The global beauty market is set to return to — and even surpass — 2019 levels in 2021, once again proving that it is more resilient than Business, which is not expected to recover until 2022 at the earliest. But, like Business, the beauty market that returns will reflect a changing landscape across regions, categories, and channels. Pandemics do not alter history as much as they accelerate it. This principle holds true for the changes witnessed across the global beauty industry, which saw nearly half a trillion dollars spent on beauty products in 2019. The reshaped market that will emerge out of the crisis, however, will reflect significant shifts across different regions, categories, and channels.
These shifts are less a disruption of norms than a surfacing of trends already latent pre-crisis. With the exception of certain elements of beauty services and travel retail, many of these changes have played out on accelerated timelines, taking three to five months to materialize, rather than three to five years. Retailers and brands are rising to meet consumer demand and make the digital shifts needed in terms of product, commitments, and purchasing experiences.
Recovery Speed and Character by Region
Inevitably, the recovery picture varies by region. Europe and Japan have been hit hard by their relatively low e-commerce penetration compared to other advanced economies and high exposure to the collapse of the $40 billion travel retail beauty market. In the context of continued negative consumer sentiment about economic recovery and new waves of local lockdowns and permanent department store closures, we do not expect beauty sales in Europe or Japan to return to 2019 levels until the first half of 2022 at the earliest. In contrast, China had already surpassed 2019 beauty sales by the first half of 2020, with an 8 to 10 percent average annual growth forecast between 2019 and 2021. This is partly due to the onshoring of some of the estimated $30 billion that Chinese consumers previously spent on beauty when traveling internationally. China’s beauty e-commerce market — which pre-crisis already comprised more than 40 percent of sales — has also continued to grow. Local “C-beauty” brands are leading the charge through innovative, agile, and cost-effective digital go-to-market models.
Perfect Diary is emblematic of this, with its hyper-local influencer strategy and light-hearted “best friend” – style customer relationship management (CRM) focused on private traffic via WeChat and other direct channels to consumers — similar to how companies outside of China might use a blog or email.260 At the same time, international giants such as Estée Lauder Companies, L’Oréal Group, and LVMH are also driving China’s beauty rebound. So far their investments in China are paying off, with L’Oréal Group reporting almost 60 percent growth of digital sales in China in the first half of 2020 compared to 2019. In the US, by comparison, we forecast a return to pre-crisis beauty sales by as early as the first half of 2021, with an average annual growth rate of 3 to 4 percent between 2019 and 2021 — if the pandemic is managed effectively in the interim. Like in China, digital will drive recovery. Pre-crisis, e-commerce accounted for 20 percent of the US beauty market; by 2021, McKinsey estimates that penetration could accelerate to 35 percent. This chimes with our consumer research, which found that one-third of US consumers plan to permanently make e-commerce their primary purchase channel for beauty. The ascendance of Amazon, which is on track to capture $10 billion, or over 10 percent, of US beauty sales in 2020 (up from $4 billion and under 5 percent in 2018) is a testament to this shift.
The shift to e-commerce for this sector is a global phenomenon: It predicts that the channel’s share of the beauty market will effectively double from just over 10 percent in 2019 to almost 20 percent by 2021. It is also a function of increased engagement in social media, both as a purchase and a discovery channel. Instagram has made significant in-roads into commerce, including plans to test shopping on its Reels video product. While social shopping is in its infancy in the US, 17 percent of US Millennials report they have either started to purchase directly through social media or are increasing their purchases via that channel.
Category Comeback and the Shift to Self-Care
The overall return to pre-crisis levels in 2021 hides variations across and within categories. According to NPD, fragrance and color cosmetics sales will likely continue to fall at an average annual rate of 12 percent and 2 percent respectively between 2019 and 2021.267 In contrast, haircare, skincare, and personal care are predicted to grow in 2021. Going into the crisis, the fragrance was already facing headwinds. Its biggest markets in Western Europe — the UK, France, and Germany, each worth approximately $3 billion in 2019 — had declined 8 percent, 6 percent, and 3 percent respectively in 2019 versus 2018. Disruption in travel retail (which accounts for approximately 20 percent of the total global fragrance market), in addition to fewer out-of-home occasions, the inability to translate olfactory experiences online, and a spending shift to scented premium bath, body care, and home fragrances, all pose challenges to the recovery of the fragrance category. Some niche, luxury fragrance brands have been relatively insulated by the strength of their home fragrance business.
