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Beauty Had a Good Year. But Will the Numbers Hold Up When Final Results Are Tallied?

January 12, 2023
January 12, 2023
Suzy Hazelwood via Pexels

The spending momentum built up over Black Friday was stymied by the cyclone bomb that impacted much of the country, resulting in deaths, power outages, flight cancellations, and lessened retail foot traffic. Consumers’ moods were further dampened by lingering economic concerns. It appeared that as the year came to a close, the tighter shoppers were with their purse strings.

Foot traffic diminished at some key retailers for the period between Black Friday and the week of Christmas, per Placer.ai, an analytics firm that harnesses data from mobile devices. Across six retailers—Walmart, Target, Best Buy, Nordstrom, Kohl’s, and Macy’s—foot traffic dropped by an average of 3.2% year over year for the weeks from Black Friday through the week of Christmas.

Exact results on how retailers fared in the last push of 2022 won’t be available until fourth-quarter financial reports are tallied in the next few months. Early numbers suggest gains were held to mid-single digits. One of the first reports out of the gate, Mastercard Spending Pulse, pegged US retail sales increases at 7.6% year over year for the holiday season running from November 1, 2022 through December 24, 2022.

“This holiday retail season looked different than years past,” said Steve Sadove, Senior Advisor for Mastercard and former CEO and Chairman of Saks Incorporated, in a statement. “Retailers discounted heavily but consumers diversified their holiday spending to accommodate rising prices and an appetite for experiences and festive gatherings post-pandemic.”

That appetite for social gatherings was a boost for the beauty industry which, according to interviews with industry experts, retailers, and brands, produced sales gains exceeding the overall industry. That was good news for the category that for the past few years took a backseat to bigger ticket items like electronics, furniture, and fine jewelry—three categories that were down or flat this year. This year it was all about affordable luxuries—a space where beauty thrives.

Adobe Analytics, which tracks online sales, singled out cosmetics as the fourth-fastest-growing online category in November versus October with an increase of 90%. The only bigger spikes were from watches, baby toys, and gift cards.

Despite the encouraging results, there are those waiting to see if gains were puffed up by prices increases, and if margins will be pinched by early and deep promotions offered by some brands. Brands including e.l.f. raised prices this year to help offset the mounting cost of goods. Some beauty prices, according to website checks, were up 10% over 2021.

“Overall, the holiday numbers looked solid, but I think there are deeper issues that need to be addressed such as price increases due to inflation, inventory issues with supply chain problems and then we have to factor in returns,” said Deanna Kangas, beauty industry veteran and President of Strategic Growth Consulting.

Some early purchases are expected to be returned, especially if shoppers saw sharp discounts as the holiday neared and bought on sale. Estimates from Salesforce warn that returns could escalate 57% over last year to more than 1.4 billion orders.

“For 2023 we still expect a mild recession in the US to pressure the US consumer, although beauty continues to be a relative bright spot.”
By Ashley Helgans, Vice President, Jefferies

Promotional activity, in some categories and by some retailers, was fast and furious. Holiday products were set up before Halloween in many stores. Amazon and Target kicked off seasonal sales in October.

La Mer was discounted in mid-December at Costco. Bloomingdale’s offered $25 off deals from purchases in cosmetics of $150 or more that could be used in other departments. Pat McGrath Labs offered up to 50% off on its range.

“I’ve never seen this before Christmas,” said industry consultant Allan Mottus. Gifts-with-purchase and purchase-with-purchase, on pause during the pandemic, also returned to stores.

Kangas also noted that the entire year was hard for smaller brands, as illustrated by the announcement of the abrupt closing of all Morphe stores the first week of January 2023, and the shuttering of beauty brands like Makeup Geek, Salty Girl Beauty, Hush + Dotti, and Lilah B., among others. Bed Bath & Beyond, which has a large beauty department, is teetering on bankruptcy.

BeautyMatter visited several stores for a boots-on-the-ground view of the holiday atmosphere. Two days before Christmas, beauty counters at Bloomingdale’s, Neiman Marcus, and Nordstrom at the Mall at Short Hills were buzzing. At the Tom Ford counter in Nordstrom, a handful of lipstick shades were sold out despite being fully in stock. It was the first time in the past year where there was a visible return to department store beauty departments, confirmed several beauty consultants.

At Sephora in Miami, clean beauty lines were selling well along with sharp deals on Huda Eye Shadow Palettes, the full range from Rare Beauty, and face products from Charlotte Tilbury. Other popular items mentioned during store tours included Kiehl’s, Dyson hair tools, any advent calendar, and “anything clean.” Fragrance counters were thriving at premium doors—not so much at mass stores, where countless gift sets were untouched during store visits the day after Christmas.

Fragrance was the fastest-growing prestige beauty category in 2021, and was off to a healthy start for holiday, according to Larissa Jensen, Beauty Industry Advisor at The NPD Group. Fragrance dollar sales expanded 4% from October 2 to December 3, said Jensen. It was one category where sales gains were driven by demand, not just elevated prices.

“Fragrance sales reached new heights following the pandemic, and it’s particularly impressive that the market is maintaining this elevated level rather than softening, which is typically the case after such an unprecedented performance,” she said.

What is notable is that growth in scents was attributed to higher average prices—not purely price discounting to generate units. Jensen expects robust gains when final sales are totaled since the bulk of holiday fragrance sales are produced just before Christmas.

Overall, physical stores gained importance for the fragrance market during the holiday period thus far, accounting for 70% of sales in the nine weeks ending December 3, 2022, which is an increase of 1 point versus the same period last year. Specifically, specialty stores are gaining dollar share, with beauty-specialty stores fragrance sales growing at four times the rate of department stores in October, according to NPD Checkout data.

While shoppers were looking for value and keen prices, they directed their beauty spending to specialty and department stores. The consensus was shoppers would rather buy a prestige beauty line instead of trading down to mass. The exceptions were clean beauty brands and stocking stuffers that sold out at Target, Walmart, and CVS. The trend to buy luxury beauty items, however, could shift if the economy continues to tumble.

Jefferies has the potential for a pivot on its radar. “For 2023 we still expect a mild recession in the US to pressure the US consumer, although beauty continues to be a relative bright spot,” wrote Jefferies Vice President Ashley Helgans in a report. However, she’s keeping an eye on the landscape.

“The backdrop for beauty brands is shifting quickly, with consumers adapting budgets to inflation, rotating from wants to needs. So far, beauty has withstood the underlying shift from goods to services given its connection to socialization, occasions, and self-care regimens.” Early signs of economic stress, Helgans added, could impact trading up and result in more discounting in 2023 versus 2022.

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