Article - June 7, 2023
Cosmetics: A Bright Foundation for Growth via M&A
Learn more about the Harris Williams professionals featured in this article.
Key Takeaways
The cosmetics market is growing due to several key themes, including an increase in product consumption, a shift in how Generation Z engages with cosmetics brands, and a rising trend toward “skinification” in beauty.
Meaningful consumer connections, often achieved through authentic social media and influencer marketing, are a paramount success factor in cosmetics.
High-quality investment opportunities are available throughout the cosmetics space, with new multi-brand platforms emerging and a market that's primed for further M&A activity.
Beauty products continue to shine across the U.S. consumer landscape, expanding 11% in 2022 with impressive performance in both prestige and mass market channels. In fact, prestige beauty was the only discretionary consumer category to post unit sales growth in 2022 (+14%) out of over 20 categories tracked by Circana.1
Within this attractive beauty sector, the outlook for cosmetics is particularly bright. The category achieved 12% growth in 2022, the highest of any area in beauty, with $25.6 billion in U.S. retail sales.2 The momentum continued in the first quarter of 2023 with U.S. prestige makeup sales growing 24% while mass was up 15%, capturing nearly one-third of all U.S. beauty sales.3
In this article, senior professionals from our Consumer Group share cosmetics trends creating growth and M&A opportunities, as well as winning formulas for brands and investors to succeed in the space.
A Spotlight on Cosmetics
Fueled by several key themes, the cosmetics subsector is projected to continue its strong growth trajectory.
For example, consumption of cosmetics products is rising with consumers continuing to prioritize them in their budgets, even amid economic uncertainty. “Although the category saw a sharp decline during the pandemic, it has rebounded and is thriving again, showcasing beauty’s recession-resilience through economic cycles,” says McPhilliamy.
She adds that consumers tend to seek joy in these affordable indulgences during times of economic stress, a concept known as the Lipstick Effect. For instance, a “treat yourself” mindset has contributed to recent growth in makeup as consumers strive for greater mental wellness. Cosmetics also remain essential daily products for many consumers with 70% maintaining their purchasing habits while cutting back in other areas during an economic downturn.4
Meanwhile, a powerful shift is underway related to how younger consumers associate with cosmetics brands. Generation Z, which includes a diverse group of 13- to 27-year-olds and accounts for 23% of the world’s population, has a significant and growing influence in beauty.5,6 “This is due to their rising spending power, which has doubled in the past two years, expanding share of voice representing over a third of social media influencers, and unique product preferences,” explains McBride.
McPhilliamy notes that Gen Z is looking for brands aligned with their values, personalized to their needs and digital lifestyles, and inclusive across ethnicity, identity, and sexual orientation. “They also want to support companies offering clean formulations and sustainable business practices,” she says. Companies like Rare Beauty, Milani Cosmetics, and e.l.f. Beauty are leading examples of how tapping into this generation’s desires can help to capture market share:
Rare Beauty
has become one of the most sought-after prestige brands after launching in 2020 with a mission to promote mental health, amplified by its celebrity founder Selena Gomez.
Milani Cosmetics
has democratized beauty by offering affordable, high-performance products to a multicultural consumer base for over 20 years, earning a top 10 mass cosmetics ranking.
e.l.f. Beauty
has seen massive growth and share price appreciation as their creative marketing, product innovation, and accessibility propelled the brand to be a Gen Z favorite.
Finally, a rising trend toward “skinification” in beauty is driving new opportunities across cosmetics. As highlighted in our Untangling Hair Care article, consumers are increasingly turning to high-performance beauty products that also enhance their overall health and wellness. “The lines between cosmetics and skincare continue to blur as products offering multiple benefits rise in popularity, solving several problems at once and bringing more value to the consumer,” points out McPhilliamy. “Beyond their consumer benefits, these multi-function products also provide brands with a wider total addressable market, better margins, and stronger consumer loyalty.”
A prime example is prestige clean beauty brand Lawless Beauty’s Forget The Filler Lip Plumping Line Smoothing Gloss, which has soothing ingredients and a natural peptide clinically proven to enhance lip volume. After its launch in January 2021, the product’s sales grew 200% in 2022.7
Winning Formulas for Cosmetics Success
To succeed in the growing cosmetics sector, meaningful consumer connections are critical. How brands create these valuable experiences continues to evolve, with leading companies often possessing a winning combination of an authentic brand with purpose, high-quality products that perform, an omnichannel approach tailored to their audience, and effective marketing to their community.
