Beyond First Blush — Power of Social Networks, Video & Data Reshaping the Beauty Industry

The beauty market includes cosmetics, hair-care, skincare, fragrance, and salon tools. Together, these segments constitute an $80B market in the U.S., estimated to grow to $90B by 2020. The cosmetics segment alone accounts for 50% of total beauty sales, with prestige beauty outpacing other segments. 61% of U.S. women reported using makeup in 2016, with millennials demonstrating an above-average usage rate and a propensity to be heavy buyers — that is, they buy more than 10 product types each year. Beauty, more so than other consumer segments, has effectively married social networks, video platforms, and data, drawing important lessons and indicators for the remainder of the consumer segment.

— — — — — — — — — — — — — — — — — — — — — — — — — — — —

OVERVIEW: The case for beauty is simple. At first blush, beauty and personal care represents a significant and attractive market segment in that it is composed predominately of high frequency (i.e., often purchased) and accessibly priced products that command sizable margins. What’s more, these products are party to a strong tradition of word-of-mouth advertising. The high frequency of repurchase allows DTC beauty brands to amass a wealth of consumer data, which they can use to prototype quickly, and bolster the customer relationship with each repeated touch-point. The tradition of word-of-mouth advertising is likewise a boon to this segment, especially given the proliferation of social media: beauty tips that were traditionally shared among friends are now being shared in the tens of millions on YouTube, Instagram, Facebook, and Snapchat. As some traditional beauty conglomerates struggle to authentically translate to the digital world, new entrants that effectively leverage social media, video platforms, and data integration are able to quickly acquire customers and transform them into fanatical, loyal communities.

Social

Social networks alone have transformed the beauty industry in a few ways:

• (1) new entrants powered by consumers
• (2) effective customer acquisition
• (3) aggregates reviews for more informed consumer decision making

(1) New entrants powered by consumers: Social networks (YouTube, Instagram, Snapchat, blogs) have given birth to a swarm of fashion beauty lifestyle (‘FBL’) influencers, who in turn have become modern day taste-makers, advertisers, and — in some cases — founders of beauty companies themselves that reflect the values and behaviors of a more democratized consumer class. Glossier (Emily Weiss — blogger), Ipsy (Michelle Phan — YouTube), Kylie Cosmetics (Kylie Jenner — Snapchat), Kat Von D Cosmetics (Kat Von D — YouTube), Anastasia Beverly Hills (Anastasia — Instagram), xoBeauty (Shannon Harris — YouTube), MakeupGeek (Marlena Stell — YouTube) serve as examples of influencers-turned-beauty entrepreneurs who now captain serious, scalable beauty companies that boast impressive engagement and conversion ratios.

Take Kylie Jenner, the queen of Snapchat with an estimated 20M+ followers. Laugh as you will at social media and roll your eyes about Kardashian fanatics, yet her beauty brand Kylie Cosmetics has reported $400 million in revenue since its launch in November 2015. Kylie explains her tightly controlled, DTC, efficient S&M approach:

“I don’t pay for advertisements. I don’t do commercials. Social media is the only way I push it: Snapchat, Instagram. I’m usually the one posting everything” — Kylie Jenner

These beauty enthusiasts, like Kylie, have demonstrated a real passion for the space, built authenticity, trust, and a fluid conversation with their followers, a component that has often been lost with heritage brands of beauty conglomerates.

(2) effective customer acquisition strategy: effectively and authentically partnering with influencers, in addition to a brand’s own active social media channels, offers beauty brands a more nimble and lower-cost customer acquisition strategy. Estee Lauder president, Jane Hertzmark Hudis, summarizes the fast pace change seen in beauty today:

“Beauty is changing at the speed of light because anybody is able to get into the game…It used to be: You put together one strategy in the fall then changed it for spring. Now you might do something at 9 a.m., and by 2 p.m., you’re talking about something completely different, because everything happens in real time.”

As a result, influencer collaborations with one another and with beauty brands offer a nimble and dynamic marketing approach much faster than traditional marketing campaigns; and for certain companies, they are proving to return sizable dollars back. On average influencer collaborations for prestige beauty launches brought in on average of 2x sales of traditional celebrity endorsements in the first month of sale this past year. Becca Cosmetics, known for their wide range of skin tone products (55% of their consumers identify as non-Caucasian), serves as one success story in effective influencer marketing strategy. The beauty company is projected to do $80M in revenue this year and was acquired last year by Estee Lauder for $200M. Becca Cosmetics partnered with vlogger Jaclyn Hill in 2015, Hill was a fan of Becca Cosmetics often doing tutorials and organically recommending their products to her 3.7M followers at the time. Now, Hill ranks as the 4th most influential beauty vlogger among millennial women according to Tubular Labs.

A testament to her influence, after releasing a single video where she showcased Becca’s Shimmering Skin Perfector Pressed — sales for this product tripled in a single week from the video release, making it the top selling item on Sephora.com. Becca Cosmetics then joined an official collaboration with Jaclyn Hill to create an entire line of co-branded beauty products together. Their first joint product (Becca x Jaclyn Hill Champagne Pop highlighter) sold out in 20 minutes on Sephora.com. The shortage created such intense and feverish demand for the product, culminating in the creation of a devoted hashtag (#findingchampagnepop) to report sightings, shortages and restockings of the coveted luminizer. Jaclyn, while an exception, is not an outlier and is further reflective of the lift influencer marketing tactics can provide in an era of consumers digesting content digitally who seek authenticity, delight and discovery.

