October 8, 2019
Gone are the simple days of cleanse, tone and moisturize. The world’s largest beauty companies including Estée Lauder, L'Oréal, and Procter & Gamble are all embracing the latest emerging technologies, from artificial intelligence to augmented reality, to give customers a more personalized, tailor-made approach to beauty. In this report, J.P. Morgan Research takes a look at how technology is helping to drive growth and shape the future of the beauty industry.
How Technology is Giving the Beauty Industry a Makeover Transcript
Noelle: Remember when cleanse, tone and moisturize was considered a complicated skincare routine? For beauty obsessives around the world, those days are long gone, as 10-step regimes and influencer-led, layered makeup looks have become the new normal. From lipsticks to sheet masks, beauty is one of the fastest growing categories in the consumer goods industry, worth around $320 billion in retail sales a year. China is a huge part of this growth story and is set to overtake the U.S. as the largest beauty market in the world by 2023. Big-name beauty brands are also embracing artificial intelligence and augmented reality to give consumers a totally customized experience.
I’m Noelle Grainger, Head of Global Equity Research at J.P. Morgan and you’re listening to At Any Rate, our Global Research podcast, where we take a closer look at the story behind some of the biggest trends, themes and industries in markets today.
In this episode, we sit down with Andrea Teixeira, J.P. Morgan’s lead analyst for North America Beverage, Household & Personal Care, who covers some of the largest beauty brands in the U.S. including Estee Lauder, Coty and ELF. Also with me is Celine Celine Pannuti, J.P Morgan’s lead analyst for European Food, Home, Personal Care and Tobacco, who looks at a number of the major European players such as L’Oreal and Unilever. Andrea, Celine, thanks for joining me.
Andrea : Thanks, Noelle, it’s great to be here.
Celine: Yeah, thanks, Noelle, for having us.
Noelle: So let’s kick things off with a bit of background on the shape of the industry, and what’s going on. How things are looking. What are some of the key trends that you’re seeing in terms of consumption?
Celine: The beauty industry is one of the fastest growing, but it’s also one that is very resilient.
Four of the company I look closely are brand owners and two are ingredients players. Now L'Oréal and Unilever are the two largest beauty player in the world, and Beiersdorf, which owns Nivea and Henkel, those two are among the top 10 players. So all together, these companies are quite a good indicator of how the industry is doing.
On the macro front, factors like low level of employment, high consumer confidence, have really been at play across the world, I must say, but especially in Asia. And that, I think, explained the boost for prestige cosmetics.
Andrea: The majority of beauty sales are in the mass markets, about 63%. While smaller in sales, prestige cosmetics are the fastest growing segment, in particular in markets like China, where it expanded 50% in 2018. But we expect it to decelerate to about 20 to 30 percent in the next five years.
The share of wallet is mostly dependent on skincare, which comprised to about a third of the market, followed by haircare, which is around a quarter, color cosmetics another quarter, and fragrances the balance, which is about 17 percent.
Total beauty grew about 13 percent last year in China, with prestige really outpacing mass, expanding at a much faster pace, close to 50 percent. And it still represents about a third of the market only.
And these trends are not exclusive to women, but also to men. Um, so men’s grooming is actually growing in the high single digits.
Noelle: You touched on China, and you probably can’t talk about any global industry these days without talking about China. So could we dive into that a bit more? Specifically, just how much is the China consumer contributing to the overall growth story today of the beauty industry?
Celine: Yeah, the China consumer is certainly contributing, uh, a great part. About 30 percent of the growth globally is driven by China domestic demand. And if we include travel and retail, it’s about 40 percent of global growth. Now China alone is about a $60 billion market, including both mass and prestige sales. And according to L’oreal, the market has the potential to double to 2030. So clearly, there is a significant potential.
