People like to feel pretty. Over the past ten years, Americans have spent more than $500 billion on beauty products. By 2024, the Chinese are expected to be spending more than $100 billion a year. In the past, most of that would have gone to cosmetics conglomerates like L’Oréal and Estée Lauder, or consumer products giants like Unilever, which sell every conceivable dye to make everything from fingernails to feet to hair, be more attractive. But in recent years, fresh-faced newcomers, often more specialized and more digital, have entered the fray.
Now the startups are showing some wrinkles, as their business models are tested, investors lose patience with red ink, and headlines up their game. Sales at Glossier, a major US makeup firm recently valued at $1.8 billion, fell by a quarter in 2021. The firm has laid off a third of its staff; its long-rumored initial public offering (IPO) may be the subject of rumors for a while yet. 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 need to experience their own metamorphosis?
The traditional way of marketing cosmetics was to pay millions to mostly white, mostly female top models and A-list stars who appeared in ads in fashion magazines and on billboards. Switching from products, which were mostly made in-house, invariably involved a position at a department store, pharmacy, or specialty retailer like Sephora. The upstarts took a different tack. They outsourced production and recruited social media influencers of all colors and genders to promote their brands. This was meant to drive traffic to their online stalls, either on the companies’ own websites (an approach pioneered in the beauty business by Glossier) or on existing e-commerce platforms like Amazon and Shopify in the West or jd.com and Alibaba’s. small in China.
This approach has some great advantages. It gives young companies access to data about shoppers and their preferences, says Lindsay Drucker Mann, CFO of Il Makiage, another young American makeup favorite. “If we sell wholesale, we lose that information,” she explains. Given how quickly makeup trends can sometimes change – just think of the sudden popularity of minimalist “clean girl makeup” – that information is invaluable.
It also helps digitize beauty shopping, which as a deep sensory experience has long resisted digitization. Il Makiage is developing artificial intelligence (AI) algorithms (sometimes by acquiring smaller AI firms) to help people choose the right foundation shade. Other brands use AI-assisted questionnaires to help shoppers choose the right product for them.
Technological literacy can also make it easier to identify and target historically underserved market segments. Fenty Beauty caters to consumers who, like its founder Rihanna, a pop icon, have a darker skin tone. In May, the firm (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 not being “multicultural” anymore, offers 51 foundation shades. Uoma’s sales grew considerably in 2021, relative to 2020. Pharrell Williams and Harry Styles, two other pop stars, launched gender-neutral beauty brands. Revenue for Byredo, which has made gender-neutral perfumes since 2006, rose to $141 million last year, up from $18 million in 2020.
Increasingly, however, the digital-first approach of upstarts is showing its limits. Outsourcing, for example, allows companies to keep few assets, but can prove costly at a time of supply chain crisis of the kind that has rocked many sectors during the pandemic.
Meanwhile, influencer-based marketing has proven great at 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 charge up to $200,000 for a single social media post. Fees may rise further as established giants increase their social media exposure, which most of them are desperately trying to do to attract younger buyers.
The ugly truth
Physical stores where many purchases, particularly makeup, are spontaneous, remain critical to the beauty business. Most Americans still buy their cosmetics at Walmart. Chemists like Walgreens and CVS also hold a large market share. About 90% of Uoma Beauty’s sales are through retail partners, says Ms. Chuter. 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 great beauty bosses are no doubt watching all of this with jubilation. The troubles of the upstarts have highlighted the enduring advantages of the incumbents: larger scale, stronger supply chains, and robust distribution networks. They also have more resources to channel into research and development (and not just chemistry labs: L’Oréal has thriving tech incubators in the US, France and Japan) or acquisitions.
Even before the latest crisis, some startups were becoming willing takeover targets. In 2019, Drunk Elephant, an American skincare brand (founded in 2012), was sold to Shiseido, a Japanese giant (founded in 1872). As more upstarts stumble and funding dries up in the middle of a venture capital winter, they, too, may find that old-fashioned beauty still has appeal.
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From The Economist, published under license. Original content can be found at https://www.economist.com/business/2022/09/08/the-ugly-truth-about-young-beauty-brands-business-model