Wars may intensify, inflation and interest rates may rise and fall. But there still seems to be mostly blue skies ahead of the beauty.
As macroeconomic trends move into the election year, beauty kicks off 2024 as the hot favorite of the 2023 holiday season and previous months. Circana reported that the prestige beauty market grew 14 percent in the nine months ending September 30, 2023, while the mass market increased 8 percent.
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Analysts and retailers agree that the upward trend should continue in the coming year, driven by TikTok and increased consumer interest in the category. Looming economic fears, including lower inflation and resulting promotions, student loan repayments, and credit card debt, are expected to have minimal impact on beauty, especially as interest rates and grocery prices remain stable.
Much of this confidence stems from beauty companies’ performance in the face of rising interest rates and recurring student loan payments over the past year. “We were still pretty resilient in fiscal 2023. Raymond James analyst Olivia Tong said the vast majority of companies are performing well. “Coty did well because of fragrance, L’Oréal continued to do well, and Elf Beauty and Ulta were very strong.”
Tong suggested that external factors may negatively impact consumer spending, but participation in the category remains high. “Interest rates are really high right now and debt is growing faster as a result,” he said. “Does this strain margins? Yes. So is this the end of the interest in beauty? NO.”
Even as consumers tighten their wallets, they’re still expected to spend money on beauty products—albeit more selectively.
“Beauty customers will be very careful about what, where and how much they spend,” said Wendy Liebmann, retail analyst and chief executive officer of WSL Strategic Retail. “Despite improving macroeconomic trends, shoppers are in ‘just in case’ mode.”
Others acknowledged that consumers will think twice before purchasing products but were still optimistic. “Overall, there is some tug-of-war for the consumer between the need to spend more on essential goods, including food, energy costs and consumables, and the willingness to spend on discretionary items. Interestingly, beauty is a staple for many consumers,” said TD Cowen retail analyst Oliver Chen.
“The consumer is at a crossroads and is being taken into consideration a lot in terms of how they think about shopping and also being selective,” Chen continued. “There are positives and negatives. The positives are that consumers have $800 billion in spending power and consumer unemployment is below 4 percent. The labor market is tight and consumer wages are rising.”
Another factor is the disinflationary environment that has emerged in some parts of the economy, especially in grocery stores.
While US consumers have become accustomed to high prices due to inflation reaching a 40-year high in 2022, this situation has been easing recently.
The consumer price index in November was 3.1 percent higher annually, according to the U.S. Bureau of Labor Statistics and economists. This figure was over 7 percent in November 2022.
That’s still above the Federal Reserve’s 2 percent target, but economists expect it to continue easing in 2024.
During peak inflation, many beauty industry players such as Estée Lauder Cos., Procter & Gamble and Coty were among the companies that increased prices due to increased supply chain and shipping costs.
While lowering inflation puts greater emphasis on beauty unit sales, it also points to more discretionary spending.
“Reducing inflation is actually a positive thing in terms of beauty. When you are in that tug of war and actually want discretionary items, you have more money to spend on non-food expenses,” Chen said.
For retailers, this could mean lower prices in other categories. “But you can achieve higher margins and revenue streams through other categories,” Chen argued. “The challenge for this sector is that as prices fall, units increase. “But overall, when more consumer dollars are freed up, that’s a positive for the entire beauty industry.”
Creighton Kiper, Walmart’s vice president of beauty merchandising, said: “We always strive to get the best value and lowest prices on the market. We will continually apply downward pressure on costs to do the right thing for our customers.
Winning price points at Walmart are split between the cheaper end of the mass market and the prestige and luxury businesses.
“We are ready to continue our momentum in 2024,” Kiper said. “We have seen a strong bifurcation in price points. “We’ve seen strong growth at price points between $10 and $12, and we’ve seen phenomenal unit growth below that.”
Saying that the other end of the spectrum also performed well, Kiper stated that the price range between 50 and 100 dollars performed well, especially digitally. “We sold more Dysons last holiday [hair tools] “More than we usually sell in a quarter, which is over $300 each,” he said.
The overall strength of the holiday season has boosted retailers’ confidence in 2024, especially luxury. Ulta Beauty, which introduced its luxury products last year, announced its partnership with the prestigious makeup brand Charlotte Tilbury last week. Macy’s has also expanded further into the high-end segment of the market, unveiling a new luxury concept in Miami last month, with more on the way in 2024.
“We had a strong holiday season for beauty, and we are focused on maintaining that position as a leading beauty destination, with a particular focus on luxury,” said Nata Dvir, chief merchandising officer for Macy’s Inc. “Continuing to invest in the beauty category, focusing on luxury, but across all different axes.”
This outlook is in line with Circana data, which reportedly shows consumers are splurging on lower-priced scents when trading up on skin care and makeup.
Shoppers at Macy’s are looking for value, whether in gift sets or items that can justify higher price points, Dvir said. “It’s not about the discount or promotion; it’s about the value you get, whether it’s through a gift set or additional service,” he said. “The customer is willing to pay when they see the value of the product, and we have not seen an increase or decrease when the product deserves its price point.”
Although the promotion has caused concern in recent years and could be on the rise after last year’s inflationary environment, Tong was optimistic. “You’ll probably see more percent of sales coming from promotions than last year,” he said. “We are still below 2019 levels in beauty. “Compared to that period, promotion is close to what would have been considered normal before the pandemic.”
Chen also agreed with this view, describing this trend as a “normalization” from the period when price discounts were less. “Consumers are returning to stores. Promotions are more concerning in other categories. “Beauty has become very healthy,” he said. “The appeal of beauty is that companies can use it as a tool to drive traffic in stores. “It can be used strategically.”
TikTok, which introduced its own in-app shopping platform earlier this year, will continue to drive growth and create new groups of beauty shoppers. As reported, at TikTok Shop’s launch, beauty accounted for 84 percent of sales, according to NIQ data.
“When you think about ‘get ready with me’ type videos, you get more product. There are a few categories that are underpenetrated, like primers, and when you look at these products that mimic filters, you need different regimens,” Tong said. “We’ve had a lot of product proliferation, and there are people who can educate a hungry consumer and create a regimen for them.”
On the retail side, it seems brands are finding better ways to predict and assume online virality. “Brands are getting better at predicting demand and even tracking demand, which can help us maximize demand,” Dvir said, noting that this phenomenon is quite specific to beauty. “This happens in every category, but beauty is not a size-intensive thing. Many people can use Clinique Black Honey. Many people can use lip oils and that is what makes these highlights stand out so much.
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