Andrea: Absolutely. China is the second largest beauty market globally. And we estimate it represents around 25 percent of all the luxury beauty sales if we include travel, retail and purchases abroad. We see this as a great opportunity for pure prestige players like Estée Lauder. And despite expectation of a GDP slowdown in China, we have not seen any deceleration in prestige cosmetics sales in the country. Growth in China has been quite resilient in both the skincare and color cosmetics.
Noelle: So those are really very big numbers. What’s happening in China to drive this?
Andrea: The main drivers for the growth in China beauty has been the increased demand, really. It’s really driven by the wealth effect, driven by the demographics and labor participation. It’s the highest women participation in the world. Ecommerce really has transformed the landscape in China, and it has allowed companies like Estée Lauder to reach more than 500 Chinese cities, while its bricks and mortar penetration in the past was only about 130 cities with the department stores.
Celine: Yeah, I totally agree. And in fact, to add a few statistics there are really some competing long term drivers. Growing middle class population, which is expecting to grow over nine times over the next decade, and that should drive premiumization. The increase in consumption, because per capita today is still five times lower than in mature markets. And also the potential for higher penetration in makeup. China is really still a skincare market, and I think makeup has a long way to go.
Now I also think that there are some interesting and very specific factors to understand what’s the success behind China. And those are the rise in digital and the increasing consumer spending, especially among the young. On digital, the rapid rise of ecommerce is really allowing brands to reach customers outside the most developed Chinese cities. In fact, right now, ecommerce represents a quarter of the market and this has favored the development of luxury brands by creating new point of distribution, well ahead the development of department stores, especially outside of the big cities.
The industry has really seen a real pickup in demand, driven by young customers. And those customers are entering the category directly, with the consumption of the prestige brand. They are looking for strong, well known brands, but also looking for innovative products. What’s interesting here is that they have strong buying power, often, I must say, subsidized by their parents and their grandparents. And this really sets the Chinese market apart, as young consumers in the rest of the world clearly do not have such buying power.
Noelle: This is really very impressive growth being driven by China. How does that compare to the growth profile of the rest of the world for the beauty industry?
Andrea: This is a very interesting question, Noelle. I’ve been getting a lot of investor questions on this recently. We did see a deceleration in the U.S. prestige market, uh, recently. It was growing, actually, in the high single digits up until, last year. And we saw this deceleration particularly in color cosmetics. We know that the sales of the luxury cosmetics in the U.S. is still highly dependent on department stores, which represents about 45 percent of sales.
Celine: Outside China, it’s fair to say that the market has been resilient, but mixed. Emerging market continues to be the main driver of growth in this industry. In the U.S., as Andrea pointed out, the mass market has been also under pressure with consumers trading up to prestige. But overall, I think the key trends here has been distribution, in terms of ecommerce, but importantly, the development of special retailers like Ulta and Sephora, that really have been driving a beauty culture, and contributed to the success of small indie brands. 09:56
Noelle: You highlighted how demographics are actually reshaping the balance of the industry, looking forward, in terms of beauty versus skincare. Could you more specifically talk about what you’re seeing there as you look forward?
Andrea: Yeah, it’s fascinating, Noelle. Color cosmetics which basically is makeup, generally serves as a recruitment in the industry, as it starts with the teens really experimenting with makeup, in particular for selfies. As we have seen the Millennials get older, they start using more skincare, so that extends, the companies’ ability to cater for all, pretty much almost all ages. And to prepare the skin and make it a better canvass for makeup.
Also, as the skincare evolves and gets into more, more ages and earlier ages, it also brings higher ticket for the companies, and more barriers to entry, given the technologies that are involved, and more recurrence of purchases. In prestige skincare, to give an example, repurchases can represent about 45 to 50 percent of sales, according to Estée Lauder.
Celine: Yeah, and I think in terms of younger generations driving demand, it’s important what has happened in terms of the digital changes. Those new population are digital natives, and that have become quite knowledgeable in terms of beauty needs, the regimes, even sometimes educating their parents on beauty routines or trends. While these trends have effectively driven the makeup boom in the past few years, because makeup is a very visual category, we clearly see the same now level of expertise and interest trending on skincare.
