in 2022, The beauty market – defined as skin care, fragrance, makeup and hair care – has generated approximately US$430 billion in revenue. Today, beauty is on an upward trajectory across all categories. It has proven resilient amid global economic crises and a turbulent macroeconomic environment. Beauty is now an industry that many people, from big financiers to celebrities, want to be a part of, and for good reason. After a strong recovery since the height of the COVID-19 pandemic, the cosmetic market is expected to reach nearly $580 billion by 2027, with a projected growth rate of 6 percent annually (Figure 1). This is in line with or slightly above other consumer segments such as apparel, footwear, eyewear, pet care, and food and beverage.
A dynamic sector ripe for disruption, the beauty industry will reshape itself around an expanding array of products, channels, and markets before this decade is out. Consumers, particularly younger generations, will spur this shift, as their own definitions of beauty shift as their perceptions of everything evolve—from the meaning of sustainability and the role of key influencers and opinion leaders to the importance of self-care. Overall, beauty is expected to be ‘premium’, with the premium beauty category expected to grow at an annual rate of 8 percent (compared to 5 percent in the holistic beauty space) between 2022 and 2027, as consumers deliberate and increase their spending especially In perfumes and make-up.
At the same time, we expect the landscape to become more competitive, as the range of independent brands that have successfully entered the market over the past decade seek expansion and as new competitors emerge. Intense competition will change existing brands and retailers as well. In line with the trend-driven dynamics in the market, 42 percent of respondents to McKinsey’s 2023 survey of consumers across China, France, Germany, Italy, the United Kingdom and the United States said they enjoy trying new brands. Meanwhile, shopping across price points is on the rise and consumers are reporting that both online and offline stores influence their shopping behaviour. Their preference for omnichannel shopping is expected to continue to fuel the transition of legacy brands online and the transition of independent brands to a physical presence.
Beauty e-commerce nearly quadrupled between 2015 and 2022, and its share is now over 20 percent, with a big runway to come. This compares to a 2022 e-commerce share of about 30 percent in apparel and shoes, and about 65 percent in toys and games.
A number of factors have fueled the growth of beauty e-commerce: the expansion of beauty offerings from internet giants such as Amazon in the US and Tmall in China; the increasing digital sophistication from direct players to the consumer; the steadily increasing importance of the Internet to multi-channel retailers; and the spread of social selling, including live streaming, in Asia. E-commerce is expected to continue to be the fastest-growing sales channel, at a rate of 12 percent annually between 2022 and 2027, but growth in traditional channels — including specialty retail, grocery retail, and pharmacies — is expected to rebound in the post-pandemic period. Consumers’ preference for omnichannel is partly due to their continued desire to discover and try in-store products (Figure 2). Department stores are expected to continue to lose market share globally.
The structural and competitive dynamics are changing
Where to play will become as important a question as how to win, given the shifting tailwinds of underlying growth. The changing dynamics will make the industry’s largely homogeneous global playbooks of the past decades less effective and will require brands to reassess their global strategies and introduce more nuance and elaboration.
Geographical diversification will become more important than ever. Recently, for example, brands can focus their footprint on the two largest countries in the industry: China and the United States. Both countries will continue to be powerful forces in this industry, with the beauty market expected to reach $96 billion in China and $114 billion in North America by 2027 (Figure 3).
But in both markets, growth will be difficult for individual brands, not least because of fierce domestic and foreign competition. Meanwhile, other countries and regions, including the Middle East and India, are ready to step into the spotlight, offering premium capabilities for specific price categories and levels. The likely outcome is that many brands will align their geographic strategies with this new world order, which will require a variety of local playbooks.
Across geographies, another growth opportunity will be products and services at the top level of the pricing pyramid: The real luxury and luxury beauty market has the potential to double, from about $20 billion today to about $40 billion by 2027.
Five subversive themes
The next few years will be a dynamic time for the beauty industry, full of new opportunities and challenges. Its high profitability, with EBITDA margins as high as 30 percent, will continue to attract new founders and investors to the space. With a limited number of spots available on the beauty board, successful brands will adapt to the changing rules of the game and secure a uniquely differentiated value proposition amidst a saturated market and increasingly sophisticated consumers. Key dynamics will include:
- Redraw the growth map. Slowing growth in China, coupled with increasing domestic competition, means that the country will not be a global growth engine for the industry. As a result, the US market will become more important, with strong growth, especially over the next few years. This market will become a competitive battleground for established brands and potential green pastures for new entrants. The Middle East is expected to fuel growth over the same period, with India expected to emerge as a new long-term hotspot.
- The rise of wellness. As consumers increasingly engage with beauty products and services to not only look good but also feel good, the lines between beauty and wellness are expected to continue blurring, with a combined opportunity representing nearly $2 trillion globally for brands, retailers and investors. Wellness-inspired products — such as skincare and makeup with probiotic and Ayurvedic ingredients, nutritional supplements, and beauty devices like LED face masks — have already captured the interest of consumers embracing greater self-care and mindfulness in their daily routines post-pandemic. The fusion of wellness and beauty will become even more pronounced in the coming years, in line with a projected compound annual growth rate of 10 percent through 2027 for the health and wellness industry. This trend will represent an untapped opportunity for many, with a first mover advantage for players who get it right.
- Gen Z effect. Gen Zers scrutinize brands as part of their search for value. Nearly half of Gen Z respondents in our survey report extensively researching product ingredients and their benefits before purchasing, similar to Millennials (and compared to a third of Gen Xers and a fifth of Baby Boomers). Along with product effectiveness and transparency, Gen Zers demand that brands represent something with credibility. In addition to their focus on sustainability, diversity and inclusion, Gen Zers greatly value brands that have an authentic, approachable image and story that transcends products and welcomes consumers into a broader community. By engaging in beauty products and services to feel good and express their authentic selves rather than adhere to specific cultural ideals, this group is challenging norms not only about the definition of physical beauty but also around gender and product categories.
- Necessity of measurement. While the past decade has seen a number of new, independent labels benefit from steadily lower barriers to entry, growth beyond a successful initial run to achieve meaningful scale remains elusive for many. Of the 46 brands founded in 2005 or after with global retail sales of between $50 million and $200 million by 2017, only five have surpassed $250 million in global retail sales five years later, in 2022. Only two have achieved Global retail sales over $750 million. To expand successfully, brands must focus on omnichannel expansion and internationalization. Category expansion appears to be most effective when the brand grows to a certain size, and when the expansion enhances and protects the brand’s unique value proposition.
- Re-calibration of mergers and acquisitions. Amid ever-increasing interest in the beauty industry from a variety of players – from “strategies” to private equity funds – mergers and acquisitions will continue to play a major role in the industry. As we’ve seen in recent years, conglomerates and financial investors alike will seek deals to invest in promising brands. But deal-making will never be the same as when the cost of capital was low. In the near term, huge deals are likely to be few and far between in response to market turmoil. In addition, criteria for M&A targets will shift from focusing on high-growth standalone “existing brands” to brands with an innovative product line and a proven ability to grow profitably, sustainably, and over the long term.
The coming years will provide all the right ingredients—from agile channel mixes to consumers eager to explore new products—for continued growth in the beauty industry. For beauty leaders and challengers alike, there will be plenty of opportunity to thrive, if they develop and implement tailored strategies that reflect the changing world of beauty.
Download the full report on which this article is based, Fashion condition: beauty (PDF file, 10MB).
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