A recent McKinsey report shows how the beauty industry has led the way in embracing digital technologies that are revolutionizing the way consumers engage with brands and shop. This has led to the rise of digital challengers that have taken market share from legacy brands and that continue to define the beauty landscape. The global beauty market—including bath and shower, fragrances, hair care, makeup, and skincare—is a $250 billion global business, according to Euromonitor. Historically, large legacy brands have ruled the industry both in market share and in prestige, but the rise of digitally native brands are shifting the balance of power.
- From 2008 to 2016, color-cosmetics challenger brands grew by 16% a year, four times as fast as legacy companies. They now account for 10% of the color-cosmetics market, up from 4% in 2008.
- Upstarts are primarily single-brand companies that represent almost 50% of the $2.7 billion in venture capital (VC) investments the beauty industry has received since 2008 and 80% of VC funding in 2017.
- 31% of the beauty companies that get VC funding emphasize “conscious consumerism”—they use natural or organic ingredients and commit themselves to following certain social or environmental standards.
- Over 70% of the $2.7 billion in VC investments were made from 2014 to 2017.
The Five Reasons for Challenger Brand Success:
1. The consumer has spoken. The growth of consumer engagement on social media.
- Beauty was the third-most-searched topic on Google in 2016.
- The number of views of beauty videos on YouTube rose by 67% from 2015 to 2016.
- YouTube is the world’s leading beauty platform, with more than 1.5 million beauty videos (accounting for 4.6 billion views) uploaded each month.
- Traditional brands account for a relatively small share of YouTube views; born-digital brands are at the top of most social leaderboards.
2. Product and shopping preferences of the millennial generation have evolved.
- Asked “When was the last time you purchased a new cosmetics brand?,” 48% of millennials active in the category replied, “In the last month,” versus 19% of boomers.
- They expect to be able to try anything once—free of charge.
- They crave newness in beauty.
- They want the experience to be fun and prefer informal interactions.
3. New marketing formula fueled by digital made possible.
- Engaging consumers directly through social media rather than traditional advertising, challenger brands have created a new way of marketing that is not transactional.
4. The growth of omnichannel and online-only beauty retailers.
- Sephora, Ulta Beauty, and other omnichannel retailers along with online-only brands let consumers sample products.
- In the United States, Sephora’s same-store sales are rising by 7% a year, and the company plans to open 20 new stores a year through 2020.
- Ulta Beauty, whose same-store sales are growing by 14% annually, has a goal of opening 100 new stores a year through 2019.
- According to the research firm L2, 60% of Sephora.com’s users and 47% of Ulta.com’s users shop by product category.
5. The sophisticated use of contracting.
- Challenger brands tend to concentrate on marketing and to outsource most other aspects of the business.
Strategic Beauty Companies’ Response:
1. Acquisitions: In 2016 alone, Bloomberg estimates, traditional companies made 52 acquisitions of beauty-related companies.
2. Adaptation: Traditional beauty-industry leaders are investing substantial resources in digital media and influencer marketing, and building digital organizational capabilities.
3. Incubation: The creation of an internal incubator within a larger business can support and participate in the growth of smaller brands.