People like to feel beautiful. Over the past ten years, Americans have spent over $500 billion on beauty products. By 2024, the Chinese are expected to spend more than $100 billion a year. In the past, most of that money would have gone to cosmetics conglomerates, such as L’Oreal and Estée Lauder, or consumer products giants like Unilever, selling every conceivable dye to make everything more attractive, from hair nails. But in recent years, newcomers, often more specialized and more digital, have entered the fray.
Now the upstarts are showing some wrinkles as their business models are tested, investors are losing patience with red ink and incumbents are upping their game. billion, fell by a quarter in 2021. The company laid off a third of its staff; its long-talked-about initial public offering (ipo) may be rumored for some time to come. Olaplex, a hair-care company that went public last September in a blockbuster IPO that valued it at more than $15 billion, has since lost half of its market capitalization. Do beauty challengers have to undergo their own metamorphosis?
The traditional way to market cosmetics was to pay millions to mostly white, mostly female supermodels and stars who appeared in ads in glossy magazines and on billboards. Moving products, most of which were made in-house, invariably involved a stand at a department store, drug store, or specialty retailer like Sephora. The upstarts took a different approach. They outsourced production and recruited social media influencers of all colors and genders to promote their brands. This was aimed at driving traffic to their online stalls, either on the companies’ own websites (an approach pioneered in the beauty industry by Glossier) or on existing e-commerce platforms such as Amazon and Shopify. in the West or jd.com and Alibaba. small in China.
This approach has great advantages. It gives start-ups access to data about buyers and their preferences, says Lindsay Drucker Mann, chief financial officer of Il Makiage, another young American makeup darling. “If we sell in bulk, we lose this information,” she explains. Given how quickly makeup trends can sometimes change – just think of the sudden popularity of minimalist “clean girl makeup” – such information is invaluable.
It also helps digitize beauty product purchases, which as a deeply sensory experience have long resisted digitization. Il Makiage develops artificial intelligence (AI) algorithms (sometimes by acquiring smaller AI companies) to help people choose the right shade of foundation. Other brands use AI-assisted questionnaires to help shoppers choose the right product for them.
Mastery of technology can also make it easier to identify and target historically underserved market segments. Fenty Beauty is aimed at consumers who, like its founder, pop icon Rihanna, have darker skin tones. In May, the company (partly owned by lvmh, a French luxury conglomerate) launched in eight African countries. Uoma Beauty, created by Sharon Chuter, an executive who left the old cosmetics industry for its inability to be more “multicultural”, offers 51 shades of foundation. Uoma’s sales rose sharply in 2021, compared to 2020. Pharrell Williams and Harry Styles, two other pop stars, each launched gender-neutral beauty brands. Revenue for Byredo, which has been making gender-neutral fragrances since 2006, jumped to $141 million last year from $18 million in 2020.
More and more, however, the numerical approach of the upstarts is showing its limits. Outsourcing, for example, allows companies to stay light on assets, but can prove costly in times of supply chain shocks of the kind that have rocked many industries during the pandemic.
The influencer-based marketing strategy, on the other hand, has been shown to be effective in encouraging initial purchases, but not necessarily repeat purchases. Additionally, as the influencer economy has grown, so have the checks demanded by the biggest names. They command up to $200,000 for a single social media post. Fees may rise further as incumbents increase their social media exposure, which most of them are desperately trying to do to attract younger shoppers.
The sad truth
Physical stores, where many purchases, especially of make-up, are improvised, remain essential to the beauty sector. Most Americans still buy their cosmetics at Walmart. Chemists such as Walgreens and cvs also retain a large market share. About 90% of Uoma Beauty’s sales are through retail partners, Chuter says. In July, Glossier moved away from an exclusively direct-to-consumer approach by agreeing to sell some of its makeup through Sephora (which is owned by lvmh).
The bosses of great beauty undoubtedly look at all this with joy. The problems of new entrants have highlighted the lingering advantages of incumbents: greater scale, stronger supply chains and robust distribution networks. They also have more resources to channel into research and development (and not just into chemistry labs: L’Oréal runs successful tech incubators in America, France and Japan) or acquisitions.
Even before the last crisis, some startups were becoming voluntary takeover targets. In 2019, Drunk Elephant, an American skincare brand (founded in 2012), sold itself to Shiseido, a Japanese giant (founded in 1872). As more upstarts stumble and funding dries up amid a venture capital winter, they too may find the old beauty still has its appeal.
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From The Economist, published under licence. Original content can be found at https://www.economist.com/business/2022/09/08/the-ugly-truth-about-young-beauty-brands-business-model