Taking a good look at the beauty industry

The beauty industry—encompassing skin care, color cosmetics, hair care, fragrances, and personal care—had a beast of a year in 2020: sales of color cosmetics fell by 33 percent globally, while overall retail sales in the beauty category declined by 15 percent. But the industry has been resilient in the past, and experts are predicting a return to growth in 2022. In this episode of the McKinsey on Consumer and Retail podcast, McKinsey partners Sophie Marchessou and Emma Spagnuolo share their outlook for the industry. (Megan Lesko Pacchia and Kristi Weaver contributed to the research cited in this episode.) An edited transcript of their conversation with executive editor Monica Toriello follows. Subscribe to the podcast.

Monica Toriello: Hello, everyone. And I do mean everyone. I say that because often when people hear “beauty industry,” which is our topic for today, they think, “Oh, it’s going to be all about products for women.” So to our male listeners, I want to say to you, that is not true. On today’s episode, we’ll be discussing some important trends in the beauty industry, one of which is the growth in unisex products and men’s products.

Let’s meet our two beauty experts. Sophie Marchessou is a partner based in McKinsey’s Paris office. She’s been with McKinsey for over 12 years, and she lived in New Jersey for about eight of those years. She moved back to Paris in late 2019, and Sophie now leads McKinsey’s work with beauty companies globally. Emma Spagnuolo is a McKinsey partner who lives in New Jersey. Emma leads our work in the beauty industry in North America. She started her career at US-based retailers Abercrombie & Fitch and Bloomingdale’s, and she joined McKinsey about six years ago.

Let’s start with a very simple question. How have your own beauty routines changed this past year and a half?

Sophie Marchessou: Mine has followed what we’ve seen in global trends. My makeup consumption has definitely decreased. Part of it was just not being able to go try fun things in stores but also having just fewer occasions to wear makeup. On the other hand, I’ve definitely increased my consumption of skin-care, body-care, and hair-care products, as well as what we call DIY products, since getting my nails done in a salon or getting my hair cut wasn’t an option. But my spending is quickly shifting back to what was my prepandemic normal.

Emma Spagnuolo: I went absolutely crazy with color cosmetics because it was something exciting for me in the pandemic. Even though I had to buy them online, I was trying new things and experimenting at home. I did follow the trends, though, in that I created a skin- and hair-care routine for myself that I’ve never had before in the past. So, for instance, if before I was a “purely color cosmetics, hardly even a moisturizer” person, I now have a serum, a moisturizer, a sunscreen, and then a fuller cover-up on top of that before I start my makeup. So I’m both bucking and following the trends. But I’m probably brands’ and retailers’ favorite customer right now.

Monica Toriello: If this were a different kind of show, I would ask you the brand of every product you just mentioned. But this is not that kind of show. We’ll talk about the business side of things. I’m curious to hear your predictions about postpandemic beauty. Some experts are predicting a Roaring ’20s: people spending a lot of money again and “peacocking.” They’re predicting a beauty boom, a rapid recovery in color cosmetics—based on both the patterns that have played out in China and a sense that people want to get back to dressing up, putting makeup on, and being out and about again. Are you foreseeing a beauty boom?

Emma Spagnuolo: I am. In the midst of the pandemic, we conducted consumer research, specifically in color cosmetics. We found that if you left it vague and asked people, “When the pandemic ends, how much do you expect to spend on cosmetics versus what you’re spending now?” you would see a significant rebound. We’re starting to see it in fragrance, of all places. Q1 [2021] fragrance sales were astronomical, both for brands and for retailers, which gives me hope that color cosmetics will be quick to follow afterwards.

Sophie Marchessou: You spoke about the industry declining by 15 percent, which of course was dramatic for a lot of players. But if you put that in perspective and compare it to other consumer categories, it’s fared a lot better.

I also believe that the outlook is a bit different by region. We’re pretty bullish about the next few years being much more exciting for color cosmetics. But we’ve seen it recover superfast in China, and we’re seeing a fast acceleration in the US as things are getting back to normal. But we’re a little bit more pessimistic about how long it will take for Europe to get back to normal and what the growth rates will be. Some of it is also just a reflection of the trends in the market prepandemic. It’s a differentiated picture by geography.

Digital experimentation and personalization

Monica Toriello: One of the biggest trends of the pandemic era across geographies is the shift to digital and e-commerce. What are your favorite examples of how retailers have been using e-commerce and, more broadly, technology during the pandemic? What are some of the clever and effective ways that they’ve been able to persuade consumers to buy online?

Sophie Marchessou: Everyone has had to experiment; everyone has had their own tactics. Especially for higher-end brands, you’ve seen smart ways to use beauty consultants or advisers to be part of the transition toward online and to go into social selling—meaning you’re directly buying from someone who’s representing the brand but not going through the traditional e-commerce or store channel.