McBride says that social media has become a vital outlet to establish these connections. “Best-in-class companies are taking advantage of the right social platforms to reach their consumers with engaging multimedia content,” he explains. TikTok, for example, holds an expanding influence on younger beauty enthusiasts with Gen Z users relying on it to search for products.
“A key to social media’s power is the ability to educate and showcase brand stories,” adds McPhilliamy. In fact, cosmetics is the most demonstrable category in beauty with cosmetics brand ambassadors generating nearly two times more earned media value than those promoting skincare and hair care.8
She provides an example: “Healthy makeup brand Youthforia capitalized on the visual impact and robust reach of TikTok by promoting their blush oil that changes color according to the skin’s natural pH balance and is safe to sleep in while offering skincare benefits.” The brand’s campaign generated 70 million impressions on the platform and helped it land on Ulta’s shelves.9
On these social platforms, influencer marketing is still essential. Effective influencer strategies tend to include a mix of large and micro influencers, and authenticity is a paramount ingredient for success. “The use of celebrities, when done right with proper brand alignment, can also be powerful with immediate amplification to a large and engaged follower base,” shares McPhilliamy.
“A premier example is r.e.m. beauty, the high-performance and innovative clean cosmetics brand founded by Grammy-winning singer and actress Ariana Grande,” notes McBride. “The brand has built a loyal community and engages with content creators on multiple social platforms, including her own 370 million Instagram followers."
From an investment standpoint, attractive opportunities exist across cosmetics by price point, channels, end consumer, and sub-categories with important nuances to understand.
Please contact our senior professionals to access the full market map.
“Relative to other beauty categories, makeup is one of the most SKU intensive due to its range of colors and continual innovation,” says McPhilliamy. “Complexion products like foundation and concealer typically engender high loyalty once a consumer finds a shade that works for them and due to their everyday use.” These products are also the top new customer acquisition categories in cosmetics according to Sephora.
An in-store strategy can be a key component for winning new customers. “Cosmetics is an inherently fun category where people like to play and experiment,” adds McBride. “Best-in-class cosmetics brands use an array of tools to enhance the customer experience such as visual merchandising and testers, virtual try-on, brand sales support, and sampling.” In fact, nearly 50% of beauty shoppers say a free sample converts them to a purchase.10
Cosmetics Glimmers With M&A Opportunity
M&A activity is increasing for high-quality cosmetics brands. Strategics are heavily involved in the category, and a much deeper universe of beauty-focused private equity groups exists compared to a decade ago. New multi-brand platforms have emerged, and the market is primed for more opportunities to pursue.
Cosmetics companies aligned with key themes, including a shift in how Gen Z engages with cosmetics products, the need for meaningful customer connections, and a rising trend toward “skinification” in beauty, will be well positioned to tap into the growth this sector offers.
To learn more about opportunities in cosmetics and across beauty, contact our senior professionals.
https://www.beautyindependent.com/analysts-forecast-strong-us-beauty-sales-growth-years-ahead/
https://www.beautyindependent.com/analysts-forecast-strong-us-beauty-sales-growth-years-ahead/
https://www.gcimagazine.com/consumers-markets/news/22847175/q1-2023-us-beauty-sales-driven-by-lips-prestige-fragrance-clinical-skin-care-more
https://www.beautyindependent.com/analysts-forecast-strong-us-beauty-sales-growth-years-ahead/
https://www.euromonitor.com/article/the-gen-z-beauty-consumer
https://www.pewresearch.org/social-trends/2020/05/14/on-the-cusp-of-adulthood-and-facing-an-uncertain-future-what-we-know-about-gen-z-so-far-2/
https://www.beautyindependent.com/lawless-beauty-forget-the-filler-lip-plumping-line-smoothing-gloss-smash-hit/
https://cew.org/reports_and_trends/the-tribe-top-10-social-medias-top-brands-january-2023-u-s-beauty-fashion-emea-beauty/
https://cew.org/beauty_news/youthforia-lands-in-ulta-beauty-following-viral-tiktok-campaign/
https://cew.org/beauty_news/what-you-need-to-know-about-sampling-in-the-new-beauty-landscape/
