2021 was a wild ride, marred with ups and downs, two steps forward and one step back. We’ve seen several macroeconomic influences throughout the course of the year, including an expanded economy flush with cash due to low interest rates, increased customer spending, and heightened corporate cash flows, all while the everyday consumer was partially sidelined from participating in the flourishing economy after brands faced inventory shortages due to supply chain constraints, and inflation rates that hit 30-year highs eroded consumer confidence and purchasing power. The result: a continued shift in the beauty sector.
An Ongoing Shift in How Consumers Define Retail
We’ve seen e-commerce take share from offline retailers for some time now. Retailers have had to innovate at a fervid pace over the past two years, including giving more attention and resources to their web shops, and the creation of some of their very own marketplaces—going head-to-head with Amazon’s third-party seller offering (which totaled $80.5B in 2020, crossing the 55% of total units shipped as of 3Q21).
Perhaps the most exciting, and rapid, arrival is social selling, driven by platforms like TikTok, the rise of the “skintellectual” consumer, the arrival of “cosmetic chemists”—beauty’s new influencer—and brands’ ingredient-led storytelling. Platforms like Flip have sprung onto the scene raising a total of $31.5M (TechCrunch). L’Occitane and ULTA have also created capabilities, with MyL’Occitane and a partnership with Supergreat, respectively.
Multidimensional Partners for Multidimensional Brands
In the not-too-distant past, it was considered suitable to simply focus on DTC from conception to exit. We have since seen the importance of diversifying a brand’s channel mix. In addition to innovative offline retail, an intensified focus on reliable supply chain and logistics partners, and building a platform on top of Amazon’s, is taking a seat at the proverbial table in a multitude of ways.
Brands are storytelling through ingredients and via retail. They’re thinking omnichannel and global, all while keeping an eye on maintaining respectable gross and operating margins. In response to these needs, vendor partners have also made efforts to adapt, creating omni-capable platforms and integrated offerings to help brands scale efficiently and effectively. “Being an omnichannel partner for brands today mandates agility to ebb and flow as the market, channel strengths, and consumer behaviors shift. Being independently owned and self-funded, we’ve been able to be agile and invest heavily to ensure we can move in step with the speed of our global brand partners’ needs,” says Piyush Golia, CEO of the PCA Group, a global distribution platform headquartered in NY. Others who demonstrate an expansion of services include SuperOrdinary entering US Amazon, and Fortress Brand’s recent acquisition of creative agency School House.
2021 also brought a jaw-dropping $5.7B of investments into a global portfolio of Amazon aggregators— companies like Thras.io, Perch, and Heyday that are building services to roll up well reviewed but otherwise unknown Amazon products. With an average of 30x earnings, these investors and platforms have initially intended to create an economy of vertically integrated scale. In 2022, let’s keep an eye on them to assist in product development and expanding into retail, following the new version of click-to-brick, Amazon to retail partners. Hero Cosmetics and Brickell Men’s products come to mind as best-in-class examples of this trend.
Diverse Investments and the Brands that Are Positioned to Win in 2022
WWD reported that 157 investments and exits occurred in 2021. Cheap capital, a booming post-COVID economic recovery, increased consumer spending, heightened corporate cash flows, the emergence of IPOs and SPACs as an exit strategy, and the threat of a nearly doubling of long-term capital gains in 2022, led to an incredible 2021 for beauty M&A. What will the landscape look like this year for current portfolio companies looking to exit, new investments, and what pillars position a brand to be attractive?
Despite the macro headwinds stated above, 2022 will still prove to be a good year for investments. Between 2016-2018, $3.6B of capital funded 874 companies. Excluding those that might’ve been a strategic exit, there is a significant number of investments from those vintages that will be seeking an exit. Although skincare will continue to have thoughtful exits, the category to watch is going to be hair. Olaplex and P&G’s acquisition of Ouai lit the fire. Tribe Dynamics points out that Ouai only trailed Olaplex and drove community building via a roster of organic advocate influencers, totaling $4.8K and $6.4K, respectively.
New investments will be an interesting theme for 2022. While a lot of money has been raised in recent years, and LP investors will likely be looking to alternative investments as a hedge against inflation, the question remains what the macroeconomic shifts will do to exit multiples and opportunity in the next 3-5 years. As a result, investment discipline will need to be a theme introduced to the community this year. Brands that are positioned to win will have weathered the rapid and dynamic changes these past two years, such as go-to-market strategies and supply chain resilience, attractive storytelling via its values, its ingredients, and its channel mix, and demonstrating a clear line to future wins, be it hero products, channels, geographies, or partnerships.
Today’s consumer has become more value driven. As such, our approach has also evolved, as we seek brand pillars that define a brand as a primary driver. To that end, an emerging theme is how brands are shining light onto categories that have otherwise been taboo. While retailers as independent as Shen Beauty and as scaled as ULTA continue to “expand their view of beauty,” Categories like ingestibles, functional fragrance, nesting at home, sleep, mental wellness, solutions for acute issues that damage self-confidence, rituals, gender inclusion, and even mysticism and healing will create new types of emotional connections with the consumer, ultimately driving conversion.
Given varying societal trends, brands have started to reinvigorate the baby category. As the millennial generation have become parents, they are increasingly conscious about the quality of the products used on their child. Conversely, the shift to delay parenthood until later in life continues, and we will watch as more focus will be placed on products and methods that combat infertility. Despite your friend’s “COVID baby” that you met for the first time this past year, pandemics and recessions have led to the sixth straight year of a decrease in birth rates.
As we enter our third year of COVID, it is clear we will not look back from a few behavioral shifts as consumers, and that the go-to-market strategies for brands and the platforms that serve them will continue to evolve. In addition to investors, brands, and the vendors who help them, I believe it will be an equally dynamic ride for consumers. Let’s all continue to observe how our preferences are changing and what platforms and brands capture our attention.