However, these brands only represent a sliver of the fragrance market. Estée Lauder Companies reported in May 2020 that Jo Malone had doubled its home fragrance and bath and body business in China yet gains in Asia were not enough to offset an overall decline in the Estée Lauder group’s fragrance business. It follows that fragrance-focused players have been hit hard: Coty reported in August that quarterly net revenues in its prestige division dropped almost 75 percent. While Interparfums saw net revenues drop over 70 percent in its second quarter, the company expressed optimism that it would be able to close 2020 with revenues down only 38 percent relative to 2019.
Colour cosmetics had also experienced tempered sales going into 2020, after a growth streak between 2015 and 2018. Now, mask-wearing and the limitations of color-matching online inhibit lipstick and face makeup sales. During the popular shopping festival in June, China saw growth in the makeup category shift from lip products (the historic growth driver of cosmetics in China) to eye makeup, which grew 159 percent. Across the globe, eye makeup has emerged as a relatively bright spot, with NPD reporting a 6 percent growth of prestige eye makeup in the US in the second quarter of 2020 relative to 2019. However, its growth cannot compensate for declines in the US prestige color cosmetics category overall, which saw sales down by 52 percent in the second quarter.
But demand is not diminished entirely — it is just different — with growth coming from “self-care” products as consumers favor creams, masques, jade rollers, and bath bombs. These categories are aligned with broader wellness trends and, crucially, lend themselves well to digital discovery and purchase. Across the globe, consumers indicate a growing preference for natural or so-called “clean” formulations, with 41 percent of German consumers and 30 percent of British consumers saying they prioritize this over a “stronger” formula. Consumers are also turning to personal care and skin care products to address conditions specifically related to Covid-19, whether that is to address dry hands, breakouts from mask-wearing (“maskne”), or puffy eyes from hours squinting at a computer screen while working remotely.
Doctors around the world have noted a spike in patients experiencing stress-induced hair loss. New York-based LM Medical practice, for instance, has seen the number of patients seeking solutions for hair loss go from one patient a day to five a day. They have also seen a 30 percent increase in procedures, which facial plastic surgeon Dr. Lesley Rabach attributes to “people taking advantage of downtime — the whole recovery process is covered by a mask.”
DIY and the Return of Beauty Services Throughout the pandemic, “do it yourself” products have also performed well. On Amazon, DIY categories of nail care and hair dye have seen the growth of 300 percent and 200 percent respectively in the US relative to 2019 levels. To put this into context, this represents four to six times the growth rate of Amazon beauty overall. However, we anticipate that the majority of consumers will return to receiving beauty services in salons once they feel physically and financially secure enough to do so. In McKinsey’s June 2020 salon services survey, when asked why they were spending less, only 25 percent of consumers said it was due to being satisfied with the results of DIY beauty. For consumers who normally frequent salons, the percentage who were satisfied with DIY results dropped to just 15 percent. When consumers do return to salons, they may be seeking different services and products more focused on embracing and enhancing their natural look. “Natural” does not, however, mean no products or services — this is a “you, but better” look.
Over one-third of consumers report, they plan to spend less on chemical treatments permanently altering the hair’s texture, such as keratin treatments, perms, or relaxants; instead, they report plans to purchase services and products that will better nourish their hair, such as bond building treatments. The natural look has its limits though: Consumers’ intent to continue covering their grey hair remains undimmed.
In terms of price points, we have seen a shift towards more affordable products in the US and Western Europe, but this appears to be driven by store closures in prestige beauty channels rather than a lasting trend. Mass-market nail polish, facial moisturizer, cleanser, and haircare all saw growth driven by price, not volume. In China, we have continued to see strong growth from premium and luxury segments as well as deep-discount focused “shopping festivals” — which drive disproportionate growth.
