Updated: Jun 19
The beauty market has always been very resilient over the last few years. Can this crisis really have a different impact?
The whole beauty industry panicked at the crisis caused by COVID-19. With almost all international markets going into lockdown, with stores, hairdressers and esthetics closed, the fear has been growing every day, as well as the expectation about what the future will be like after COVID-19.
With a great capacity to adapt, the industry has been making great efforts to minimize the impact of the beauty sector, with cases of companies that have transformed themselves to produce hand and surface disinfectant, offering beauty services to professionals who work in the front line, online beauty consultations, free demonstrations and lives, among many other initiatives that have taken place in the market.
However, brands cannot forget the financial side, in an industry that generates $500 billion a year and employs millions of people around the world directly and indirectly.
The aim of this article is to examine in detail the expected effects on the beauty industry in the next 3 to 6 months, as well as what changes may occur in the industry in the long term and how the different players (distributors, brands and investors) may adapt to the new reality that will arrive.
With the two European countries that have been most severely affected (Italy and Spain) managing to reduce the number of new infections and, consequently, the number of active cases (see graphs), like several other European countries, it is now time to start thinking about what a slow and cautious recovery to normality will be like.
The beauty sector has always represented one of the most stable and promising markets, even after having resisted slightly in the 2008 crisis, from which it fully recovered in 2010 (see graph).
Although this crisis is already having a greater impact on brands and distributors than any other crisis, there are signs that the beauty industry can once again demonstrate its resilience. If we analyse the figures for the Chinese market we can identify that from an 80% drop in February (compared to the same month in 2019) it has recovered to a drop of "only" 20% in March, which is remarkable considering the circumstances. Although consumers expect to spend less on beauty products in the short term, they indicate that they will still spend more than in other categories such as clothing and footwear (see graph).
In a McKinsey Global Consumer Sentiment Survey nine scenarios were explored for the economy over the next few years, based on current trends and the most expected scenarios by experts, with the beauty industry predicted to fall by about 20 to 30 percent.
The analysis of the recovery of the Beauty industry in each of the scenarios should be made taking into account two main factors:
Where and how beauty products are being sold?
What's being bought?
Where and how beauty products are being sold?
In the main beauty markets 85% of purchases were made in stores, with small variations by product category, with the millennial generation (born between 1980 and 1996) having a 60& (see graph) buying percentage in store.
With the closure of about 30% of the world beauty market, some stores will not open again and some will take up to a year to open again.
Main changes in the sale of beauty products
Although the increase in online sales is not offsetting the decline in store sales, several brands have reported 100% growth in online sales. However, this growth in the general market is expected to be more between 20 and 30%, as is the case reported by Sephora in the US (30% growth compared to 2019). These percentages are in line with McKinsey's study.
Sales at major retail players fell sharply, with the Boots network in UK reporting a 66% decline between 25 March and 3 April. Consumers in the UK expect to spend 50% less than usual on all beauty products in the coming weeks.
The return to consumption in store
According to what has been happening in China, the return of consumers to store purchases can be slow, as it has been seen in China where despite the opening (13 March) and the reported "revenge spendings" sales did not fully recover. Most stores in China report traffic between 9 and 43% compared to the pre COVID-19 period, with the large malls being the slowest to resume consumption levels.
Promotions to clear the stock
Distributors and brands are, contrary to what would be normal before COVID-19, betting on promotions to attract consumers and clean up inventory, with large prestige brands offering online discounts of up to 40% in order to compete with specialized department stores and thus capture consumers oriented to promotions. It is also expected that as stores reopen, promotions will increase to recover customer traffic more quickly.
What beauty products are being purchased?