Emma Spagnuolo: The other digital element that I have found really exciting is the use of personalization and quiz-type diagnostics. It’s a fun way to engage the consumer and to create a product for them that they feel is uniquely theirs. In some cases, there are six formulas and you take a quiz that pops out the best formula for you. There are other cases where it truly is a very personalized product. This trend has been successful in marketing for years now, and I think we’ll see it continue.

Sophie Marchessou: There’s another level of personalization that is common now in beauty, which is personalized packaging. For example, you’ll get your initials or some sort of personalized touch on your product, which makes it feel more authentic and more special to your needs.

But as soon as you go into customized formulation or truly customized packaging, it’s very difficult to make it a cost-effective offering. So, especially for large brands, it’s all about: Do you try to offer a bit of customization through your entire product line, or do you have a subset of your offering that’s a customized offering? [The latter] is the direction that a lot of brands are going. It’s a challenge but one that’s definitely worth investing in for the next few years.

Social selling

Monica Toriello: Sophie, you mentioned social selling. Social selling and livestream selling are huge in China and other Asian markets but haven’t quite taken off in North America and Europe. Is it coming? What will be the tipping point? And then what should beauty players be doing right now in that space?

Sophie Marchessou: My guess would be that it will be a pretty substantial channel and way of selling, because it goes back to this desire for a personal recommendation, a personal touch and interaction, which consumers are increasingly favoring. I think it will only go to the tipping point when you have platforms that are supported in a large way, like you have in China. And today, you don’t. So you could imagine that some of the platforms that you have in China could be replicated in the US. TikTok, for example, could become an interesting channel for that.

Emma Spagnuolo: I have a pretty bullish take on this. Right now, we sit here in the US, and we don’t see how it could be as viable or as big as all of the other channels that we have. But I really believe that the value that we see coming out of China is going to excite all of those entrepreneurs who are looking to either expand their current offerings from China to the US, or [inspire] the entrepreneurs in the US to find a way to create that next channel. And then I think it’s absolutely going to take off.

Consumers today want that live interaction. They want to be engaged. They want the authenticity and the credibility that these KOLs [key opinion leaders] in China or influencers in the US bring to the product. Also, some people don’t like the in-store interaction. Social selling speaks to extroverts who are looking for somebody to be talking to them but also to the introverts who don’t love to talk to a beauty consultant when they’re in a store—so it actually reaches out to a large group of consumers who are interested in beauty.

The omnichannel future

Monica Toriello: You expect some stickiness in e-commerce and digital channels: you’ve said that digital channels will gain more than 15 percentage points of share globally, meaning some of the dollars that consumers used to spend on beauty products in stores, whether that’s department stores or drugstores, will instead be spent on digital channels. That is a significant channel shift. Beauty players, to some extent, have been preparing for this shift; they’ve been building their digital capabilities. But in your experience, are there things that companies should be doing that they’re still not doing on the digital front?

Emma Spagnuolo: The biggest thing that I would advise all of my beauty retailers to focus on is capturing and leveraging data and customer relationship management. The pandemic forced people online, so retailers were getting additional digital traffic that in the past they wouldn’t have. Now, it’s up to them to leverage that.

Second, for those that have a store footprint, they have to create a store experience that complements and matches that digital experience—because consumers who were forced to buy from them digitally now have the ability to go back into the store. You want to make sure that it remains a seamless experience, because we’ve known for years now that the omnichannel consumer who is shopping both digitally and in store has a much higher lifetime value than anybody who’s shopping any single channel.

Sophie Marchessou: It’s important to define what it is, as a retailer or beauty brand, that you want to stand for and what consumer experience you want to provide—and stick to it. The answer doesn’t need to be the same for everyone. There are, depending on your customer targets, features that might be more or less relevant, so it’s not about going after the gimmicky things and having technology enhancements in the store just for the sake of having them. It’s about figuring out, in the consumer journey, what are potential pain points? And how do you then say, “Those three things I’ll prioritize. That will be how I deliver this omnichannel experience.” Then, make sure you trickle that down through the organization so that not just your digital team but also your store team is aware of the experience you want to provide, and explain why it matters.

That makes a big difference. I think the mistake a lot of retailers have made is being unclear on what they prioritize, especially when it comes to omnichannel features and experiences, but also not communicating it broadly enough in their organization. So they almost have a two-speed organization, and the two don’t work well enough together.

Monica Toriello: In beauty, as in other categories, the future of retail is omnichannel, as you’ve said. The role of the store will change; it’ll be more about curation, personalization, and experience, rather than just transaction. What are the most exciting examples that come to mind when you think about the possibilities for brick-and-mortar beauty retailers? Are there any beauty retailers that are doing or experimenting with amazing things in stores right now?

Emma Spagnuolo: One of the retailers that I’ve been really excited about lately comes from the department-store channel. That’s interesting to me because the department-store channel is one that, over the past couple of years, has not been performing as well. It has not been performing as well in terms of [financial] numbers, but we’ve also felt as though the decisions being made in department stores may not have been as optimal as in some of our open-sell specialty channels.