Conscious Consumption and a Call to Action
Today’s consumer is more ethically minded, demanding that brands and retailers build their businesses with a conscience. 2020 has seen a continued focus on sustainability, with beauty manufacturers facing pressure from both consumers and shareholders to take action. What constitutes “sustainable,” however, is not clear-cut, as there is no regulation defining what it means to be “natural”, “clean” or “sustainable.” Retailers from mass market to luxury are responding by creating their own standards, with “clean beauty only” retailers flourishing, from US-based Credo Beauty to Oh My Cream in France. While claims around sustainability are increasingly table stakes in the beauty business, consumers are not necessarily willing to pay more for it. Two-thirds of consumers in Germany and the UK consider a brand’s actions on sustainability to be an important buying factor, but only one-third of Germans and 16 percent of Britons are trading up their purchases to more sustainable brands, versus 46 percent and 36 percent of Germans and Britons, respectively, trading up for quality.
The very public acts of racial injustice in the US and around the world in 2020 have also pushed the beauty industry to reflect on its role and responsibilities in shaping beliefs and behaviors. Consumers have called on global beauty giants to stop using promises of “whiteness” to sell products, citing the harmful stereotypes (if not ingredients) inherent in such claims. In the US, we are seeing companies join initiatives such as Aurora James’ 15 Percent Pledge (committing to dedicating at least 15 percent of their shelf space to Black-owned businesses) or Uoma Beauty founder Sharon Chuter’s #PullUpOrShutUp movement that challenged companies to go beyond words of support and be transparent about their actions. Beauty companies are recognizing that being ethical and inclusive as organizations are both important and good for business — but that the industry has a long way left to go.
Digital Discovery and the Changing Role of the Store
Retailers around the world are rethinking their assortments to meet changing demands. Not surprisingly, many are planning to expand their 2021 assortment in skincare and natural products, according to a survey of 50 US beauty merchants across the mass market and premium beauty retail. They also plan to focus on “hero” SKUs (a brand’s bestsellers). The retailer has plans to test using stores as quasi-warehouses to facilitate same-day delivery of holiday orders. In other words, the need for stores remains strong but the reason to go to the store is changing.
Outlook for 2021 and Beyond
There is no question that 2020 has brought unprecedented challenges to consumers and companies around the world. Compared to other sectors such as Business, beauty has been relatively insulated from the impact of Covid-19, as consumers continue to look to it as an affordable — and easily orderable — “pick me up” in a time of such duress. As beauty moves into a recovery phase, companies across the value chain — from manufacturers to retailers — will need to ensure they are flexible enough to adjust to category and regional opportunities, while maintaining or increasing their digital investments.
Business Players Focused on Digital, Asia, and Luxury May Have an Edge. The Global Business Index offers a bird’s-eye view of the Business industry, tracking financial development and value creation through economic profit. Spanning regions, value segments, and product categories, the MGFI is comprised of a proprietary data set of public companies whose predominant revenue streams are from Business.
Continue to the exploration of economic profit — a measure of value creation that comprises operating profit less adjusted taxes and cost of capital. The metric measures absolute value created over time, taking into account how much each company invests to generate its performance. Firstly, unpacking historical economic profit composition and development across the industry, then explore the impact of Covid-19, which has caused a combined $50 billion of value within the Business companies studied to fall into a state of distress by September 2020. Finally, we look at stock market valuations and their implications for what it will take to succeed in 2021.
Taking a category perspective, sportswear has had a strong recovery, reflecting the accelerating “casualization” trend. By October, the category was up 7 percent compared with December 2019. Jewelry and watches were the next-best performing category, suggesting that investors believe that consumers remained happy to make “investment” purchases during the lockdown, even as their appetite for new clothes declined. The market capitalization of jewelry and watch specialists was down 7 percent compared to their December 2019 valuations by October 2020. Clothing and footwear categories were down 18 and 19 percent respectively by October from their December 2019 levels.
While 2021 is likely to be challenging for almost all Business companies, there will be opportunities for some. Those that find success is likely to continue to pivot to digital, understand where the demand lies, and target better-performing geographies, segments, or product categories. In challenging times, bold decisions often reap the richest rewards. However, decision-makers must also show they are able to respond quickly to a dynamic situation while managing risk effectively because the decisions they make over the coming months will be critical to the future of their business.