New Federal Package CEO Melissa Niebes Plans To Double The Manufacturer’s Business In 5 Years

This month, Melissa Niebes, formerly a VP at Reckitt and L’Oréal, became CEO of Federal Package. Most recently president and chief commercial officer at the beauty contract manufacturer, she steps into a role previously held by Steve Dakolios, who has become vice chair and senior advisor to the company.

Acquired in 2011 by private equity firm Fulham & Co. and based in the Minneapolis area, Federal Package, which will be exhibiting at Beauty Independent trade show Uplink Expo next week, has more than 40 years of experience navigating the ebbs and flows of the beauty industry. An organic-certified manufacturer, it has a storied history in packaging—it’s said to be the first company to use the plastic polymer polypropylene in propel-repel containers—as well as formula production across products like lip balm, deodorant and sunscreen. To respond to the contemporary market, it’s amplifying its research and development, microbiology lab and filling capacity, and helping brands focused on profitability by closely examining product costs.

Beauty Independent caught up with Niebes to discuss her ambitious plans to grow Federal Package, private equity investment in the contract manufacturing space, ingredient quality degradation, what it takes for beauty brands to make it today, and a few things they should know about working with a copacker.

What are some of your goals as CEO?

I was brought on to help define the long-term strategy for the company. As we look across the portfolio of customers, types of products we create and brands, it was very apparent based on my background and the beauty industry that, while we have a great niche in wax-based anhydrous products like balms, deodorants and sunscreen sticks, there’s a right for us to own some space within other categories: lotions, creams, serums and SPF lotions, which is a very large category and it’s growing quite nicely with the onset of the education around skin cancer being the No. 1 diagnosed cancer. I myself have had skin cancer removed.

There’s an opportunity for us to try to diversify the portfolio of customers and continue to grow. We ambitiously want to double the business in the next five years and go into adjacent categories. We have the equipment, we have the capability, and we have the staff to do so.

How big is Federal Package?

There are a lot of bigger contract manufacturers than us, and there are a lot of smaller contract manufacturers than us just within the city of Minneapolis, where there’s a dozen or more contract manufacturers, and we’re in the middle. Bell and Apex are going to be bigger than us, and some of the others are going to be a bit smaller. We all fit a need. Our MOQs, what brands we service and what brands we’re looking for are different.

Our MOQs are anywhere from 5,000 to 10,000 depending on what the product is. Sometimes that’s harder for DTC startups right out of the gate. We tend to look for brands that maybe have outgrown the CM that they started with because their volumes got too large. A lot of brands tech transfer from smaller CMs to us for that reason. We have larger manufacturing lines and more robust quality processes, and they may be looking to get into OTCs because a lot of the smaller CMs don’t do OTC.

What expansion have you done or are you doing?

Our strategy is really to lean on the pillar of innovation and part of the expansion was our laboratories. So, we expanded our R&D lab, our microbiology lab as well as our quality assurance lab all to gear up for the growth of going into lotions, creams and serums. More water-based products mean exponentially more testing.

For 10-ingredient anhydrous products, you’re not testing a lot of things. We only technically test odor, color and appearance. You’re not testing raw materials for microbes, which you would for a lotion because of water-based content. So, we’re testing raws plus you’re going to be testing across the entire compounding process as well as the production process and finished goods. It’s a lot more testing, a lot more rigorous. That was all put in place as well as the R&D side to continue to build on our stock portfolio.

We have been traditionally more of a custom shop. Customers would come to us with formulas that they either already have, want to tweak or a target that they want to mimic in the market. What we’re getting a lot more of from brands is, what do you have ready for me to put in a bottle and put on the market now with a few tweaks? So, building out that stock portfolio is another big piece.

Then, manufacturing lines. We put in two new manufacturing lines last year. Part of that was because we were bumping up against capacity, which is a good problem to have, and also getting ready for additional growth, so getting bigger bottle-filling machines.

There’s been more private equity investment in beauty contract manufacturing. What are you are seeing in the landscape? 

There’s a lot of M&A activity happening right now. A few private equity firms have bought two, three or four [CMs], and they’re making a network out of them. That provides strength to that cohort to say, this CM does this really well, and this other CM does that really well, and now they can cross-sell. I definitely see that trend continuing to grow. Also, we’re seeing vertical integration, so more contract manufacturers bringing to market either white-label or true brands.