What I’m seeing from this particular retailer, however, is that it has really made an effort to create an engaging store experience that brings in consumers, educates them, provides them with the opportunity to shop unencumbered, but then also has beauty consultants available if they need help. The store footprint allows people to come in, test product, look at product, smell product, and do it in their own area.

They have a beauty bar set up, as well as a huge floor so you can try all different types of products—everything from color cosmetics to skin care to hair care to personal care. They’ve done a very nice job of staying on top of the trends. They have a large area dedicated to home fragrance, which was huge during the pandemic. Now, they’ve started to almost gamify the experience: you can come in and try all these different personal fragrances. So this has been truly exciting for me because it’s reopening department stores to create an exciting experience that goes beyond just stocking products.

Sophie Marchessou: One interesting retailer is Aroma-Zone, which is a French retailer. It is the first DIY concept that I’ve seen that is truly engaging and fun, and most importantly, is able to speak to very different customer segments, all in one store format and layout. If you are a die-hard DIY customer and you know what type of ingredients you need, then you can very quickly navigate toward the essential-oil aisle, then the container aisle, et cetera, and get everything you need. If you are a newer person to DIY, you have areas where there are lot of explanations on everything you need. It’s all in one stack; you can just pick the products. It’s a very interesting example of a retailer that’s innovated on something that speaks to a lot of customers now: do-it-yourself, sustainable products.

Taking action on sustainability

Emma Spagnuolo: Since we started doing our generational research in 2016, we’ve been seeing a simmering belief and willingness to pay for more sustainable products. We’re seeing a lot of brands and retailers start to take action in one of two ways. The first way is to change how they do things and how they package things in order to be more sustainable and more environmentally friendly. The other way is to come up with different initiatives that counteract some of the harm that they may be doing to the environment. This way, they have kind of a net-zero impact because they’re driving sustainability initiatives in other ways.

Sophie Marchessou: Early on, companies were able to pick and choose. For example, “Am I going to commit to [taking action on] climate change and carbon reduction, or will I focus more on the formulation and the type of ingredients or sustainable packaging I use?” Now, it’s a little bit too late to pick and choose. If you’re a large group or a large brand, you have to play in all of those areas.

The trick, which we don’t see companies do enough of yet, is to commit all the way down the organization and make that part of people’s evaluation metrics—because when your performance bonus is tied to very specific metrics related to sustainability, it changes the picture completely. All of a sudden, it truly becomes a corporate-wide priority.

‘A desire to be inclusive’

Monica Toriello: Sustainable products constitute one growth area. Another seems to be what I mentioned earlier, which is unisex products and men’s products. In fact, I’ve noticed that some of the biggest influencers in beauty right now are men. What are the implications for beauty-products manufacturers and beauty retailers, which have traditionally catered almost exclusively to women?

Sophie Marchessou: I think this speaks to a broader desire of beauty brands to be inclusive. And gender is part of that, but it’s not the only element. Ethnicity is another huge consideration, especially in the US. Interestingly, when we look at the size of the men’s beauty market, it is not outgrowing the overall beauty market. But it’s an important consideration for companies to decide whether they want to speak to that market, and [what is] the best way to do so. Is it just having inclusive imagery, which for some brands and products actually works? Or is it having a special dedicated line?

Emma Spagnuolo: The other thing is that the way we track men’s products versus women’s products is going to have to be slightly updated. One thing that I have seen proliferating is the idea of having a men’s line that specifically targets male consumers and that looks different and feels different from women’s. But at the end of the day, it’s still a body lotion or a facial cleanser.

Brands absolutely have to be talking to specific consumers. You can no longer just push your brand messaging and assume that if you spend the most, you’re going to be the winner. It’s about those who really speak to a specific consumer base and answer the questions that that consumer has. Those are the ones who are going to be successful. All spectrums of inclusivity are super important, whether it’s men or other ethnicities, or even older consumers who still feel young and are looking for younger brands.

Working toward a North Star

Monica Toriello: Let’s close with this question: If the CEO of a beauty company comes to you and says, “It’s been a tough year. There are too many things on my agenda. I want you to tell me the one thing I need to focus on in 2021 and 2022,” what would you say to that CEO?

Sophie Marchessou: Reenergize your organization and your people. I’m a firm believer that you only achieve change by relying on your colleagues and a team. You have to have a team that works together, that’s cross-functional, that’s working toward a North Star together.

Emma Spagnuolo: I would just advise everybody to think about: What is the next leapfrog step in digital and in e-commerce that makes you uncomfortable, that you think could never happen in a million years? Think about that, and really pressure test whether that reaction is the right one, or whether or not this is something that you should be the distinctive leader in. That type of thinking is what helps organizations reach that North Star that Sophie’s talking about.