Recently, at Rainmaking Venture Studio, we’ve been delving into the beauty space, on the hunt for new venture opportunities.
In this two-part blog series, we share reflections on the fundamental forces shaping this space, and whether the business models we have today can survive Covid and beyond. Part 1 will explore the macro trends and part 2 will deep dive into the business models.
So let’s dive in!
This means enjoying more comforts in our own homes, or in other words, “Hello Covid”.
At-home beauty was already a trend well before Covid, from treat boxes that let you discover all the products you never knew you needed, to custom hair dye or refills arriving at your door monthly.
However as beauty salons and department stores locked down, this only accelerated the trend. In the US, between March and June, health and beauty sales were up 13%, rising $3.74bn from 2019 to reach $32.2bn.
At home colouring saw the greatest growth- more than doubling from $50m in 2019 to $128m. This has hugely benefitted corporate-owned startups e-salon (51% owned by Henkel) which grew 500% year on year in March 2020, and also Colour and Co (owned by L’Oreál), where an average of 100 consultations a day pre-pandemic, exploded into 1,000 consultations a day.
With hairdressers shut, it’s no wonder we saw growth in at home cuts and styling. Hairstyling products jumped 20% to reach $145m. Meanwhile, men’s at-home hair clipper sales grew 53% year on year.
With continued uncertainty as to when, and for how long, further measures might strike, this is a trend we believe will continue to gain share from professional beauty.
Yet as people stay safely cocooned in their households, this poses new challenges for the beauty brands. Namely, how to adapt and help customers discover and sample brands outside of the in-store experience.
Historically, 90% of customers preferred to test and buy in-store. But in the pandemic, e-commerce has unsurprisingly grown far faster, up 31% YoY compared to 7% growth seen in in-store beauty.
We’ll dig into the business models solving these challenges in part 2, but lots of the solutions we’re seeing here aren’t new. Instead, this trend has given a much needed boost to beauty boxes and subscription sampling services like Birchbox (a monthly goodie box of full and sample size beauty products), who had cut 25% of their workforce in February but have seen growth in Covid.
#2 Self Love
In other words, treating yourself, caring for yourself, and ultimately gifting yourself time and products to help relax and pamper. In Covid, this trend is closely entwined with cocooning, as options to treat yourself to a spa day, blow-dry, or manicure outside the home remain restricted.
This is not a new trend, but again is only growing stronger amidst the strain of covid as those under stress look for easy ways to indulge, and don’t have the option of heading to their nearest beauty counter for a try-on session. Not coincidently then, the theme of October 2020’s Birchbox is actually Self-Love.
Again, the data is clear as spend moved onto self-care in the first wave of global lockdowns; looking to Zalando as one example, where pampering and beauty from skincare to nails, hair, and even candles were up 300% year on year in April. Meanwhile, for Amazon, nail care products rose 218%, hair colouring was up 172% and bath and body products grew 65%.
For brands looking to respond to this trend, the question may be how to keep the concept fresh after months of lockdown. Do the same propositions still work, or will products start to plateau?
And in the medium term, these services are not necessarily safe from the pandemic’s impact. Already, the number 1 reason for canceling these subscriptions is financial, so the test really comes as we move deeper into recession following the second wave.
In beauty, sustainability can take many forms. From reducing waste in the supply chain, to recycling, composting, reducing or reusing packaging, to making sure ingredients are sustainably farmed.
Again, it’s not new. It has been a buzzword in most industries for years now — back in 2015, Nielsen were already proving that 73% of Millennials would pay more for sustainable goods. But it is a trend that has only grown. A 2019 Accenture study showed that 83% of all respondents believe it to be “important or extremely important for companies to design products that are meant to be reused or recycled.” Meanwhile, 72% had shifted to buy more environmentally friendly products since 2014, and 81% expected to continue to buy more in the next 5 years.
The question for brands though remains… how much more will consumers pay for a sustainable option? Or will they come to expect it as the norm?
The other big challenge for businesses is to stop sustainability being just a campaign, but to actually it part of the business model, and to invest in sustainability throughout the supply chain. As consumers become more aware of brands “greenwashing”, sustainability claims are increasingly likely to be challenged.
Bolt Beauty is a great example of this. They were the first brand to create a full range of skincare in capsule form. Not only are the capsules themselves biodegradable, but they are made from quickly replenishing seaweed which also acts as a carbon sink. They come in a glass jar which is designed for reuse, with refills delivered in a compostable bag. And the brand even offsets its carbon impact with credits.
How much waste happens in production? Where do you source your ingredients from and how sustainably are they farmed? What’s the impact on deforestation? What’s the carbon cost of production and shipping? These are questions brands will increasingly have to be ready to answer. Any new brand launching needs to factor sustainability in from the start and older brands need to work out how to catch up.
# Gen Zpend
Another reason sustainability is going from strength to strength, is an increasingly socially conscious consumer: Gen Z. Though definitions do differ, Gen Z is the generation born 1997 and 2015 and is actually the largest age group, making up 40% of consumers.