After the pandemic got underway, there was a big supply chain crunch. What’s happening along the supply chain today that’s impacting you?

We haven’t had constraints. The bigger issue for us has honestly been quality. We’re working on redundancies of suppliers. We always want to have at least two sources, and we’re seeing a need to go deeper and qualify more materials for substitution. We’re going to continue down that path as we’ve seen a degradation of quality.

Why do you think those quality issues are occurring?

There’s margin pressure. The question is, are shortcuts being taken? Sometimes, it’s not the actual product itself, but it’s what it comes in. You have ripped bags, tears and holes, whether they’re thinning out a plastic liner or a barrel doesn’t get completely cleaned. So, you get some contaminated product. For us, if we don’t know if it’s contaminated, we don’t want to take that chance.

Tell us about the packaging side of Federal Package’s business.

We have 17 different propel-repel containers. It’s a very niche container offering of anything that’s going to take the product up or down for lip balms, deodorant, etc. The biggest thing that we’re seeing is everybody’s asking for PCR, so post-consumer content, which has become hard for us to find because we have products that touch the skin and specifically touch your mouth. You do ingest part of your lip balm that you’re putting on your lips.

We only use FDA-regulated, which means that cannot be like a Windex bottle previously so there’s no issue with any sort of chemical that would come into contact with the consumer. That limits our PCR supply. It also affects pricing. There’s a pretty big price differential between virgin and post-consumer recycled content because of the process that it goes through. You’re talking a good 50-cent difference at a minimum from a price standpoint. Those are some of the challenges we’re having on that side.

Last year, we delved into whether there was a product quality crisis in the beauty industry. Do you believe there is a product quality crisis?

I haven’t been heard it necessarily called a crisis per se, but based on what we’re seeing and experiencing with materials, there’s [degradation of some of them]. I know some others are feeling that, too.

There’s so many new brands that are coming on the market at all times, and people are trying to lock in into sources. If something does become capacity constrained because more and more brands are trying to use that specific ingredient, especially if it has a technology piece to it, then you start either getting copycats or you start getting people where their capacity grows faster than the raw material they can procure. I think that’s part of what’s driving some of that.

What do brands not really understand about working with a contract manufacturer?

We have a fairly robust requirement gathering process, and when we start with a questionnaire, we see very quickly how sophisticated that brand team is. Depending on what level they’re at, we know if we have to educate. It’s things like sometimes they don’t realize that, going from four colors to five colors is going to change the cost to your product, and last minute sometimes we get the labels in and we’re like, “You changed this, what happened?”

So, there’s a lot that we do in education, which is fine, we’re happy to provide that. On the flip side, we can’t do everything. We can’t provide advice for everything. We’ve thankfully built up a lot of partners that we offer and recommend for label and regulatory compliance. Especially if they want product claims, they really should test for that, but they don’t want to spend the testing. We do use a software system to help with regulatory claims, whether it’s on raw materials or the formula as a whole itself. That makes it a bit easier. We use The Good Face.

What do you think it takes to make it today as a brand?

Brands should think about margin and where they want to be well in advance, really understand if my shelf price is X, then everybody makes their money down the line. We think about that, and we have a scoring system for brands to say, what is your retail shelf price?

We want to make sure that they’re successful in the market, but if they’re not allowing for the retailer to make margin, they themselves to make margin and for us to make margin, then eventually that’s going to get squeezed, and they’re going to end up having some issues and usually we get squeezed, right? Because the retailer wants more margin, and then we have to try and make things cheaper.

Elaborate more on the profit margins.

Right now, we aren’t making products that are less than really that $10 price point in the market. I mean, there’s a few that are little under that, but as we go into skincare, lotions, creams and serums, we would love to be at a shelf retail of $30 because that will allow everybody to have healthy margins and room for movement as needed.

Traditionally in the beauty space, retailers, they always try to push it up, but at least from my experience in the past, assume if they’re making somewhere between %30 and 40%, I would say brands need to target a %70 and then that allows us to make our margins.

What trends are you spotting based on what brands are asking you to do?

We’re getting a lot of SPF requests, so SPF lip balms have been super popular. That partly is because we do have stock formulas ready for that, so that is really turnkey for us. We’re seeing tinted SPF as well. We are getting a lot of deodorants. Brands that have a portfolio are looking to add that additional piece. There are so many trends that are going all at the same time. Natural and clean continue to still be in the mix.