Considering the new reality and physical distance, together with the use of masks, fragrances and make-up have become less important. Analyzing some of the most prestigious brands, we registered falls of 55 to 75% compared to the same period in 2019. Even after they resumed work, consumers continued to wear masks, which will lead to a slower recovery in the makeup category, with the exception of eye products, eyebrows and eyelashes. I ask the contrary eye products now show a very interesting growth potential, with Alibaba showing increases of 150% per month. Skin care products, hair products and bath products have shown relative stability, and in some cases even growth, as NPD's report on the 800% increase (week of March 16) in the luxury soap segment in France shows. Amazon's report also confirms these trends with an indication of a slight decline in makeup sales compared to growth in the nail categories (218%), hair colour (172%) and bath and body product (65%) (see graph).
Another upward trend is undoubtedly the "Do it Yourself" product category. With the closure of many beauty salons, and consumers avoiding physical contact, combined with the greater economic difficulties, due to the loss of jobs and the contraction of the economy, many consumers are heading for this category in line with the 36% cut they plan to make in their spending. For this reason brands with categories such as hair dye and nail care are gaining new consumers, as reported by Nielsen in the US, where it reports an increase in sales of hair dye and cutting machines between 23 and 166% in the first week of April compared to the same period last year.
Retail impact of COVID-19
Retailers must accommodate fast-changing shifts in behaviour, away from experience and indulgence to convenience, safety and necessities.
As countries start to lift restrictions and non-essential stores re-open, implementing social distancing and employee safety measures, become critical. Footfall is down, but basket sizes are much higher and, in apparel, childrenswear, leisurewear and nightwear are in demand – all necessities for the current lifestyle.
Retailers must make the physical shopping experience safe and easy to navigate – and use new merchandising methods to encourage higher volumes.
They also need to speed up online capacity.
As even more department stores collapse (Neiman Marcus, JC Penney, Lord & Taylor among the latest) shopping centres must reconsider anchor store status with food retailers taking more prominence.
High unemployment and a global recession will hit household budgets over the next couple of years and a recovery in retail to 2019 spending levels is likely to take at least two years.
Supply chain & demand disruption
The shift online in grocery is challenging supermarkets – Tesco has increased its weekly delivery slots from 590,000 at the start of the crisis to over a million by employing more staff to pick and more drivers to deliver.
Others are all increasing capacity – but also increasing costs as well and this is the major problem to solve: how to make a profit with online food deliveries. Few retailers have scaled their online grocery platforms effectively.
The cancellation of fashion orders in the wake of store closures is putting severe strain on suppliers, and the huge quantities of unsold stock will flood the market pushing prices down further and increasing the strain for surviving businesses.
Sector-specific stimulus programs
Retail is a major employer, so any government stimulus programs tend to have a major impact – however there is a limit to how long governments can support furloughed workers and many businesses with high debt levels will not survive.
Being a force for good
Brands are diverting production to aid health workers and supporting local communities. As they have a direct connection with the public, retailers are keen to be seen to playing their part in the community.
The long-term impact of COVID-19 on the cosmetics industry
There will be several permanent changes that this crisis will leave in the beauty industry, three of the most important:
Fast growing digital
Digital channels will accelerate their growth, with online trading directly between brands and consumers, brand selling platform and marketplaces will become more important, confirmed by the indications given by consumers regarding their forecast of greater involvement and spending on online purchases. It is therefore essential that brands and distributors prioritize their digital channels to attract and convert new customers and build loyalty among existing customers. On the other hand, the use of artificial intelligence will need to accelerate, and innovative solutions linking brands, distributors and consumers, such as the Cosmetikke platform, will be key to the future of all players in the beauty market, fighting the growing concerns of safety, hygiene, difficulty in traveling, and the lower expected attendance at trade shows in the future.
More innovation, faster
As this crisis has shown, the world can change rapidly, significantly changing consumption needs and consequently demand. Even before COVID-19, brands felt the pressure to innovate faster, in order to keep up with the digital native brands, connected directly to the consumer, in the speed of launching products in less than a month. Now this need for speed of innovation will be greater than ever.
Faced with all the difficulties that the crisis has imposed on the beauty market, closer collaboration between brands and distributors through shared efforts to attract consumers, follow market trends, and build customer loyalty, as the Cosmetikke platform enables.