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The Impact of Economic Instability on Beauty

August 4, 2022
August 4, 2022
behrouz sasani via Unsplash

The economic instability and disruption to the global markets that we have been fearing for months has finally arrived. Daily news headlines are dominated by inflation concerns, rising interest rates, and gas prices, and continued supply chain slowdowns that are rattling consumers and threatening the resilience of even the most established companies. And there’s no end in sight. According to the latest McKinsey Global Survey, pessimism about the second half of 2022 is on par with the early months of the pandemic in 2020, with more than half of all respondents expecting global conditions to worsen over the next six months.

While the beauty sector was able to ride out many pandemic-related challenges, there is not a single beauty brand today that has not been impacted by supply chain challenges, rising interest rates, inflation, and price increases. The industry has become intensely competitive and fast-paced, with consumers flocking to flashy celebrity-backed brands and indie skincare and cosmetics lines with massive TikTok followings. Even 90-year-old powerhouse Revlon was struggling to keep up with supplier payments, inflation, and labor shortages and was forced into bankruptcy. That should serve as a stark warning to beauty brands of all shapes and sizes that if you’re not willing or able to invest heavily in product innovation and digital marketing efforts, you could be next on the chopping block.

Historically, the beauty sector has been quite resilient during times of economic turmoil—the pandemic being one such example. For the average consumer, most beauty products are relatively affordable—some even considered necessities—so there has rarely been a real slowdown in consumer spending in that sector. While beauty is still holding strong at big retailers like Ulta, in this ultra-shaky environment, the M&A market is poised to pull back in anticipation of more uncertainty down the line. As WWD recently reported, “There are signs that other areas of the industry’s ecosystem, namely M&A, may be in for a slowdown.” That’s certainly an indicator that brands will be on the lookout for alternative financing options to keep their businesses operational and to support continued growth in a tough market. 

Inflation, Inflation, Inflation

Inflation is affecting nearly every aspect of American life and business right now—gas prices, groceries, restaurant meals, travel. Even the beauty sector is experiencing inflationary pressures and, as a result, brands are driving up prices, with the beauty price per unit shooting up 17% this past year (NielsenIQ Omnishopper Panel). Facial skincare, cosmetics, and nailcare were most affected, with fragrance and haircare categories not far behind. Consumers are surely taking notice by consciously shifting their spending habits, with 84% of Americans planning to cut back on their spending due to inflation, according to data from a recent Harris Poll.

With inflation at a record high and rising interest rates making it more expensive to fund businesses, many beauty brands have been scrambling to stay one step ahead. Finding the right balance between innovating and delivering value remains key, as is diversifying distribution channels. Pricing products appropriately, keeping an eye on inflation trends and managing increased costs of doing business—everything from procuring raw materials to labor to packaging products—are all critical to protecting market share and remaining an attractive investment.

Streamlining Inventory, Diversifying Distribution

Target’s news this quarter about its plans to right-size inventories by cancelling orders and marking down unwanted merchandise threw investors and brands for a loop. Large retailers like Target and Walmart are facing inventory and supply challenges like every other company, but with significant excess home goods and apparel inventory filling warehouses, they have no choice but to take a short-term hit to get back on track. When Target announced its plans to clean house, beauty brands have generally fared okay, but it’s an important reminder about the need to maintain a clean, lean inventory position in this environment.  

McKinsey reports that 75% of US consumers say they’re researching and purchasing both in-store and online these days, with 45% saying that social media influences their purchases. To capture this audience, brands must solidify their omnichannel presence, pairing direct-to-consumer channels with brick-and-mortar locations or multi-brand retailers.

Bottleneck at the Ports

The standoff at the Pacific Coast ports continues. The labor dispute affects 29 different ports, spanning California to Washington, that handles 40% of US imports. While the union has agreed to continue work as the negotiations drag on, just the idea of further slowdowns or closures threatens to upend the global supply chain and overall economy.

Brands would be wise to keep an eye on the negotiations and to work with shippers that are planning accordingly. Many are already rerouting precious cargo away from the West Coast ports, particularly Long Beach, which in turn is driving up costs and clogging ports in New York, New Jersey, Houston, and the Southeast. And while the ports are still operational during the negotiations, no one wants to predict what will happen if the talks break down. The last time the West Coast ports labor contract fell apart in 2015, workers ceased operations for only eight days, costing an estimated $8 billion in losses to the Southern California economy alone. With holiday products arriving soon from overseas suppliers, stalled negotiations, or worse, a strike, would be disastrous for companies trying to get products to consumers or to retailers’ shelves.

Small Wins

On the positive side, shipping and freight costs seem to have stabilized somewhat. While still higher than pre-pandemic costs, they are certainly down over the highs of the past 6-12 months. The war in Ukraine and the spike in energy prices have not helped, but the costs of shipping overseas goods seem to finally be leveling out.

More positive developments are also on the horizon now that a critical new piece of legislation was signed into law at the end of Q2, with sweeping changes to the ocean shipping industry expected to address port congestion, delays, and rising costs.

To combat the inevitable supply chain slowdowns, brands should seek out financial partners that work with bigger brands and retailers and regularly deal in high-volume orders. With existing relationships with more reliable suppliers and the right financing structure in place, many brands have been able to secure raw materials and products more quickly, without interruption.

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