Changing consumer preferences: What does the data say?
At the beginning of 2021, uncertainty about school, office and event reopening kept beauty businesses guessing about how changes in preferences might unfold for the remainder of the year. However, as life begins to normalize, consumer preferences are likely to shift again. A focus on health and functional beauty will be the mainstay as consumers will embrace self-care. Look for essential oils, organic ingredients and even CBD in beauty products. Companies will be reliant on customer data and insights about that data to understand consumer needs and wants. Likewise, technology will help businesses provide personalized consumer journeys via artificial intelligence, augmented reality and other consumer-facing platforms. Customer data and insights will be vital for beauty companies to manage SKUs, minimize returns and capture spending in hot categories. Also in 2021, consumers will be drawn to ingredients that promote antiaging benefits. While historically such products have been marketed to middle-aged and older consumers, brands have developed strategies to deliver the message to millennials and Gen Zers as they make up an increasing share of the overall market. Previously, products typically targeted for younger consumers touted the latest trends and styles; now they stress multipurpose ingredients that moisturize, cleanse, protect against UV rays and damage from air pollution, in addition to offering aesthetic appeal. This multiple-use trend has allowed consumers to reduce their reliance on using multiple special purpose products.
Direct-to-consumer: Developing the digital beauty counter
The pandemic uprooted the traditional cosmetics sales model. The days of beauty counter trials and sales associates handing out fragrance samples as the norm are over. Retail closures and social distancing have forced consumers, who may have been averse to making online beauty purchases in the past, to adopt the direct-to-consumer, digital channel. Successful brands have been able to recreate a high touch beauty counter experience in a digital arena through online demonstrations, virtual shopping events and digital sampling. While increased consumer mobility will bring some sales back to physical retail, the role e-commerce plays will have staying power. It’s crucial for beauty companies to understand which digital strategies will stay relevant or can be adapted to interact with new physical shopping experiences to succeed across all channels. Emerging technologies such as artificial intelligence and augmented reality will continue to open new opportunities to bridge physical and online channels for holistic shopping experiences.
Innovation: Creating differentiation
In this highly competitive sector, middle market beauty companies will need to look for innovative ways to stand out from the pack. While differentiation may have come mostly from marketing in the past, beauty companies are now touting the very formulas and processes that go into their products to make them stand out. Some companies are emphasizing the sophisticated science behind their formulations to bring new functionality to products, while others are touting the use of natural and organic ingredients. Even packaging, once a critical component for standing out on the shelves, is being highlighted for its sustainability rather than its design in order to lure increasingly environmentally conscious beauty consumers. Middle market beauty companies should use their consumer intelligence to determine which messages are vital in the buying decisions and leverage that data in product development and marketing.
Supply chain and operations
In 2020, consumer products businesses experienced the fallout from supply chain disruption and demand shock. The beauty sector was no stranger to these challenges. Looking forward, as demand continues to rebound, beauty companies will need to ensure their supply chains can keep pace. With commodity prices on the rise and a global shipping backlog, many beauty companies will find themselves struggling to procure products efficiently. Labor scarcity and rising wages that plagued manufacturers prior to the pandemic will persist as companies will struggle to bring employees back to work. Data-driven demand planning and optimizing production will play an important role in minimizing cost exposure in 2021, as brands balance changing consumer preferences while also staying nimble. Likewise, in terms of improving operations, growing beauty companies will address SKU management; leverage technology, such as machine learning to improve processes, lead times and margins; and look at ways to update merchandising and marketing efforts to connect with an increasingly diverse customer population through a multitude of channels.
Beauty is resilient: Deal activity blooms
The beauty sector, which has been resilient during past recessions, found itself hit hard during the pandemic and shutdown as consumers sheltered in place. With consumers spending more time at home, they looked to alternative purchases to fill the role of affordable indulgences that cosmetics played in past. However, the industry responded by accelerating innovation in areas from customer experience and niche products to packaging and ingredients to meet the needs of a beauty and personal care consumer with different priorities. In 2021, large beauty players will be positioning themselves to right-size their brand portfolios even further to align with preferences. Many of these large companies adjusted their debt-heavy balance sheets during the pandemic and will look to acquire proven middle market brands to accomplish this. Deal activity shows that private equity firms and strategic acquirers have invested in companies with innovative sales models that bring the personal touch of the beauty counter and salon experience to consumers in their own homes, and those that offered customizable or functional product lines that could be tailored for specific customers or offered health and wellness benefits. This will continue to ring true in 2021.