As a leading investment bank with a specialty focus on the beauty and personal care space, we at Piper Jaffray see a lot of business plans. With tens of millions of investment dollars at stake, there are six key themes that I’m looking for beauty brands to own and incorporate as I search for the next breakout brand to help fund. These themes permeate the entire beauty industry, and will continue to drive value for brands big and small.
1. Everything Is Omni-Channel
The Internet, pop-up shops and new retailing concepts are continuing to redefine the landscape. Brands and retailers alike must pursue multi-channel models, utilize content and develop educationally rich methods to reach consumers.
According to research from L2, “If you can get a consumer to watch a 3-minute video, a Google study shows that consumers are 40% more likely to go in a store and look for your brand.” Providing education to your target consumer is paramount, as seen in new direct-sale concepts such as Paula’s Choice, Beauty Counter and Julep, which are beginning to disrupt the older direct-sales brands.
2. The Power Of Specialty
Beauty specialty retail continues to take share from the department store, bolstered by mall traffic declines and the success of e-commerce for these specialty retailers.
We are seeing this with big brands like Sephora and Ulta (which are immensely successful with their respective loyalty programs), as well as with regional specialty retailers such as Beauty Brands, Peninsula Beauty, Blue Mercury and Beauty Collection, which are all enhancing growth plans.
3. Positively Prestige
In the world of “have and have-nots,” the prestige category continues to outperform. In addition, innovative, distinct mass brands with strong value propositions such as NYX Cosmetics and e.l.f. are disrupting the food, drug and mass retailer channels. Prestige matters; prestige beauty sales were up 23% in the U.S. in 2013 and reached $2.2 billion in sales.
4. Social Media Butterflies
Social media personalities are making dramatic strides as a powerful means for beauty brands to grow awareness. Beauty vloggers like Michelle Phan, Bethany Mota, Zoe Sugg and Kandee Johnson are becoming the new celebs and influencers.
We are seeing vloggers gain traction with huge audiences, especially millennials and teens, on subjects like color cosmetics as a form of art and expression; skin care product reviews and education; and hair care application and styling. As the platforms continue to develop, we are seeing that YouTube, Instagram and Twitter becoming significantly more credible and influential than Facebook.
5. We Want More Than Color
Functional cosmetics are gaining speed with brands such as ITCosmetics, Tarte and Colorescience all showing tremendous growth. Functional products like BB creams, CC creams, and other cosmetics with anti-aging properties and sunscreen are also continuing to grow rapidly. Medi-spas, dermatologists and skin care professionals are becoming better merchandisers at the forefront of the functional product wave, with help from brand partners.
Multi-tasking brands remain at the forefront of product innovation, squeezing growth in the overall value of the market because consumers now expect a single product to serve multiple functions, as reported by Euromonitor International in GCI. Demand for products with multi-tasking solutions has spread across the industry, triggering fierce cross-category competition as brands battle to recruit new consumers and keep existing ones.
6. Emerging Markets Are Hot
The global beauty industry was valued at $454 billion in 2013, and emerging markets continue to outgrow developed economies. The Asia-Pacific region represents the largest share in the global market of personal care products with 56% of volume, whereas Europe accounts for the second largest share at 19%. In the hair care sector, Brazil accounted for over 20% of global hair care growth in 2013, the largest single country contribution in any segment.
When a brand has these six elements in place, they are sending a clear signal that they are ready to scale. These drives both a competitive advantage and, ultimately, value to buyers, investors and shareholders.