Noelle: So clearly, digital is a big trend, right, and driver in the beauty industry. How is it actually disrupting the industry today? And can you talk a little bit more about, you know, how your companies are reacting and responding to that, so that they stay relevant and in, in front of the consumers and the trends?
Celine: Yeah, it’s true that there’s been a lot of talk about technology disrupting the industry, but I believe this has brought a lot of positives, because they have played well for beauty. I would highlight, for instance, a few areas. If you think about it, consumer intimacy. Now our companies have not only the ability to talk to their consumers, but as well to hear what they say via social media or reviews. And that’s really important from a marketing standpoint.
If you think about product availabilities, of course we think about ecommerce. But think as well about virtual try on, where you can, through augmented reality, try, uh, some products. Example here is L'Oréal. They bought a startup company called Modiface, where you can try on makeup, and this could be rolled out to hairdressers, so that when you go to the hairdresser, you can try all hair color, for instance. And lastly, also think about innovation. There is a lot going on in terms of product efficacy and personalization. Now companies have access to better diagnosis tool, and they can provide tailor made products or even regimen. I would here highlight, for instance, Shade Finder by Lancome, where they use AI to recommend a particular foundation for consumers. Or they could even do personal foundation, which they do with their brand [indiscernible] by Lancome. So, you know, all in all, I think our companies have been quite successful in looking at how the evolution of technology could help them. It is true that there was worry that the new entrants will challenge the incumbent, but it has not been the case.
Andrea: I think the technology impact is two-fold. For the companies, it really reduced the barriers to entry for new brands, in particular in color cosmetics.
In skincare, the mode of brands like Estée Lauder or La Mer, which is also owned by Estée Lauder, is definitely more important. In many cases, we have seen many companies acquire those brands, too. An example was Too Faced, which was purchased by Estée Lauder a couple of years back. Net/net, digitalization has been a positive for consumption, and also led to higher return on investment, for marketing for most of these companies.
Now in terms of products, we are seeing brands come out with some really innovative products, some examples like similar to what Celine had mentioned. In the case of Estée Lauder, they had, launched similar, the Clinique iD, through their Clinique brand, which pretty much scans your skin for personalized skincare regimen, which comes in an affordable $39 price point, which is really is an entry level for prestigious skin care. And Optune by Shiseido, they’re coming out with a skincare machine which is really cool and innovative that combines the products for personalized skin types, and also use cartons. So the consumers will be automatically replenished by online delivery.
Noelle: So that’s some very interesting insights on new products and the use of technology in the industry. Beauty is clearly a dynamic and on trend industry these days. That wraps up our discussion for today. Andrea, Celine, thanks so much for joining me to share your expertise and your views.
Stay tuned for more Global Research podcasts from J.P. Morgan.
This communication is provided for information purposes only. Please read J.P. Morgan Research Reports related to its content for more information, including important disclosures. This episode was recorded on July 17, 2019.
The beauty industry, already one of the fastest growing categories in the consumer goods industry, is undergoing a digital transformation as social media and e-commerce have revolutionized the way brands can connect with their customers.
The rise of both beauty tutorials on YouTube, where influencers with millions of followers showcase complex makeup looks and an Instagram-led “selfie culture”, have helped beauty sales boom in recent years.
Nowhere is this e-commerce push more evident than in China. Historically a dominant skin care market, China is now the second largest beauty player in the world, expanding to 14% of the overall global market in 2018 from 12% in 2013.
China, historically a dominant skin care market, expanded to around 14% of the global market in 2018 from 12% in 2013. Two-thirds of the market is still in mass beauty sales, but luxury is growing at a faster pace.
The top players in luxury skincare in China are L'Oréal with 17% share, followed by Estée Lauder with 13% and Shiseido with 6%.
