a hurricane shut down its Savannah production facility for two days in September, backlogging orders. The company proved unprepared to divert product from other planes in order to meet immediate domestic market demands. Although the company has since expanded production capacity at its Savannah plant to meet higher market demands, Carson's success may well lie in its ability to develop backup production facilities at each of its other plants.

The future for Carson Inc., however, is indeed promising. With production facilities around the globe, plans to launch a number of new products this year and net sales forecasted to reach $108 million this year (up nearly $30 million over 1996), Carson is well on its way to becoming the leader in ethnic personal care products.

As Leroy Keith puts it: "This is no longer a little sleepy company in Savannah serving a domestic market."