by Wars can break out, inflation and interest rates can rise and fall. But it still looks like the sky is mostly blue ahead for beauty.
As macroeconomic trends ebb and flow heading into an election year, beauty has entered 2024 as the favorite of the 2023 holiday season, as well as the preceding months. Circana reports that during the nine months ending September 30, 2023, the prestige beauty market grew 14 percent, while the mass market increased 8 percent.
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Analysts and retailers agreed that the upward trajectory should continue over the next year, driven by TikTok and consumers’ increased fascination with the category. The looming economic fears (disinflation and subsequent promotion, student loan payments and credit card debt, among them) are expected to affect beauty minimally, if at all, especially as interest rates and grocery prices stabilize.
Much of that confidence comes from how beauty companies fared last year amid rising interest rates and the resumption of student loan payments. “In fiscal 2023, we still had a lot of resilience. The vast majority of companies did well,” said Olivia Tong, an analyst at Raymond James. “Coty did well because of fragrance, L’Oréal continued to do well and Elf Beauty and Ulta were very strong.”
Tong posited that while external factors could hurt consumer spending, engagement with the category remains high. “Interest rates are really high right now, and debt is increasing faster as a result,” she said. “Does that put pressure on margins? Yes. But is that the end of interest in beauty? No.”
Even as consumers tighten their wallets, they are still expected to shell out for beauty products, albeit with more options.
“Beauty shoppers will be very conscious of what, where and how much they will spend,” said Wendy Liebmann, retail analyst and CEO of WSL Strategic Retail. “Buyers are in ‘just in case’ mode, despite better macroeconomic trends.”
Others acknowledged that consumers would think twice before purchasing products, but remain optimistic. “In general, with the consumer there is a tug of war between the need to spend more on essential goods, including food, energy costs and consumables, and wanting to spend on discretionary items. Interestingly, beauty fits among the essential products for many consumers,” said Oliver Chen, retail analyst at TD Cowen.
“The consumer is at a crossroads and is very much taken into account in the way they think about purchases and also their choices,” Chen continued. “There are positive and negative aspects. The positive is that the consumer has $800 billion in purchasing power and consumer unemployment is below 4 percent. “The labor market is tight and consumers are experiencing wage growth.”
Another factor is the disinflationary environment that is emerging in parts of the economy, predominantly in the food sector.
While American consumers have become accustomed to sky-high prices due to rising inflation, which hit a 40-year high in 2022, that situation has been declining lately.
In November, the consumer price index was 3.1 percent higher than a year earlier, according to the U.S. Bureau of Labor Statistics and economists. That figure was up more than 7 percent in November 2022.
This figure is still above the Federal Reserve’s 2 percent target, but economists expect it to continue to decline in 2024.
At the height of inflation, many beauty players such as Estée Lauder Cos., Procter & Gamble and Coty were among the companies that raised prices due to rising supply chain and transportation costs.
Although disinflation places more importance on beauty unit sales, it also points to greater discretionary spending.
“Deflation is actually positive for beauty. “When you’re in this push and pull and you really want discretionary items, you have more money to spend on non-food,” Chen said.
For retailers, that can mean lower prices in other categories. “But you can get higher margins and revenue streams through other categories,” Chen said. “The challenge for that sector is to increase units as prices fall. But in general, when the consumer has more free dollars, it is positive for the entire beauty industry.”
Creighton Kiper, Walmart’s vice president of beauty merchandising, said, “We are always looking to have the best value on the market and the lowest prices. “We will constantly push costs so we can get it right for our customers.”
At Walmart, winning prices are split between the least expensive end of the mass market and its prestige and luxury businesses.
“We are prepared to continue our momentum into 2024,” Kiper said. “We have seen a strong bifurcation in prices. “We’ve seen strong growth at price points from $10 to $12, and below that, phenomenal unit growth.”
The opposite end of the spectrum is also doing well, Kiper said, noting that the $50 to $100 price range is doing especially well in digital. “Last holidays we sold more Dyson [hair tools] of what we normally sell in an entire quarter, which is more than $300 each,” he said.
The strength of the overall holiday season has boosted retail sentiment for 2024, particularly in the luxury sector. Ulta Beauty, which introduced its luxury offering last year, announced its partnership with prestigious makeup brand Charlotte Tilbury last week. Macy’s has also gone further into the high-end of the market, introducing a new luxury concept in Miami last month and more on the way in 2024.
“We had a strong holiday beauty season and have been focused on securing that position as a leading beauty destination, especially with a focus on luxury,” said Nata Dvir, chief merchandising officer at Macy’s Inc. “We will continue to invest in the beauty category. beauty, with a focus on luxury, but on all different axes.”
That outlook is in line with data from Circana, which showed consumers switching up skincare and makeup while cutting back on fragrances for lower-priced scents, as reported.
Macy’s shoppers look for value, Dvir said, whether in gift sets or products that can justify higher prices. “It’s not about discounts or promotions, it’s about the value you get, whether through a gift set or an additional service,” he said. “The customer is willing to pay when he sees the value of the product and we have not seen a shift up or down when the product deserves its price.”
Although the promotion has caused concern in recent years (and could increase following last year’s inflationary environment), Tong was optimistic. “We’ll probably see a larger percentage of sales come from promotion than last year,” he said. “In beauty, we are still below 2019 levels. Relative to that period, promotion is close to what would have been considered normal, before the pandemic.”
Chen agreed, calling the trend a “normalization” from when price discounts were scarcer. “Consumers are returning to stores. The promotions are more worrying in other categories. Beauty has been very healthy,” she stated. “The attractive thing about beauty is that companies can use it as a tool to drive traffic to stores. “It can be used strategically.”
TikTok, which introduced its own in-app shopping platform earlier this year, will continue to drive growth and christen new cohorts of beauty shoppers. As reported, at the launch of TikTok Shop, beauty accounted for 84 percent of sales, according to NIQ data.
“When you think about ‘get ready with me’ videos, the result is more product. There are a couple of underpenetrated categories, like foundations, and when you look at these products that mimic filters, you need different regimens,” Tong said. “We have had a lot of product proliferation and there are those who can educate and create a regimen for a hungry consumer.”
In retail, it also appears that brands are finding better ways to predict and embrace online virality. “Brands are getting better at predicting demand or even chasing it, which can help us maximize it,” Dvir said, noting that the phenomenon is quite specific to beauty. “This happens in all categories, but beauty does not depend on size. Many people can use Clinique Black Honey. Many people can use lip oils and that is what makes these products so popular.”
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