More Than Skin-Deep: The Cosmetic Executive Women Year in Review

In beauty is strength, and opportunity. The global beauty market is undergoing major shifts in consumer demand, and in the use of technology to meet that demand. That, paired with low barriers to entry and high levels of fragmentation, is creating significant potential for strategic buyers and financial investors.

Those are among the key takeaways for Kelly McPhilliamy, managing director in the Harris Williams Consumer Group, who recently attended the Cosmetic Executive Women (CEW) Global Trends Report event.  Read on for her complete insights on what makes beauty a bright spot for buyers and investors.

Responsible Consumers, Responsive Brands

With its close ties to fashion and popular culture, the beauty industry rewards the responsive, and punishes those who lag behind. In particular, according to McPhilliamy, growing consumer interest in environmentally friendly and socially responsible products has pushed leading and emerging beauty companies to innovate accordingly.

Indeed, as shown in Figure 1, the majority of U.S. consumers are willing to pay a premium for sustainable products, from 53% of seniors to 87% of Gen-Z shoppers. Among younger generations, sizable portions of buyers are willing to pay as much as 11–20% more for these products.

Figure 1: U.S. Shoppers Will Pay More for Sustainable Products

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Source: Deloitte – 2018 Holiday Survey of Consumers

That willingness has opened the door for differentiation based on sustainable packaging, less waste and formulas free of harmful ingredients. Yet, as McPhilliamy points out, “free-of” is no longer enough. It’s increasingly important that beauty products include key ingredients linked to better overall health and wellness.

“The old saying that ‘beauty comes from within’ is becoming a mantra for forward-looking beauty companies,” says McPhilliamy. “The most innovative brands are making products that not only improve your appearance, but also improve your health by enabling you to sleep better or to de-stress. Brands at the forefront of bringing these types of benefits to consumers are seeing success.”

One example is adaptogens – medicinal herbs and botanical extracts used to restore balance in the body and ease anxiety and stress. Getting their start in ingested products such as smoothies, adaptogens are now moving into beauty, addressing consumers’ demand for ways to reduce the effects of stress and fatigue on their skin, and improve their overall wellness. 

McPhilliamy’s experience in the industry and at CEW suggests that this spirit of responsible consumerism is now extending to ideas like inclusion and social awareness. For cosmetics, the first step in this direction is often a wider range of foundation shades, beyond the standard range of flesh tones.

Yet McPhilliamy notes that leading brands are going further: “Inclusivity is not just about having shades for every skin color; it's about how you present your brand and what you support. In today's environment, consumers increasingly want to support brands that are socially conscious, and linked to an authentic cause.”

The Beauty of Technology

How can beauty companies stay one step ahead of these ever-evolving consumer tastes? By using Google, of course.

McPhilliamy shares an eye-opening statistic from the event: “Consumers engaged in 23 billion beauty-related Google searches in the U.S. in 2018.” While this number is staggering on its own, the insights available in this wealth of data are what’s truly impressive.

“We can see which specific ingredients – such as turmeric and cannabidiol (CBD) – are trending upward and rising in popularity.  We can also see which specific chemicals are of greater concern in certain countries,” says McPhilliamy. “This is a very important source of data for companies trying to find ways to broaden their brands or identify growth opportunities.” 

Advances in technology are also changing how beauty products are bought and sold. Examples range from apps to skin care devices to augmented reality that allows consumers to try on makeup virtually. Technology is being used to educate retail salespeople and consumers, and to personalize the consumer experience.  In return, brands are getting data on what consumers try, and what they ultimately buy.

Because many beauty products are still sold primarily through two-step distribution, this consumer data is information brands wouldn't otherwise have – especially brands without a strong online presence. “This is a real area of interest for brands and retailers,” says McPhilliamy. “And getting behind a technology is another avenue for potential investors to gain exposure to the sector, versus trying to pick the next big brand or beauty trend.” 

Technology continues to have a profound impact on consumer brand discovery and engagement through online influencers and subscription sampling.  Influencers, also known as creators, have played a major role in driving awareness, education and ultimately sales for brands of all sizes.  Subscription sampling is also on the rise, whether for single brands serving a specific need or a curated range of products personalized for the consumer.  “The rise in influencer marketing, along with low barriers to entry and new business models, has enabled digitally native, independent brands to take share from established players,” says McPhilliamy.

Digital natives contribute to the fast-growing digital sales channel for beauty. McPhilliamy believes that “over time, Amazon is going to become a more important channel simply because it has such a reach into the U.S. consumer market, and provides the convenience that today’s consumers want.”

That’s not to suggest that traditional retail is going away anytime soon, says McPhilliamy. Brick and mortar still commands the lion’s share of sales, and is sharply focused on innovation: “Retailers such as Macy’s and CVS are pursuing creative partnerships to bring newness and excitement into their beauty departments. Ulta has invested in technology to enhance its artificial intelligence, augmented reality and personalization capabilities. Overall, we think beauty in retail will continue to grow.”

A Bright Spot for Buyers and Private Equity Investors

Given the amount of innovation occurring within beauty and the sheer number of up-and-coming players, it’s no wonder that strategic buyers and private equity investors continue to be interested in the space. Generally robust margins, low capital expenditures and strong global growth for key categories contribute to this attention.

Indeed, several large strategic buyers remain active in the sector, and new ones are entering it. Many are acquiring independent brands that have been able to carve out a place in a growing category or geography. Others are looking for companies with best-of-breed capabilities that can be leveraged across their portfolios, such as digital marketing skills and know-how in new, high-growth channels.

However, the buyer universe is evolving: Private equity firms of all sizes are rapidly increasing their exposure to beauty.  In the last five years, the number of U.S. private equity firms in beauty has risen dramatically, notes McPhilliamy: “Investors are attracted to the sector’s fragmented nature and to its growth potential.”

“Recent successes have shown that the opportunity is massive if you really hit it right,” concludes McPhilliamy. “Generally speaking, the categories are profitable, and the cash flow dynamics are really strong. Add to that the opportunity for technology plays, and beauty is truly a bright spot.”

Published March 2019