As a strategy, celebrity-backed brands have been hugely successful in recent years, but they’re not immune to the realities of a difficult direct-to-consumer market.
This week, diaper and baby care business Hello Bello, backed by Kristen Bell and Dax Shepard, filed for bankruptcy.
Bell, Shepard, and a management team formed the company in 2019, partnering with Walmart to develop a brand that made premium, natural baby products accessible to lower-income consumers. It launched exclusively in Walmart stores and on Hellobello.com, hitting $80 million in sales within twelve months.
Hello Bello’s early success led to an investment from VMG Partners in July 2020. The deal handed VMG a 35% stake for $20 million, with proceeds to support accelerated international growth and an expanded retail presence across grocery, drug, wholesale, and specialty markets.
The ensuing pandemic provided an early sales bump, and by December 2021 Hello Bello had become the largest direct-to-consumer diaper brand in the U.S., boasting 130,000 subscription customers (on top of its retail business).
Diaper Production Soiled
Hello Bello produced its diapers via a fixed-price contract with a single outsourced contract manufacturer, Irving Products, but when that contract came up for renewal in 2021, Irving pushed through a more than 18% price increase.
The revised pricing wasn’t surprising in an era of accelerating inflation and tangled supply chains. Hello Bello, however, found itself stuck between a sole-source manufacturing rock and a wholesale retail hard place.
Its primary channel partners, Walmart and Amazon, refused to accept a price increase of more than 10%. Where other businesses could have passed on the cost to consumers, Hello Bello had no option but to take a meaningful hit to its unit economics.
Worse, the company’s margins were already paper thin, a function of its launch into a mature market with price as its only competitive differentiator — Hello Bello was so reliant on its low-cost value prop that management said that, even if Walmart and Amazon had allowed it, this level of price growth might’ve killed the business anyway.
Manufacturing Mistakes
Hello Bello responded with a bet-the-company move into vertically integrated manufacturing, believing they could regain their lost margin by taking production in-house.
The decision appears borne on questionable logic: assuming Irving raised prices based on the same macro headwinds faced by everyone else, the move to vertical integration should provide no more margin than the contribution Irving was taking from its contract with Hello Bello.
But, because Irving was a contract manufacturer operating a meaningfully more scaled and sophisticated platform, Hello Bello could realistically have hoped to capture just a small portion of what Irving’s take had been.
That’s not to mention the gap in institutional knowledge. A full-scale manufacturing launch under a financially induced time crunch is not the type of scenario that typically leads to successful outcomes for inexperienced execs. But, whatever the thought process, Hello Bello felt the move made sense on paper (or Excel).
Unsurprisingly, it quickly turned into a logistical nightmare.
The company hired an Italian manufacturing design firm to custom-build its diaper production line. In normal course, Hello Bello would’ve sent an employee to collaborate on development in Italy before the machines were disassembled and shipped to a newly-purchased Texas manufacturing facility. The design firm’s engineers would have accompanied the parts to Texas, overseeing final installation and qualification.
None of that was possible in the midst of a global pandemic (which the company presumably knew prior to proceeding with this option). Instead, unfamiliar third-party U.S.-based engineers took control and struggled to stand up the lines at the Texas site.
After a more than six-month delay, Hello Bello kicked off production at the owned facility, only to immediately run into prolonged raw materials issues.
Ongoing supply chain woes combined with sourcing and quality control shortfalls meant a stop-start production schedule. That, in turn, killed Hello Bello’s employee recruitment and retention — after hiring a full cohort of floor employees (no easy task in a historically tight labor market), production would halt, and the recently hired team would quit after their hours were cut or placed on indefinite hold.
Sorting through the mess, it took until June 2022 to fully insource diaper manufacturing. A feat in itself, but rather than provide a much-needed lifeline, Hello Bello’s vertical integration produced diapers at roughly the same prices they’d been charged by Irving, the outsourced provider they’d been working to ditch for more than a year.
In management’s words, the only thing vertical manufacturing delivered was an “untenable position with severe liquidity constraints.”
Heading for the Exit
Pandemic-related inflation and supply chain issues quickly replaced the early COVID revenue bump. Higher shipping costs (both raw materials and finished product) and increased raw materials costs worsened margins, while delayed product shipments prevented the business from fulfilling customer orders.
Taken in context with the concurrent manufacturing-related hit, Hello Bello’s unit economics were badly upside-down. For the most recent fiscal year ended January 31, 2023, the company reported negative $15 million of EBITDA on $179 million of revenue.
Around the same time, Hello Bello hired Jefferies to find a buyer, while also taking $30 million of rescue capital (in the form of subordinated notes) from VMG Partners to fund the cash burn until exit.
The sale process launched with initial outreach to 155 parties. Eighty signed NDAs, of which only four opted to submit IOIs. By February, all four of the bidders had declined to proceed.
Continued outreach managed to get a non-binding LOI signed in August with cleaning products business Grove Collaborative. They also backed out shortly thereafter, concerned with further acceleration in cash burn and late vendor payments, per The Information.
Bankruptcy
This month, Hello Bello finally managed to secure a deal with Hildred Capital Management. The healthcare-focused investor signed a stalking horse asset purchase agreement valued at $64.9 million, leading to this week’s Chapter 11 filing.
The filing also contemplates debtor-in-possession financing of $47 million from Hello Bello’s existing lender, including $12 million of new money. Based on the Hildred proposal, and after taking into account the new money DIP, VMG looks set to take a meaningful loss on the rescue financing it provided last year (on top of its worthless equity stake). An expensive lesson on the perils of direct-to-consumer.