They spend earlier on beauty than we might expect with 60% buying before they’re 14 (for Millenials it was 39% and for the older generations only 23%). This means they’re in the market a lot longer. And now, they’ve entered the working world and are only increasing their disposable income.
However, hopes of winning them early to secure their loyalty may be mis-founded. More so than older generations, Gen Z purchase impulsively, trying things they’re seeing on their social media feeds (whether through ads or their favourite influencers). They are also quick to change their minds while purchasing if the experience isn’t smooth, and if expectations like free and fast delivery aren’t me.
When it comes to beauty, this is a generation that take lessons from their own peers. They want ‘authentic’ campaigns including normal bodies with their ‘flaws’ celebrated not hidden. This is a generation that grew up just as Millenials were making a move for body positivity with anti-photoshop campaigns like Dove’s Real beauty which began back in 2004.
In the pandemic, we may be seeing this shift deepen, with Y Pulse showing a clear trend towards women becoming more comfortable wearing no makeup. More tellingly, a third of those surveyed believe they’ll continue to wear less makeup post-pandemic.
This lifestyle may be made easier by AR tech, using filters instead of makeup to look better on video or social media in lockdown. Snapchat filters can be used on Zoom, Google Hangouts, and Skype with Snap Camera Software now, and Zoom even has an inbuilt “touch up my appearance button”. It’s free, and a lot easier than doing a full face of makeup.
Again, it’s not a new trend- back in 2018, L’Oreal acquired AR beauty company Modiface to use filters as another way to market new products, letting customers try before they buy.
But as AR becomes embedded in our work tools and on our cameras, does it become less of a customer acquisition channel and more active competition for the cosmetics space? And if so, how can brands monetise it? After all, it’s a feature Gen Z have grown up expecting for free.
#4 Affordable Luxury
Another trend accelerated by the rise of Gen Z is Affordable Luxury.
Affordable luxury essentially promises higher quality products, without the massive markup.
This can be achieved in three ways: from new credit options like Klarna, to reduced prices via beauty buying clubs and discount stores, to direct to consumer brands who cut costs in the supply chain.
Affordable luxury is a trend only likely to be strengthened by a recession. It extends to fashion, jewellery, and closely aligns to the self-gifting and treat yourself mentality already discussed.
Klarna (a Unicorn who have already raised $2.1bn) has seen strong growth in Covid, even while tightening its lending restrictions, as it capitalises on the move of even more spending online. Between March and April 2020 they saw 20% merchant growth in the UK and 21% in the US. The challenge for Klarna will be trying to keep the quality of their loan book high as we enter a recession, as they don’t make extra interest on late repayments, but simply stop lending to that customer.
The luxury market is also being made more accessible through discount sites like CultBeauty and Look Fantastic, who not only offer their own reductions but also integrate payment options to spread the cost. The challenge for these resellers remains customer retention. Bargain shoppers move with the best offer, making it hard to compete with others on anything but discounts.
#5 Diversity and Inclusion
From race, to gender, to size, consumers don’t just want to see lip service to equality, diversity, and inclusion, they want products that really work for them.
For makeup this could be having a genuinely representative range of black and brown skin tone options for makeup in Rihanna’s Fenty which has 40 shades of foundation, to actually testing skincare on black and brown skin at startups like 4.5.6. Like the rest of the world, beauty is not going to get away with being colour blind any longer.
One startup to watch here is Nudemeter, a SaaS product for beauty websites. The founder, Atima Lui, found there was a light skin bias in skin-matching for beauty products, so she’s training her own AI algorithm to fix it.
The impact of the black lives matter movement can also be seen moving into the supply chain as Sephora this year became the first beauty brand to join the fifteen percent pledge — in it, they committed to have 15% of their supply chain attributable to black-owned businesses and producers.
The key for businesses here is authenticity. It’s not enough to show representation and diversity in marketing campaigns if it isn’t backed up right across the customer experience, baked into the business model, and seen throughout the supply chain.
Again, more socially conscious Millenials and Gen Z are key to accelerating this movement. Beyond racial equality, they’re championing the body positivity movement already mentioned and rejecting gender conformity. Partly, this is a response to a rejection of the “pink tax” where women typically pay more for equivalent products but is also part of a redefinition of masculinity, where self-care isn’t just seen as “feminine”.
Back in 2015, Dollar Shave club were ahead of the trend when they launched their “His and Hers” marketing campaign- featuring exactly the same razor for men and women. This was a year before their $1bn acquisition by Unilever.
By 2018, more than half of men in a Euromonitor survey were already using facial cosmetics like foundation, concealer, or BB cream. Today, both Charlotte Tilbury and Fenty (by Rihanna) are providing makeup tutorials for men too, but normalisation of this trend has largely been driven through social media, where influencers like Manny Gutierrez and James Charles attracted millions of followers to youtube and Instagram for their beauty tutorials.
But the question for startups entering this space and brands adapting remains: do you target one gender, create different lines, or go unisex?
As to the other aspects of diversity- it’s not about “do you?” it’s about “how do you?”. How do you bake diversity into your whole business- not just your marketing campaigns. From how you hire and treat your own employees, through to product design and testing, to how you reach and deliver to the customer; and everything in between. How are you building for diverse users: whether in race, gender or accessibility?
