Tuesday 26 November, 2019
As thematic investors, we look to identify and leverage the global ‘themes’ and trends that underpin and shape market performance. See Frank Braden’s (Senior Equity Analyst, Global Thematic) assessment of the forces driving the global beauty industry’s surging growth - and equally significant change.
What’s driving the ‘breakout’?
From the department-store market of not-so-long ago, where consumers generally chose from a limited range of large, global brands, to practically endless options and an industry reinventing itself at breakneck speed – the change in the global beauty industry has been as rapid, and striking, as its products (and now influencers) often promise.
This has been driven by the intersection of several large global themes: the ageing of baby boomers, the rise of the social-media driven “selfie generation”, and the rapid growth of the middle-class in Asia and other key emerging markets.
Bulging wallets, ticking clocks.
With large amounts of disposable income, and an ever-growing focus on the creeping effects of time, consumers aged 50 and above are expected to increase their ‘beauty spend’, by 58 percent over the next 20 years – to $4.7 trillion. While no longer necessarily looking for the latest trends in colour cosmetics, ‘boomer’ consumers are leading the growth in skin care as they seek to counteract the effects of sun damage over the years. Meanwhile, their more traditional shopping preferences are playing a significant role in sustaining more ‘hands-on’ areas of retail - preferring in-person or phone conversations to email or online chat options.
Insta-growth is maturing.
The image-obsessed ‘digital peacocks’ of the selfie generation - always striving to look their best in close-up social posts - have driven strong changes in cosmetics demand since 2012. However, this spike in demand seems to have reached its peak in 2016 and has moderated since 2017. As with the boomers before them, it is expected that as ‘Millennials’ get older, we’ll see a shift in their spend from ‘look at me’ cosmetics, to skin care. But their influence on the market goes well beyond their spend - with this generation’s social media focus and the legions of “social influencers”, it has a massive and ongoing impact on how consumers discover and purchase beauty products. That evolution has lowered the market’s barriers to entry, with a resulting explosion of choice.
Rising income is another key theme that is supporting beauty spend in emerging markets, particularly China and Brazil. In China, a fast-growing growing middle class, combined with increasing female spending power, and the previous one child policy leading to higher purchasing power for Millennials and Gen-Z, demonstrates the clear potential for future growth. According to Estée Lauder CEO Fabrizio Freda, the average China consumer spends $23 a year on ‘prestige beauty’, while the average U.S. consumer spends $255. As the wealth gap continues to shrink between these markets, the enormous opportunity available in the Chinese market can only be expected to increase.
While the global beauty ‘pie’ is growing… strong disruptive factors are transforming the market.
Chief among these is the combined forces of e-commerce and social media - with e-commerce altering the pricing and distribution dynamics of the entire industry and social media shifting the marketing playing field to create both opportunities and threats.
Together, these forces offer a formidable challenge to traditional ‘establishment’ brands - by allowing new independents to flourish and spread like never before. The large advertising budgets and preferential shelf space that traditional players once relied on, are being increasingly sidelined by platforms like Instagram and Snapchat, and the growing prevalence of online delivery… while the rise of social influencers gives their followers a proxy by which to sample the physical products.
Kylie Cosmetics is the prototypical example of the disruptive power of social influencers. Kylie Jenner was able to leverage her fame as part of the Jenner/Kardashian clan - and her 150 million followers on Instagram - into a cosmetics empire that beauty company Coty recently paid $600 million for a 51% stake. While traditional brands are now focused on building a large and growing social followings, they have much fewer in aggregate than a growing list of independent beauty companies.
Animal testing - another long-term ‘hot-button’ issue for the category - is also seeing new shifts. While ‘animal-tested’ products have been banned in the EU since 2013, other countries including NZ ban the practice, but not the import of cosmetics that have been tested in elsewhere (which account for over 90% of NZ sales).
And while China still requires tests on animals for imported cosmetics - it has also allowed Western cosmetics companies using e-commerce platforms to bypass this requirement since 2016, allowing smaller, cruelty-free companies to reach the Chinese consumer.
So… who is ‘worth it’?
The degree of current change in the beauty industry, makes it difficult for investors to see clear winners. While large global brands like Estée Lauder and L’Oreal continue to dominate, disruptors are changing the dynamics of the industry. As new independent companies fight for and win an increasing share of the pie - the overall pie is also increasing as the above factors lift the entire industry.
We think there are several key attributes that smart investors should look for:
1) Higher exposure to prestige beauty relative to mass beauty
2) Growing online/social media presence
3) Strong E-commerce presence across numerous channels
4) Well positioned in China and emerging markets
5) Strong position in the faster growing skin care category
6) Cruelty-free products