As we talked about recently, there are areas of strategic focus that retailers, in general, can focus on to be best prepared for an economic downturn. This week we want to dive into tactics the beauty industry can employ to succeed.
Beauty Market Shifts
The Lipstick Effect, also called the Lipstick Index, is the beauty industry’s leading economic indicator. The theory is that in times of financial turmoil, women will indulge in discretionary purchases that uplift without breaking the budget.
While the concept may not hold much weight in traditional economic institutes, new data from StyleSage shows sell-out rates of lipstick increased 19% at Ulta Beauty and Sephora in the first quarter over the previous year. However, the product count for color cosmetics is on the decline, down 8% since the start of the pandemic at the same major beauty retailers.
Despite discussions that the skincare boom is over, the sell-out rate of skincare increased 35% in the first quarter over the previous year. According to Statista, skincare is the dominant segment of the beauty industry, with 42% of the market share. The sell-out rate of haircare increased by 2%, while bath & body (-21%) and fragrance (-26%) decreased during that same period. Product count for categories like fragrance (+24%), bath & body (+14%), skincare (+9%), and haircare (+10%) are also increasing, showing a glimpse into Ulta Beauty and Sephora’s merchandising strategy.
With economic volatility likely for the foreseeable future, many beauty investors, investment bankers, and entrepreneurs anticipate deals and valuations to ebb. How can beauty brands succeed in today’s volatile market?
Here are six strategies brands can lean on to weather the economic storms.
Consumer preference for brands they know and trust is a challenge for new beauty brands looking to break through. Existing brands should lean into the DNA of their founding principles, and emerging brands should carve out a niche space in the industry that will allow them to connect with their target consumer.
The long-established aspirational concept of beauty has been dismantled, and consumers are looking for a personal, inclusive, and authentic community. Regardless of legacy, brands should listen to their consumers and ensure they connect with them at every touch point, gathering as much data along the way as possible.
Loyalty programs serve as a win-win. Ulta Beauty’s loyalty program, Ultamate Rewards, went viral on TikTok after user @dayanara.herrera5 shared that she was able to save over $600 through the program. The retailer has close to 32 million members in its free rewards program, making up more than 95% of its online and in-store sales. Platinum members spend at least $500 with Ulta per year, and Diamond members spend $1,200.
A recent study from Accenture found that 75% of consumers are more likely to make a purchase when recommendations are personalized to them. AI also presents a significant opportunity for brands looking to further personalize processes, especially in areas like skincare analysis.
Skincare brand Proven, for example, says it feeds consumer data into its AI platform — which contains information on more than 100,000 products, 8M+ testimonials, 4,000+ scientific publications, etc. — to provide the most effective ingredients for users.
Quizzes address customer-specific preferences and customize products according to the results. Quizzes are adopted in the D2C haircare market, which has seen companies emerge across geographies like the US (Function of Beauty), UK (Shampora), and Japan (Medulla, Laborica).
Localization of Production
Beauty must go both local and global to meet consumers where they are. Distribution channels and market strategies are crucial to success. When entering new distribution and markets, pay attention to timing, specifically delivery-to-consumer. The localization of production can give brands the upper hand over brands that have outsourced production.
A strategic omnichannel approach is imperative. In the US, online personal care and beauty sales totaled $62.6B last year, up from $53.1B in 2019. Shiseido Japan has mastered the omnichannel approach. The beauty company opened its flagship store in July 2020 and simultaneously launched a new virtual store on its website. The goal was to create multiple channels that provide equally satisfying shopping experiences by addressing customers’ new preferences — including the desire to limit human contact amid the pandemic and the growing preference for online shopping.
A customer journey that combines phygital (physical + digital) elements is here to stay. Proving the role of the physical store is still important, as a sizable percentage of beauty customers (41%) said they would not buy any beauty product that they had only tried on virtually.
Pulse on Trends
Social media has sped up the trend cycle, and young, digitally native Gen Z consumers are looking for the next big trend. According to NielsenIQ, Gen Z consumers are 2x more likely to try new items and 1.4x more likely to make impulse purchases.
Always keep a pulse on trends, white space opportunities for assortment, and new categories that are right for your brand ethos. AI-powered tools, like StyleSage, help brands and retailers benchmark demand to maximize wins and minimize losses.
With rising prices, brands and retailers are increasing promotional efforts. Since Q2 2020, average prices at Ulta Beauty and Sephora are up $2. Given recent reports on inflation in the beauty industry, this should come as no surprise.
Brands and retailers are responding with an increased frequency and threshold of promotional efforts to help move unsold inventory. According to a recent report from McKinsey & Company, several prestige brands are offering discounts online of up to 40%, competing with specialty beauty-product and department stores to capture promotion-oriented consumers. The trick is for beauty brands to apply their promotions with a laser focus and not to get consumers reliant on discounts over the long-term.
Incubators and M&A Activity
Big beauty brands incubate and acquire competitors to cash in on niche spaces. The recent Byredo/Puig deal is an example of how our industry constantly evolves, and the consumer desire for self-expression and self-care is at the forefront of change. Larger companies often fall short when creating this type of brand in-house. Culturally, they’re usuall
y risk-averse and will follow the same standardized approach. It takes time to build this type of brand and a strong community in an authentic way.
Target’s accelerator program, Target Takeoff, was launched to mentor emerging beauty brands. Among its alumni are gender-neutral makeup line Fluide and Mented Cosmetics, which makes makeup for people of color. In February 2021, Estée Lauder upped its stake in Deciem and plans to acquire the rest of the company within three years.
Want to understand more about tools for pricing and assortment mix that are critical during these times? Learn more here!