How MCoBeauty built a $1 billion empire from makeup dupes

Aussie scale-up MCoBeauty has built a $1 billion beauty empire in only eight years.

Its business model?

Lux for Less.

‘Duping’ other popular beauty products and offering a low-cost alternative.

Today, MCoBeauty has grown to the number one cosmetics retailer in Woolies, and is taking the US by storm.

And it was just valued at over $1 billion. Freaking bonkers — particularly for an Australian business!

Let’s break down the MCoBeauty model.

How does the business work?

The MCoBeauty operating model is simple.

1. Identify other popular beauty products and work out what is patented and trademarked
2. Copy the product with a lower-cost competitor
3. Distribute the product in supermarkets

The team is extremely intentional and unashamed about the way it mimics competitors.

As founder Shelley Sullivan explained to the ABC:

“We have a very stringent process that we go through when we decide that we want to launch a product”.

“We have a whole product development team of about 10 people, and we have a great external lawyer … and we have a look at the product packaging, and then we go through a process of seeing that … there’s no trademarks and there’s no patents.”

Once they know what is protected, and what is not, MCoBeauty is ruthless about producing products that are nearly identical replicas…

Is this even legal?

That was my first question.

The answer?

Sort of.

It probably should be illegal, but for the fact that MCoBeauty has really good lawyers.

In 2021, MCoBeauty was sued by Tarte Cosmetics for copying their “Shape Tape” concealer packaging.

After the lawsuit was lodged, MCoBeauty quickly changed its packaging to look slightly different.

In the words of the founder: “We changed that quick smart,” Sullivan said.

But even if they were sued, it would have been incredibly hard to prove that they were infringing any laws.

There is a ‘Wonderment’ test that the law applies as patent expert Dr Sarah Hook outlined to the ABC.

Basically, it would need to be proven that a customer could mistake one product for another on the shelf.

But because almost all of MCoBeauty’s products are sold at supermarkets like Coles and Woolies, it means that by definition, they won’t appear next to the luxury products that they copy.

So they’re off the hook…

The Charlotte Tilbury case

In 2023, MCoBeauty copped some heat for copying Charlotte Tilbury’s ‘Hollywood Flawless Filter’.

Tilbury’s product was a $70 RRP concealer only available domestically at Mecca.

Within months, MCoBeauty had a competitor at half price – that looked drop-dead identical, but for a few minor changes in the packaging.

When asked to explain whether or not their actions were legal, MCoBeauty’s Patent Lawyer Len Mancini explained that:

“Let’s start with the word ‘Flawless’. Charlotte Tilbury doesn’t own the word Flawless. Charlotte Tilbury has a trademark for Hollywood Flawless Filter. Those three words in combination. So using the word Flawless is not an infringement of that trademark”.

Whilst Len might be right from a legal perspective – whether or not this is ethical is another question.

A brand built off of influencers

Whether or not you like the MCoBeauty model, one thing is for certain.

They have absolutely crushed influencer marketing.

Some of their stats include:

But this isn’t just a marketing tactic – it was also a regulatory decision.

In Australia, comparative advertising is regulated by the ACCC.

Whilst legal, you must make sure that all claims made are true, and not deceptive.

This makes it very tough to say that your products are ‘just as good quality’ as another, without objectively being so.

But what if those claims are made on behalf of your ‘customers’ (ie influencers)?

Using a swathe of influencers allowed MCoBeauty to directly compare its product to its peers without facing regulatory scrutiny.

Consumer perceptions

Even more interesting, though, is that the brand seems purpose-built for UGC platforms.

After all, beauty dupes have been around for decades; they’re not a new phenomenon.

So why has MCoBeauty absolutely taken off?

I think there are a few interesting things going on here, but the rise of TikTok and UGC content feels like a real inflection point.

Dupe products are almost built for virality.

If you look at search traffic volume for ‘dupes’ over the last 5 years, the category is absolutely taking off.

Interestingly, consumers actually seem to view brands like MCoBeauty in a positive light by offering a lower-cost alternative to otherwise unaffordable beauty products.

In a world where beauty giants like L’Oréal and Estée Lauder make billions, having a low-cost option feels like a win for the everyday customer.

But not everyone is as forgiving of the business…

In the words of beauty writer Minnie Isaac:

It’s often just a packaging dupe, betting on the fact that people purchasing them haven’t tried the high-end versions to accurately compare … the product ingredient lists are often worlds apart.”

MCoBeauty is pretty shameless when it comes to its duplicates.

And the numbers speak for themselves.

The financial teardown

I’ve got to be honest.

MCoBeauty’s numbers are actually ridiculous.

For a business built on undercutting its competitors by offering affordable solutions, I can’t believe the margins are this good.

In FY24, MCoBeauty did 27% net profit margins and nearly $50 million in profit.

It also has consistent 40% EBITDA margins and 65%+ gross margins. Wow.

Perhaps it is cutting corners in terms of the quality of the product or ingredients, but it’s hard to tell.

Beyond the product questions, the business seems to be acquiring customers very, very efficiently though…

One could say that is the beauty of this business model.

Looking at the operating expenses, the business only spent $11.2 million on sales and marketing expenses in FY24 (only 6% of revenue), which is way, way less than other competitors. L’Oréal spent 32% of its revenue last year, for instance.

So how come it can spend so little on advertising?

Well — because it is a copycat of other products in the market, its competitors do a lot of the marketing for them.

To grow revenue 3x in 1 year is also pretty phenomenal, and very uncommon for an Australian business.

Breaking down the deal

For all of its controversy, MCoBeauty is a masterclass in corporate finance.

In 2022, MCoBeauty sold a 50% stake to billionaire Dennis Bastas’ DGB Group for an undisclosed valuation.

From a founder’s perspective, this helps to de-risk the business by locking in a guaranteed payday, with further upside if the business continues to grow.

Not only was it smart to sell part of its equity, but Shelley picked her investor very well.

MCoBeauty could have sold its equity to anybody. But the backer it chose, Dennis Bastas, owns Arrow Pharmaceuticals: one of the largest pharmaceutical manufacturers in Australia. He unlocked a new distribution channel for the business in stores like Chemist Warehouse, helping to drive incredible growth.

And grow it did.

Revenue basically 4x’d in a year. The business’s expansion into the USA is also exploding — going from $97,000 in sales in 2023 to a whopping $24.3 million just a year later!!

In February, MCoBeauty sold the remaining 50% stake of the business to pharmaceutical billionaire Dennis Bastas, valued at $1 billion. A pretty incredible outcome considering the business was only founded in 2016.

Key takeaways

Bastas owns a number of other beauty companies, including Nude by Nature and Make Up Cartel, which he purchased for about $60 million last year off of Crescent Capital – so there is reason to believe we are starting to see the formation of an Australian Beauty empire.

Collectively, the Arrow Pharmaceuticals empire is touted to be worth more than $3 billion, and could be up for an IPO or a huge acquisition as it continues to grow.

This article was first published by SBO Financial.

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