Mass Market Beauty Confronts Tricky Terrain

For mass market retailers, beauty has been a bright spot over the last year — but can it last?

Retailers are hoping ongoing supply chain issues won’t derail their beauty sales revival, even as price increases coupled with looming economic fears are potentially driving more shoppers to trade down to mass brands.

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That will be one of the topics, along with concerns over inflation and the threat of a recession on the front burner, when the titans of the category meet at the National Association of Chain Drug Stores Annual Meeting, April 22 to 26 at The Breakers in Palm Beach, Fla.

This will be the first time since 2019 the meeting is held in person. Top executives from L’Oréal, Procter & Gamble, Unilever, Coty, CVS, Walmart, Rite Aid, Walgreens and Shoppers Drug Mart, among others, are expected to attend. There will be some familiar faces in new places such as former Walmart exec Musab Balbale, who will speak at a strategic exchange session in his new role as senior vice president and chief merchant for CVS Health.

Doubtless one of the issues that he, and others, will be addressing is the ongoing impact of the geopolitical turmoil that has roiled the business.

“There was hope that supply constraints and shipping delays would abate. But with the Russia-Ukraine crisis, oil costs rising and labor and throughput issues still at ports in China and the U.S, the risks of supply burdens are persisting into mid-year and potentially second half as well,” said Stephanie Wissink, equity analyst with Jefferies.

Kinks in the supply chain are here to stay — much like many fear COVID-19 will persist. “Who would have thought supply chain would become a phrase commonly discussed at dinner time conversations,” said Debbie Erickson, the managing director and general manager of Coty USA.

Like all companies, Coty has implemented plans to keep shelves filled. “We’ve prevented bottlenecks by expanding lead times and increasing local sourcing,” said Erickson, who stepped into her role in February. She was formerly general manager for luxury and consumer beauty business in Canada.

Alex Keith, chief executive officer of P&G Beauty, also moved aggressively to offset any deleterious effects, both in the present and the future. “Our efforts are focused on increasing the agility, effectiveness and efficiency of our production and distribution capabilities,” she said.

P&G is also using data analytics to inform advanced planning, helping the company have greater visibility to potential material outages and better manage inventories. “This effort is helping us keep production lines moving in our plants and keep products stocked as best as possible on retailer’s shelves,” Keith said.

For its part, Maesa has been working to aggressively onshore as much of its manufacturing base as possible to help alleviate impacts of tariffs, high shipping costs and simultaneously reduce replenishment lead times, according to Scott Kestenbaum, chief growth officer.

“We’re building new, additional, dedicated production lines within our core manufacturing plants to support increased growth and capacity and we are holding higher levels of safety stock on raw ingredients/components that have been deemed as risks due to global supply chain externalities,” he said.

Courtesy

Retailers are implementing their own measures, too. “To make sure our consumers are impacted as little as possible by these challenges, we’ve invested in improved technology to better predict consumer demand. Many of our suppliers have also invested in their own manufacturing capacity,” said Andy Kettlewell, group vice president of inventory and analytics for Walgreens.

Such measures should enable manufacturers and retailers to focus on the real business at hand: Where growth in the future will come from.

“There are the key issues on everybody’s mind like the impact of inflation and supply chain,” said Wendy Liebmann, CEO of WSL Strategic Retail. “But what I’m hearing is that people want to move beyond the logistics of every day… where are the new opportunities? How do we grow and what are points of differentiation?”

The industry, she said, has opportunities to build out services such as linking beauty to health conditions like how to help patients with diabetes manage skin care.

In an interesting twist, one of the biggest opportunities could come from rising costs and consumer belt tightening. “The past two years have been our best two consecutive years. We made a lot of new customers and they’ve stayed with us,” said Mark Griffin, president and chief executive officer of Lewis Family Drug. “A lot of people bought what they needed rather than driving to Saks and we have to keep them coming back.”

New Jersey resident Julie Ross is a case in point. With the Omicron spike, Ross didn’t want to “schlep” to the mall for Clinique, so she bought an eyeshadow at CVS. “I didn’t see that much of a difference, so I stuck with the mass brand,” she said.

Mass beauty retailers hope to court more shoppers like Ross. The industry has seen tradeoffs to mass in tough economic times before. During the global financial crisis of 2008-2009, prestige sales took a bigger hit than mass, according to Wissink. Ulta Beauty’s most recent results could be a barometer. “Their prestige cosmetics decelerated, but mass cosmetics moderated less, so there absolutely could be some transfer from premium to mass,” she said.

NielsenIQ data substantiates that prices are on the rise with dollar sales advancing faster than units. For the four-week period ended March 12, 2022, year-over-year mass beauty dollar sales rose 8.1 percent versus only 4 percent for unit growth. The escalating cost of beauty products could favor mass brands where the pain of paying a dollar more for a $7 lipstick isn’t as tough to justify as spending $5 more on a $30 product, sources said.

Griffin said customers are not pushing back yet. Tarang Amin, E.l.f.’s CEO, said that although his company raised prices on two-thirds of its stock keeping units, the company managed to maintain its opening price points to keep its value proposition.

P&G is trying to temper its price increases with added usage benefits. “As a company, P&G has seen substantial year-over-year increases in commodity and transportation costs ⁠— in fact, these are the largest increases P&G has seen in about 20 years,” said Keith.