With the regulatory landscape changing, what’s occurring in the sunscreen category?

Mineral sunscreens are definitely on the rise. That market is going to continue to grow with innovation around zinc and evolving minerals into a better product in terms of spreadability, weight and skin breathability. There are so many great raw materials now on the market that don’t feel like they used to.

How do you help brands with the shifting regulatory landscape?

As part of the intake form, we ask where they’re going to be distributed, and we have a pretty hard discussion about that upfront. If they, they’re like, “We will never go to Europe,” it’s like, really? You want to think about that in the beginning. You don’t want to find out down the road that you’re in the market two, three years, and you have to change your formula to meet a regulation you didn’t expect.

We definitely lean on The Good Face software to constantly check our stock formulas against regulation. We have contacts at the FDA, we’re part of associations like Independent Beauty Association that are also friendly with the FDA, and we stay up to date on what’s going to happen.

Brands are ramping up clinical testing. What’s going on in that area?

We are trying to bring as much in-house as possible. We do use certified labs, and they’re great, but are bombarded. We’ve seen lead times increase substantially. We have more equipment coming on for this year to qualify to be able to do more testing in-house wherever we can. We’ll never do human panel testing in-house of broad spectrum, RIPT, but as much as possible we want to do because it is more cost efficient and faster for our customers. So, it’s a value-add.

You mentioned you handle a lot of tech transfers. What’s the breakdown of your customers owning their formulas versus not?

It’s about a 50/50 mix for us. It tends to depend on where the brand is in their life cycle. Younger brands may not be the ones that own their formulas because they started with a smaller CM, so we get asked to reverse engineer and improve upon what they have. They may have started out with the formula they kind of settled for, but maybe didn’t quite like. They’re big enough now to move to a larger CM and get a product that they like better.

The bigger, more established brands will have bought out their formulas, and they already own them. Their CM may have stopped producing things. We’ve seen that happen where they’re not just like, we’re not going to make that type of product anymore. So, we see tech transfers that way or they start to have issues and look for a CM that is going to give them more attention.

We’ve been hearing from CMs about brands’ increased usage of independent cosmetic chemists. They express concern about that leading to formulas that can’t be scaled. What’s your feeling about brands using independent cosmetic chemists prior to going to a CM?

We do get that a lot, and we get it where typically it comes from another CM that we know. We’re friendly with other CMs in the market, and they will say, “We can’t scale this.” So, we take it, and we’ll have a conversation. We usually have to tweak something in order to make it work for scale.

We try not to make compromises so that you maintain the inherent look and feel, whatever the brand is trying to achieve with the original formula. I don’t necessarily see that as a negative. We like to see that as more of a challenge. How can we take this and actually get this to scale and get it to market?

How many people do you have working at Federal Package? What’s it like to work at a CM?

We have about a little over 100 full-time employees and around 60 temps between three shifts that we run five days a week. We’re private equity owned, but we are definitely a family organization. The culture here is very much that family orientation. We have a regular 9 a.m. standup meeting across functional teams. What are we producing today? Where do we have hurdles? Where do we have shortcomings as we look to the end of the week or even into next week?

It’s a very collaborative environment, and I think a fun environment. Typically, when we do a pilot for a brand that’s new, 90% of the time they’re here watching their products being produced for the first time, and they really like that interaction and involvement. I know some CMs don’t do that, but we think it is engaging and allows them to see the process.

What are you spending a lot of time thinking about these days as you try to realize ambitious goals for the growth of the company?

I need to maintain this organization and grow it for the employees and for long-term growth. My charge is running the business, so I’m always thinking about what we need to do to make sure that we are solid. For me, that’s a lot of looking around the organization and de-risking where we might need to. Sometimes that means we might need to slow down and that’s OK because I want to make sure that we are doing the right things, we’re not taking shortcuts, and we’re making sure that there is a longevity with the business.

We want to continue to make sure we’re up on the legislation and regulations, so making sure that we don’t miss something along the way. At the same time, it is that innovation. The fun side of it to me is getting the R&D team out to conferences, seeing what’s out there, going to trainings and continuing education to make sure that we keep that going internally so we have that pipeline of stock formulas and the ability to troubleshoot a formula that comes in.