#6 Hyper Personalisation
We can already see the impact of diversity and inclusion in how some established beauty brands are using hyper-personalisation to become more representative. For instance, Lancôme Le Teint Particulier, blends a bespoke foundation shade at the beauty counter and is capable of colour-matching up to 22,000 skin tones.
And, the demand for a more personalised experience extends beyond colour matching for makeup.
A great example of the next wave of hyper-personalisation is looking at DNA matching for skincare; determining your predisposition to colour damage and aging, hyperpigmentation, or other skin complaints, all leading to a personalised regimen.
Meanwhile, wellness trackers are seeing increasing cross over with beauty. Roche-Posay has created a bracelet to track your UV exposure and warn you when it might damage your skin. The tech even claims to be the world’s first battery-free wearable.
Personally, I’m waiting to see the next wave linking hormonal tracking to beauty. We’ve already seen tracking apps like Natural Cycles and Clue take off, with women wanting to better understand how their fluctuating cycles impact everything from cravings, to sleep, to fertility, to weight gain. In fact, Natural Cycles (which previously relied on a thermometer for daily temperature readings) have just branched out with their first IoT partnership with the Oura ring. A couple of skincare brands are already offering hormonal phased solutions, such as Phase and Knours but as yet, this is still generically applied, rather than tapping into the personal tracking data which menstrual apps collect. How far can beauty be behind this trend?
#7 Pretty enough to post
Beauty products have always had to be aesthetically pleasing, but today they have to be able to earn a spot on the coveted Instagram grid, or at least a place in their stories. From unboxings to uploading your skincare regime, beauty is in the eye of the follower.
To start to quantify the value of getting picked up through posts; the influencer industry is projected to nearly double from 2018 to 2022 from $8bn to $15bn. No surprise then that 79% of retail brands have upped their influencer budgets in 2020.
Think about HiSmile, a teeth whitening solution which made at home smiles easier to perfect. One of their main mediums of growth: Instagram influencers and celebs filming themselves with the bright blue whitening device in their mouthes. In their first three years (2014–17) the founders invested $20,000 of their own money, turning it into a $100m turnover in sales.
But while this was once an innovative way to scale a business, today it is a pre-requisite.
Now, startups are baking this into their business models from day 1. For example, beauty gummies or vitamins- which not only purport to help make your skin, nails, and hair even more beautiful — now have to be picture-perfect themselves. Nourish3d is a great example of this, using 3d printing tech to combine the personalisation trend with the (literal) sparkle needed to make the product post-worthy. So far they’ve raised £2.6m in capital since they were founded in 2019.
Particularly when we think about the new wave of direct to consumer brands, this poses a challenge in how to stand out, both in influencer partnerships, but also with the everyday influencer. It’s time to invest in photogenic product designs and more elaborate unboxing experiences as online discovery replaces in-store browsing.
#8 Clean Beauty
No, clean beauty isn’t just soap, I checked. Clean beauty means avoiding harmful ingredients. But, it’s not a regulated space and the term “clean beauty” can be used interchangeably with “natural” “green” or “eco”; there’s no one definition to rule them all.
Yet, it’s a word already loved by today’s sustainability-conscious consumer, and early signs suggest that Covid is only accelerating the trend, as customers are increasingly health-conscious.
Klarna has seen almost 20% growth in clean beauty spending during the pandemic so far. This is still largely due to Millenials, who make up 70% of purchasers, but as outlined earlier, it’s Gen Z who are now growing fastest and they have increased their clean beauty spend 26% since March.
This trend can also be seen in the rise of direct to consumer brands like Deciem, who avoid product names altogether and instead focus on the ingredients- making clear exactly the concentration and quality you can expect. Deciem is also calling for more environmentally conscious consumption, as can be seen in their website’s call for slow shopping and replacing Black Friday splurges with KNOWvember -understanding what you really need before you buy.
This comes with its own education challenges, as brands have to help customers navigate what they want and need (again, harder when you can’t go in-store to seek expert advice and pick up some handy samples).
Platforms like TikTok, YouTube, and Instagram may be the key to lifting this weight from the brands, as influencers help explain new products to their followers, almost offering ‘beauty education as a service’. As long as they like and understand your product, you have a clear channel to a market that will increasingly respect brands that offer a clear view of what they’re really selling.
Beyond just the label and ingredients, this trend is also symptomatic of a wider call for transparency, extending throughout the supply chain linking back to those questions of sustainable and ethical ingredient sourcing and manufacture, waste and reuse, and the negative “impact” of beauty products.
Which trends are you watching?
This scratches the surface on the key trends impacting the beauty industry, which other ones are you watching?
Now that we know the key industry drivers, in part 2 of this post, we’ll explore what this means for today’s beauty business models. Are they pandemic proof? And where might the opportunity for the next evolution lie? How are incumbents and startups alike adapting their business models, and how do they hold up to these headwinds and tailwinds?
If you’re curious to see what other trends and business models we uncover, you can also join our studio newsletter to stay in the loop with new venture opportunities and market trends on Substack.