To help offset those costs, the company looked to find cost savings within other areas of its business, and is also focused on providing a wide range of options across price points. “Where we do need to pass on some costs, we’re pairing those increases with meaningful innovation,” said Keith, citing as an example Pantene’s Hydration Treatment Bombs from China, which are said to provide up to 48 hours of improved look and feel to hair.

“Our consumers love the superior performance as well as the unique single-dose usage experience, thus creating value for them on multiple levels,” said Keith. “Through this approach, we’ve seen more consumers gravitate to our mass-priced product offerings.”

WSL Strategic Retail dug into the consumer mind-set in a study called “The Beauty Shopper + The Inflation Effect.” When asked about the impact of rising on finances, 33 percent said they are cutting spending to pay for the basics. One-third said they are reducing what they spend on cosmetics, 20 percent are decreasing their spend on facial skin care and 14 percent on hair care. That doesn’t mean doing without, said Liebmann, but it suggests using less, using up supplies at home or purchasing on sale. Notable for mass brands —17 percent said they’d choose less expensive brands in cosmetics.

Kestenbaum said the current marketplace is the perfect storm for masstige beauty, a segment of the industry that emerged during harder economic times in the ’90s. “Masstige brands are uniquely positioned during recessionary times, as they benefit both from increased traffic to food, drug and mass retailers, as well as prestige shoppers that may look to trade down,” he said.

Mass retailers are adding products that fit that sweet spot of being not too expensive, but also not seen as inferior. Lauren Brindley, Walgreens’ group vice president, personal care and beauty points to additions for the second half of 2022, including Hey Humans, a 99 percent plastic-free packaged personal care brand, and Makeup Revolution, known for affordable inclusivity. “Customers impacted by rising household costs don’t need to trade off the quality of their beauty regimen for a more affordable price,” she said.

Fast-growing Milani has seen a boost from influencers who use its products as “dupes” to premium lines. For example, a buzz built around Milani’s Color Fetish Matte lipstick as a substitute for Charlotte Tilbury resulted in a sellout at Ulta and a 300 percent sales increase over a two-week period at Walgreens.

“We convey a great value and performance to our consumers who are looking for pay-off and pigment,” said Mary van Praag, who took over as CEO of Milani in 2020. “Our momentum continues. In a recent period Milani outperformed the category by three times and our 24-week performance in omni channel is growing above 20 percent.”

P&G, too, has seen consistently strong sales even with the headwinds. “Despite the continued challenges of the pandemic and other macroeconomic impacts, P&G Beauty has grown sales for 25 consecutive quarters,” said Keith. “I can’t comment on business performance for our second half except to note that our brands have introduced a number of successful innovations, including Olay Regenerist Vitamin C + Peptide, which was the number-one new item launched in the U.S. skin care category during July, August and September of 2021,” said Keith.

At E.l.f. Amin is bullish on the color cosmetics category. “We see a good trajectory in categories like lip where consumers want a moment of color. Consumers are responding positively to innovation,” he said.

E.l.f. has been at the forefront of cleaner formulations and going forward all products will meet the European Union Cosmetics Regulation ingredients standards which will require the reformulation of about 350 products with a list of about 1,600 ingredients the brand will not use.

Coty is riding the tailwinds of success in clean beauty, too. Cover Girl Clean Fresh Skin Milk Foundation was the number-one new foundation in spring 2020; Lash Blast Clean Volume Mascara, a vegan formulation, immediately ranked in the top 10 mascaras after launch, and following a restage, Sally Hansen Good. Kind. Pure Nail Color has given that brand a 15 percent sales jump.

Courtesy of Coty

Sustainability is expected to be the other key buzzword at NACDS — although efforts by both retailers and brands could be stymied by supply chain issues, as well. “Advances in supply chain innovation are unfortunately being set back, especially for mass beauty,” said Caitlin O’Keefe, partner in the consumer practice of Kearney. “Part of that is that post-consumer recycled materials or PET are more expensive or not available.”

At Unilever, though, sustainable packaging, product formulation and responsible sourcing are mission critical. “In packaging, we’re really excited about our recent launch of Dove’s refillable body wash,” said Niki King, head of sustainability at Unilever.

For product formulations, Unilever is committed to ensuring that 100 percent of its ingredients are biodegradable by 2030. Thus far, Love Beauty and Planet has reformulated its body washes and shampoos and conditioners to be biodegradable, and Shea Moisture, for its part, is focused on responsible sourcing.

“Without a doubt, there will be a focus on how to attract and retain the modern omni consumer by creating educational, entertaining and engaging digital experiences,” said Kestenbaum.

The conversation is expected to be a two-way street. “We really look forward to hearing from our retailers about their newest innovations and top priorities,” said Erickson. “Much like we are, retailers are charting new paths, innovating to make richer in-store and online experiences and really setting the tone when it comes to major trends like clean beauty.

In addition to Balbale and other retailers who will be speaking at breakout sessions, NACDS has programmed a robust lineup of speakers, including CNN’s chief medical correspondent Dr. Sanjay Gupta, and Colleen Lindholz, president of Kroger Health.

“Yes, there will be conversations on inflation and supply chain challenges. But there will also be brand new topics on the agendas,” said Jim Whitman, senior vice president, NACDS. “The way our companies talk and sell to consumers has evolved. Companies will explore how to leverage new digital capabilities, how to leverage retail media networks, how 5G can change the shopping experience — all of these topics will be explored, collaboratively.”

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