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Beauty had another bumper year in 2022. Myriad brand launches, product innovations, store openings and acquisitions proved the industry’s ongoing resilience, despite lingering uncertainty due to rising inflation, a looming recession and ongoing supply chain woes.
The global beauty sector is on track to reach $546 billion by the end of the year (up from $529 billion in 2021), driven by growth across all categories, with the potential to hit $596 billion by 2025, according to data from Euromonitor International. However, the battle is far from over, warns David Schneidman, director of Alvarez & Marsal Consumer Retail Group, which specialises in business transformation.
While some prestige beauty brands are benefitting from affluent consumers continuing to splurge, several others have been challenged. The Estée Lauder Companies, parent to brands including Mac Cosmetics and Bobbi Brown, saw organic sales fall 5 per cent for the quarter ending 30 September, while net sales fell 11 per cent to $3.93 billion. The company is particularly dependent on China, which accounts for over a third of sales. L’Oréal also said China hurt sales in its luxury division, but reported a net sales increase of 9 per cent to €9.58 billion for the same quarter. It’s less reliant on China, with only around 20 per cent of sales coming from the region.
“All signs point to a tough holiday season and a tough global economic outlook for the next 12 to 24 months,” says Schneidman. While beauty brands have fixated on growth for a good part of the last decade, cost and operation will define 2023, he believes. “We’re going to see who can tighten up their operations and finances as prices increase and consumers are potentially spending less.”
Product reinvention
While stockpiling cash and streamlining their businesses, brands are focused on becoming essential to consumers. One way to do so is through product innovation. Unlike years past, when consumers would show off an extensive #shelfie of beauty products, many younger shoppers have a new preference for “skinimalism”, opting for simpler routines and less wasteful packaging.
Brands are responding with fewer but more innovative launches. It’s not about introducing a steady flow of new SKUs to drive newness and excitement, but improving what’s already on the market. In September, Hermès launched the Plein Air complexion balm — a hybrid makeup-skincare-fragrance product. Mac Cosmetics unveiled a performance-based skincare line, designed to simultaneously improve skin and enhance makeup. Laura Mercier is launching a new foundation and powder, formulated with nourishing ingredients such as peptides and vitamin E, traditionally found in serums and creams.
Consumers increasingly view wellness through a much broader and more sophisticated lens, encompassing not just fitness and nutrition but also overall physical and mental health and appearance. They’re spending more on products and services that promote better health, says Alvarez & Marsal’s Schneidman. “Ingredients like hyaluronic acid are becoming more prevalent [in makeup]. Even a tinted moisturiser has a functional aspect where it gives you even skin that matches your tone, but it’s also moisturising your face.”
Product innovation in formulations will continue to be a key trend across global markets, says Emilie Hood, senior beauty research analyst at Euromonitor International. “Consumers will move away from extensive routines and heavy makeup looks, favouring multi-use products, leading to lower volume sales than pre-pandemic, but higher unit prices,” she predicts.
New retail channels
Traditionally, prestige brands have lived in a high-end retail environment, such as luxury department stores, to target and sell to consumers. But, in a bid to reach today’s consumer who is discovering and shopping across multiple touchpoints both online and offline, brands are prioritising convenience and accessibility, and turning to non-traditional outlets and partnerships.
In July, Ulta Beauty, the largest beauty retailer in the US, brought brands like Fenty Beauty, Olaplex, Tula and Peter Thomas Roth to Allure’s in-person and online beauty stores. Ulta has also rolled out shops-in-shops at more than 100 Target stores nationwide and online, with the goal of reaching 800 across the US in the coming years. In August, French multinational retailer Sephora ramped up its US presence with a rollout across all of Kohl's 1,100 stores. And now available in airports, cult brands Aesop and Byredo can be purchased through Gate Zero, a new concept store by streetwear publisher Highsnobiety and travel retail giant Gebr Heinemann.
New players are also coming to the fray. In April, following its acquisition of beauty retailer Violet Grey, luxury e-commerce platform Farfetch and its retail store Browns entered the beauty market. The gave established brands including La Mer and Charlotte Tilbury, as well as exciting upstarts such as Haeckels, a more global platform to sell on. In November, Sephora announced it would re-enter the UK market after closing stores in 2005.
“As brands tighten up their cost structures, knowing they need to drive more sales, [they will be] looking to other markets to drive incremental sales growth rather than trying to continue to win in their own backyard,” says Schneidman. The right partnerships can help “drive traffic into your store that you normally would not have” in “a very reputable way”, he adds.
