BeautyMatter's recent Q2 2024 Investment and M&A Report revealed significant shifts in the industry. The data highlighted a striking 23.5% decline in beauty deal activity compared to the same period last year, marking a notable tightening of capital within the sector. The BeautyMatter Deal Index recorded just 16 growth investments—the lowest since tracking began—compared to an average of 44 growth deals over the last 15 quarters. This stark 64% reduction underscores the challenges that beauty brands face in securing funding at this critical growth stage.
Moreover, the report indicates an alarming rise in brand failures, with 14 companies filing for bankruptcy or ceasing operations in the first half of 2024 alone. Major players in the industry have also felt the impact, with L'Oréal’s CEO acknowledging a slowdown and LVMH’s perfume and cosmetics division falling short of projections. Despite these concerning trends, there are pockets of resilience. Retail giants like Target and Walmart continue to view beauty as a vibrant category within their assortments, and some brands are not only surviving but thriving amid these complexities.
To help shed light on the market's mixed signals, BeautyMatter sat down with JuE Wong, Board Director of The Honey Pot Co.; Deanna Kangas, beauty advisor and investor at Strategic Growth Consulting; Andrew Stanleick, consultant and private equity senior advisor; and Margarita Arriagada, founder of Valdé Beauty, to discuss the current state of the beauty industry and the critical signals to watch over the next 12 to 18 months.
In Wong’s view, the slowdown reflects "expectations and investments being calibrated to more realistic levels." She noted that in the past, the market had seen "outsized valuations" that are now being brought back down to earth.
Arriagada concurs, noting that the industry is at an inflection point, marked by rising customer acquisition costs and increasing market tension. She emphasized the necessity for a "back-to-basics, disciplined approach," viewing this moment as an opportunity for the industry to innovate in areas like commerce, retail, distribution, and new product categories.
Stanleick, with 30 years of experience in the beauty industry, expressed optimism, citing data indicating a 10% growth in the global beauty market last year, despite the challenging economic climate. He advised leveraging free data sources, such as Google Trends and SEC filings, to extract valuable insights.
Kangas, a brand founder who navigated the 2008-2009 recession, underscored the importance of monitoring real estate trends and indicators like layoffs and store closures. She cautioned that these factors can serve as early warning signs of economic downturns that could affect beauty brands.
Arriagada shared her insights on how adjacent consumer categories can provide valuable insights into beauty industry trends. She has been closely monitoring the athletic space, particularly the emergence of challenger brands in athletic footwear that have successfully captured market share from established giants like Nike. This shift indicates a more sophisticated consumer who values lifestyle and community, seeking products that enrich their lives beyond basic functionality. As she noted, "Consumers are leaning into wanting to belong to something that adds more value to their life."
In addition, Margarita highlighted the significance of social currency and cultural relevance, pointing to the viral popularity of Stanley Water Cups as an example of a product that transcended its utility to become a social phenomenon. In the jewelry sector, she observed a surge of indie brands catering to consumers' desires for self-expression and personalization. “There’s a need for self-expression and personalization that carries over across industries,” says Arriagada.
Overall, Arriagada expressed optimism about the beauty industry's future, emphasizing that understanding these cultural dynamics and consumer desires will be crucial for brands aiming to connect with today’s audiences. Her observations underscore the importance of authenticity and community engagement as key drivers of success in the evolving beauty landscape.
During the panel discussion, Cafarelli highlighted that many beauty founders have not experienced a downturn, given the unprecedented growth in the industry over the past decade. He turned to Stanleick for insights on how founders and management teams can navigate rocky times.
Stanleick emphasized several key focus areas for beauty brands. First, he urged founders to concentrate on their core consumer and deliver genuine value. "Really focus on giving them value [and] launching products that are new, better, different," he says.
Stanleick also cautioned against trying to appeal to everyone, advocating for building customer loyalty to achieve a repeat rate of 30%.
Second, Stanleick stressed the importance of cost management. He advised brands to either hire a CFO or work with a competent fractional CFO to closely monitor expenses and cash flow. "Many brands fail because they don't manage those two areas well," he warned.
Third, he encouraged founders to carefully select their strategic partners, highlighting the necessity of aligning visions. "It's really difficult in this environment if you end up with a cap table where 50% wants hyper growth and 50% wants immediate profit,” he says. This misalignment can lead to significant challenges.
When discussing the factors that set thriving brands apart during market fluctuations, Kangas emphasized the crucial role of mindset in navigating challenges. She recalled a pivotal moment when she faced significant setbacks and met with a real estate investor who told her, "You don’t know how to play the game unless you can do the positive and the good times with the bad times."
Kangas shared how her team focused on creativity and rapid decision-making during tough times. For instance, when faced with excess inventory, her team devised a successful surprise sale strategy, which sold out quickly. They also leveraged partnerships, like donating office supplies to a charity, which resulted in increased visibility and sales after a celebrity shared their initiative on social media. "No idea is a bad idea ... you might as well throw it out on the table because you have no other choice," she advised, underscoring the importance of experimentation during challenging periods.
Kangas concluded by emphasizing the significance of grit and strong partnerships in overcoming obstacles, reflecting on how supportive relationships, like the one she had with Sephora, can be instrumental in a brand's survival. She also highlighted the need to focus on core products and simplifying operations to weather the storm.
“Ultimately, it’s a business we are running; it’s not a charity,” Wong added. “It is not a passion project. Even if you love it deeply, if your numbers and data indicate that you are not making it work, have the courage to pivot.”
She stressed the importance of community, especially during tough times like Covid-19, urging founders to consider the needs of the audience they serve. As a specific example, she noted that when 50% of Olaplex's business was affected due to salon closures, instead of focusing solely on their struggles, they created an affiliate program to support hairstylists. This initiative not only helped the stylists but also fostered strong community ties, resulting in mutual support that benefited all parties involved post-Covid.
In discussing how Sephora identified brands that would come to define the retailer’s assortment, Arriagada highlighted the importance of recognizing white space opportunities and staying true to the core values of product performance and innovation. She noted that while the retail landscape has evolved, the principles remain similar. "What are we most excited about? Where is the white space opportunity?"
Arriagada emphasized the need to focus on unique brand stories and founder narratives that resonate. She cited the creation of Kat Von D as an example of tapping into an underserved consumer base, specifically the Latina and marginalized communities. This strategic move not only filled a gap in Sephora's offerings but also transformed the brand's culture and market presence. Ultimately, she urged a return to intuition and passion in making decisions that excite both the team and consumers.
Speaking to what’s next, Stanleick highlighted the convergence of beauty, health, and wellness as a major opportunity for growth in the industry, noting that consumers increasingly view health and beauty as interconnected. He pointed out that this trend could boost various categories, including clinical skincare, supplements, injectables, and sexual wellness. Additionally, he emphasized that AI represents a transformative potential for the beauty industry, comparing its current state to the early days of the internet in 1995, suggesting that it could revolutionize how the industry operates.
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