Fashion Case Special Edition | The new face of beauty

What is beauty? It’s a question that philosophers have pondered for centuries. And now it is increasingly being introduced into the beauty industry. This convergence means that brands and retailers are facing profound shifts in what used to be the relatively straightforward business of helping people look good.

Before this decade was even out, today’s $427 billion beauty industry had reshaped itself around a wide variety of products and markets. Consumers, especially younger generations, will spur this reshaping, as their own definitions of beauty shift as their perceptions of everything from their role in sustainability to the importance of self-care evolve. Brands and retailers will also change, seeking greater flexibility and adopting omnichannel operating models. They will do so while still competing in an already crowded market in all categories – skin care, makeup, fragrance and hair care.

This special edition of The State of Fashion by fashion business and McKinsey & Company explores the global beauty industry through a set of key dynamics affecting brands and retailers in 2023 and beyond. The report uses market intelligence, insights from industry executives and other experts, and proprietary analysis to identify the best business opportunities, while providing retail sales forecasts by price segment and category over a five-year period to 2027. To enrich this report, McKinsey also conducted a survey Global has captured the shopping behaviors and preferences of consumers in six major beauty markets.

The catch is that the beauty market is expected to continue to show the resilience it has fostered in recent years, demonstrating time and time again that it can survive — and even thrive and grow — amid economic turmoil, while other consumer sectors struggle. It is now an industry that everyone from major financiers to celebrities wants to be a part of, for good reason. McKinsey estimates that by 2027, the global beauty industry will record more than $580 billion in retail sales, growing at 6 percent annually.

How the industry arrives at this number depends on the ability of brands and retailers to navigate the dynamics this edition of State of Fashion explores: new geographic hotspots; thriving luxury opportunity; the path for emerging brands to scale; the evolving landscape of mergers and acquisitions; the steady rise in wellness-related beauty; and the complexities of Gen Z cosmetic consumers.

First and foremost, geographic diversification is more necessary than ever. Only recently, for example, have brands been able to focus their mark on the two largest countries in the industry – China and the United States. Both markets will continue to be a huge force for the industry – China is expected to reach nearly $96 billion by 2027 and North America at nearly $115 billion. But in both markets, different factors mean that growth will be hard to come by for individual brands. However, there is a positive side: other countries and regions are ready to step into the spotlight, including the Middle East and India. Brands can also find opportunities by targeting consumers with products and services at the top level of the pricing pyramid: luxury beauty has the potential to grow from about $20 billion today to about $40 billion by 2027.

The next few years will also be a period of reckoning for some brands that until recently had carved out niches built on disruption. These rival brands are starting to go down the same bumpy path as other small and medium-sized brands in their quest for scale. Certainly, a beauty brand’s path to $20 million in annual sales will continue to be very different from one to $250 million or $800 million, especially with so many brands entering the industry.

However, the brands highlighted in this special edition that successfully break through barriers to growth show how the rulebook for scaling can be rewritten, with a laser-sharp focus on building footprints, international channels, and smart finance considerations. Mergers and acquisitions may have a role to play here. As in recent times, conglomerates and financial investors alike will seek deals to invest in promising brands. But dealmaking will be different in the near term. Potentially mega deals will be few and far between in response to market turmoil as well as the need for brands to demonstrate their ability to increase profitability through innovative product pipelines.

Another future-driving beauty dynamic returns to the question of what beauty is. It’s at the forefront of many cosmetics consumers’ minds, and for that we can thank Gen-Z. This generation, today’s teens and twenties who will represent a quarter of the world’s population by 2030, is having an enormous impact on the industry given, for example, their control of social media channels to express likes and dislikes, influencing older generations of consumers, and challenging mainstream views of what Makes a beautiful person.

The definition of Beauty will continue to expand to include much more than the lipsticks, face masks, and fragrances associated with the sector as consumers strive to look and feel good. Nowhere will this be more evident than in beauty’s steady march to wellness. As part of today’s $1.5 trillion global wellness industry, wellness-inspired products—from digestible nutritional supplements to sleep aids to lotions made using ancient medicinal traditions—have already captured the attention of consumers as well as care-conscious retailers. Self and vigilance. Epidemiological daily routine. The fusion of wellness and beauty is expected to become more pronounced, with McKinsey predicting 10 percent compound annual growth through 2027 for the health and wellness industry.

Ultimately, the coming years will provide all the right ingredients – from an agile channel mix to consumers eager to explore new products – to drive the industry. For beauty leaders, this will be a unique time to thrive, with strategies that reflect a new facet of beauty.

Cosmetics retail sales by channel to 2027

The report identifies five important dynamics for the industry over the five years to 2027:

1. The New Growth Map

Beauty’s international growth chart of the past decade needs an update. Although China is still a powerhouse, it is no longer the only driver of growth for brands. The United States, which will continue to be the largest market in the world, will grow in importance to the industry even as competition for market share intensifies. Other markets, particularly the Middle East and India, may offer a range of ways to meet those challenges.

2. Awakens wellness

A new definition of beauty is reshaping the marketplace as consumers shift their goals from aesthetic perfection to holistic luxury. Brands can leverage emerging wellness subcategories—from sleep to sexual intimacy to absorbable beauty—to upgrade their existing products and expand their portfolios, provided they do so with credibility and authenticity.

3. Gen-Z decoding

As Gen-Z grows, brands must adapt, finding new ways to speak their language. This may require retiring traditional ways of doing business—from marketing to product development—and rethinking assumptions about this diverse, digitally savvy, and demanding generation that prioritizes value and effectiveness when choosing their beauty brands and products.

4. The measure of determinism

For many emerging beauty brands, the early days of getting up and running was the relatively easy part. Now, they need to face the greater challenges that continuing their growth trajectories entails. In an industry that has become crowded, geographic expansion and channel expansion will likely be critical to gaining more market share.

5. Recalibrated Mergers and Acquisitions

In the short term, the beauty M&A business may not deliver as many blockbuster deals as has been seen across the industry in the past, but dealmaking will continue to thrive. The potential benefits for buyers and sellers remain as strong as ever, playing a pivotal role in strategies focused on international growth, innovation and competitive product portfolios.

For a deeper look at the report, join us for the Global Beauty Business Forum global livestream on May 30-31, 2023. Click here for all details on how to register.

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