Source: Euromonitor and J.P. Morgan
E-commerce has played a significant role in driving this growth, with online sales now representing a quarter of the market, as brands have been able to reach customers outside the most developed Chinese cities.
“This growth in e-commerce in China has really favored the development of luxury brands by creating a new point of distribution, well ahead of any developments seen in department stores. An increase in consumer spending from a growing middle class has also led to a pickup in demand. Young customers with real spending power, often subsidized by their parents and grandparents, set the Chinese market apart,” said Celine Pannuti, Head of European Consumer Goods Research at J.P. Morgan.
Luxury players, such as Estée Lauder, have been the major beneficiaries of this e-commerce boom in China. The prestige cosmetics company grew over 40% in China in the 12 months to June 2019, on top of the 67% growth seen in the previous 12 months.
“Younger Chinese consumers are not only more affluent, they are also using skin care much earlier than previous generations. Alibaba and other e-commerce platforms have accelerated this process, particularly for luxury cosmetics and now represent more than 30% of premium cosmetics sales in China,” said Andrea Teixeira, Head of North America Beverage, Household and Personal Care Research at J.P. Morgan.
Cheaper, mass market beauty product sales make up two-thirds of the total market, but it’s the premium end that is seeing the most rapid expansion – particularly in the U.S. and China – which, when including travel retail, represent about half of all global prestige market sales. Growth in luxury beauty brands outpaced the mass market for the fourth consecutive year in 2018, Euromonitor data shows, with skin care, hair care and fragrances leading the way.
“Makeup demand is moderating worldwide, particularly in developed markets, following the strong recruitment phase led by increased social media and selfie adoption from 2012 onwards,” said Teixeira.
While e-commerce has helped give smaller, indie brands a boost, the large multinationals, such as L'Oréal and Estée Lauder, are still leading in skin care. As skin care requires more research and development than other beauty products, customers tend to remain loyal to larger brands they know and trust.
“With the millennial generation getting older and make-up serving as a recruitment tool for skin care, we believe the accelerating growth trend in prestige skin care is here to stay longer-term. We see this as a great opportunity for pure prestige players like Estée Lauder,” added Teixeira.
To keep customers engaged in what is a highly competitive market, brands are using new forms of emerging technology to personalize products and services. L'Oréal is helping customers looking for the perfect foundation shade to match their skin tone with artificial intelligence (AI). L'Oréal l luxury subsidiary brand, Lancome, uses a custom made machine to scan the skin to find the right color match. Customers at Lancome beauty counters can then have their foundation mixed in-store, with a proprietary algorithm choosing the right shade from thousands of variations. The French beauty giant also acquired augmented reality (AR) startup, ModiFace, developed by dermatologists. ModiFace uses AR to perform try-on simulation on photos or videos for makeup, hair and skin care. It also helps measure the precise state of skin and observe any potential skin changes in live video. The app’s technology is able to detect changes such as dark spots, discoloration, dryness, uneven skin and rosacea. It can even visualize the changes before and after the use of any beauty product, helping to recommend and ultimately sell products for customers’ specific skin care needs.
Estee Lauder is taking customization to the masses, with its Clinique-iD serum-infused moisturizers, while leading Japanese beauty brand, Shiseido, is fully moving into delivering beauty as a service. Earlier this year it launched “Optune”, a machine that eliminates the need to select skincare products at all. An app analyzes the skin and chooses the best mix of skin care cartridges for the machine, which dispenses just the right amount of product. When the cartridges are nearly empty, replacements are ordered automatically. The group also recently acquired a startup specializing in artificial skin or “Second Skin” technology. This is not yet available to customers, but the brand is developing a technology that physically corrects the condition of the skin, using a product that contains a reactive polymer layer.
“At the heart of it, the beauty industry is a business of personal advice and technology is just enabling this. So what you see from tutorials to targeted content, augmented reality, or even personalization of products – all enabled by digitalization – has really been an accelerator for the industry,” added Pannuti.
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