Capitalising on star power
Famous names have been aggressively cashing in on the boom in prestige skincare. Today, the global beauty market is teeming with brands from celebrities such as Ciara, Pharrell and Jared Leto, influencers including Tina Craig and Charlotte Palermino, and an even younger generation of creators such as Emma Chamberlain and Hyram. Celebrities are always looking for ways to diversify their revenue streams, says Schneidman. “It’s a tale as old as time.”
Celebrity-led brands generate significantly more noise than regular brands “because [they] already have that brand recognition”, says Schneidman. However, most celebrities have a limited timeframe for relevancy before consumers take interest in another star; therefore it makes sense to take the opportunity “to drive incremental penetration, footprint and distribution for a short to medium term”, he believes.
Some critics question whether celebrity labels are squeezing other brands out of an increasingly competitive industry. Execution and credibility will be key to survival, regardless of whether the brand was launched by a well-known person or not, Schneidman believes. “If your brand is based on a product, mission or value proposition around diversity and equality, it can take a lot longer to drive that awareness,” he explains. “But, once you do, that loyalty can last in perpetuity.”
De-risking operations
Celebrity brands are an appealing target for investment or acquisition. In March, agency SuperOrdinary bought a majority stake of Joanna Vargas for an undisclosed sum. In June, growth equity firm Sandbridge Capital took a minority stake in U Beauty, the skincare brand founded in 2019 by fashion and beauty influencer Tina Craig and her friend Katie Borghese. In November, Estée Lauder Companies acquired Tom Ford in a $2.8 billion deal — the largest in the luxury industry this year, serving as a testament to not only the strength of prestige fragrance but also the appeal of Ford's star power.
More deals can be expected next year, although they will likely be of a smaller scale, Schneidman predicts. “What [these companies are] doing is de-risking but [they] are also elevating the category,” explains Schneidman. “Many beauty and personal care players now have venture arms where they can make smaller investments and dip their toe in.” In doing so, they’re giving brands access to their network and potential knowledge on how to succeed, he says. “But, they’re also attaching themselves to a lot of brands and they don’t know who’s really going to win and make it.”
Schneidman estimates that 95 per cent of fragrances and personal care lines from fashion brands are licensed. Among the exceptions are Chanel, the LVMH group and Dolce & Gabbana, which pivoted in February to take beauty back in-house. Since August, rumours have circulated that Kering plans to follow suit. However, groups such as Coty and L'Oréal will continue to play an important role as “a lot of celebrities and fashion houses don’t have the capabilities to [manufacture and distribute products] by themselves,” he adds.
Meanwhile, growing awareness of misinformation, fake reviews and so-called sponcon means that consumers are asking more questions about products, ingredients and efficacy, says Olivia Houghton, deputy foresight creative editor and lead beauty analyst at The Future Laboratory, which identified accreditation as one of the defining beauty, health and wellness trends for the year. Amid surging inflation and resulting price increases, as well as a more health-focused mindset since the pandemic, research, testing, proof points and facts can help brands to foster understanding, trust and positive sentiment among consumers, she says. “Hard data and science are bringing trust back to the beauty sector that has typically been powered by inflated claims and surface-level results.”
Brands are already becoming more meticulous about the claims that they’re making. Science-led skincare company Deciem, for example, has a regular PR team as well as a dedicated scientific communications team, whose “responsibility” is ensuring that it is “not misleading consumers on product benefit”, according to the company. The two work hand-in-hand. “We ensure that all educational content and product efficacy claims are true, can be supported with clinical trial data, and are not deceiving our customers.”
What’s next
Looking ahead to 2023, science and technology can help safeguard beauty brands against future shocks, secure supply chains and provide fresh ideas for products and experiences, says The Future Laboratory’s Houghton. “Brands can position their in-house expertise as their USP and make scientific innovation their point of difference in a crowded marketplace.” As corporate responsibility continues to be a priority, brands should think beyond slapping a blanket term such as “vegan”, “clean” or “natural” on a product, adds Schneidman.
One of the categories most ripe for disruption is fragrance. Byredo is testing what fragrance can look or smell like in the digital realm. In June, the fragrance brand teamed up with digital fashion startup Rtfkt on 26 wearable digital “auras”. The virtually rendered ingredients represent emotions that consumers can select to wear online, to express their mood.
Maintaining a seamless omnichannel experience will remain paramount, says Schneidman. “Online is the best place to drive awareness, to find your customer, to learn and to validate your product. But the cost of acquisition online is expensive,” he says. “Consumers want to smell, feel and look at a product [so] the physical store is back. Beauty is a unique category that is both emotional, functional and transformative. And so with that, people want to have a personalised experience and [the ability] to try the product [online and offline].”
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