(3) Aggregates reviews for more informed consumer decision making: social networks centralize what was previously a broken and bias product review system, largely dictated by beauty conglomerates who own 70% of the beauty industry. New consumer entrants, ie tweener and teenagers, buying makeup for the first time used to rely heavily on a family member or adult family friend. In 2010, NPD conducted a survey and when asked to name their primary influence for acquiring and applying makeup, 66% of the nearly 400 tween girls polled pointed to a family member or adult family. Now that’s changed, 92% of makeup users get information on beauty products from influencers’ YouTube videos — a tremendous jump.

Rather than relying on family members for information on beauty brands, they are turning to influencers on YouTube and Instagram, reading comments, and cross referencing with reviews on beauty sites — Sephora, Ulta, Memebox, etc. Comments and engagement with a trusted follower serve as a benchmark for reviews themselves. The more organic engagement with a certain product, the more trust this builds among consumers, creating a review system of its own on social networks. Centralizing reviews that represent the full spectrum of skin and hair types allows for best-in-class products — not just those that were most aggressively marketing by CPG companies — to gain traction, attention, and ultimately a loyal consumer base.

Video

Some are surprised to learn that the beauty genre is the second most watched video genre on YouTube, trailing only gaming videos. Beauty stands to benefit from video more so than other consumer segments for a few reasons:

• (1) video tutorials make beauty application more accessible and approachable
• (2) consumers watching tutorial videos are primed for product discovery

(1) Video tutorials make beauty application more accessible and approachable: Makeup, skincare, and hair styling can be an intimidating space to broach — think burning hot curling irons, clay masks, contouring kits, and eyelash curlers that look like some medieval torture device (seriously) — it’s not for everyone. Nor have beauty conglomerates or fashion houses advertised or been particularly great at producing products for all skin, hair, and size types hence companies like Walker & Company, Mayven, and Becca that have risen to prominence in recent. Video tutorials done by ‘real people’ offer an opportunity to strip away the intimidating and unknown components of makeup and hair styling, encouraging people to feel more comfortable with the products and techniques. As a result, over 95% of beauty-related content on YouTube is user generated, and tutorials rank as the most popular beauty video subcategory on YouTube, capturing 45% of views and earn higher audience engagement than other videos.

With a democratized platform, consumers can watch tutorials by ‘real people’ that have similar skin, hair, and face types that they connect with, rather than relying on CPG companies that have been narrowly focused on the types of women they showcase in their advertisements. With beauty conglomerates owning less than 5% of total beauty views on YouTube by 2015, it points to the consumer preference to seek authentic, impartial videos from independent beauty vloggers.

(2) Consumers watching tutorial videos are primed for product discovery. These videos are more influential than ever in purchasing decisions as viewers are primed to learn and buy, and influencers must teach and delight their followers with new tutorials and product discovery to maintain their brand. It becomes a natural ecosystem. Nearly 66% of beauty shoppers agree that YouTube videos help them visualize how products work in real life and serve as an excellent source of information. This change is recent. The internet went from the least-frequented source of product information four years ago, to the fastest-growing in 2016, swaying both styles and sales according to NPD. A few years back in 2010, Google found that 50% of all beauty shoppers watch beauty videos on YouTube while they are shopping for products. This number has now jumped to 92% of makeup users get information on beauty products from influencer’ YouTube videos. Beauty is a testament to the power video can play in building brand, influence, and ultimately helping a consumer navigate her shopping experience; other consumer segments have ‘tutorials’ of their own to learn from beauty.

Data

Data within beauty plays two key roles:

• (1) DTC beauty brands can derive real-time insights and make faster decisions in a highly competitive market, which is incredibly advantageous in a high frequency market;
• (2) consumers are willing to give up more personal data in exchange for a highly personalized product or service.

(1) Derive real-time insights and make faster decisions in a highly competitive market: The consumer journey is more complex than ever, and consumer trends and preferences change rapidly. DTC, digitally native beauty brands carry the advantage of tracking the full consumer journey across omnichannels, resulting in a deep understanding of who their consumers are, how they behave, and what they prefer. Relative to other more durable (i.e., purchased less frequently) consumer categories that yield few data points over a consumer’s lifetime (take, for instance, mattresses or luggage), beauty brands are able to collect a rich mosaic of data due to the repeatability and frequency of beauty purchases. The frequent and robust collection of data leads to an immediate customer feedback loop, allowing beauty brands to prototype quickly and integrate the feedback into their product. Glossiers’ Lindsay Manas, explains how Glossier leveraged their community and feedback loop when they develop products, in particular their best selling Mily Gelly Cleanser:

“The story was huge. Almost 400 comments — all of which we recorded and consolidated and sent right to our chemist. There were key words like ‘mild,’ ‘glowy,’ ‘moist.’ That became the checklist for everything we wanted in the final product.”

Glossier, serves as a successful example of building and leveraging an engaged community, and integrating feedback into their product development. Not only does Glossier win on developing a product they know their consumers will love, but consumers feel like an invested stakeholder and more likely to turn into a brand ambassador.

(2) Consumers are willing to give up more personal data in exchange for a highly personalized product or service: Secondly, we are seeing a crop of data-driven beauty companies that are offering highly personalized products and services based on self provided consumer data and surveys. Prime examples in the U.S. are Birchbox (makeup), Madison Reed (hair color), and Function of Beauty (hair-care). A combination of consumer willingness to share personal data and advancements in technology — mobile devices equipped with high-quality cameras, better bandwidth and processing power and machine learning — could be the vehicle that will allow personalization in beauty to grow from novelty to mainstream service. In Japan and Korea, markets that in recent years really bred major beauty innovation and serve as leading indicators for the rest of the global beauty market are seeing growing prominence and traction with personalization — Skin Inc (Japanese), Plumko (Korean), and MatchCo(Santa Monica, recently acquired by Tokyo based Shisheido) are a few names that have grown popular in recent. Beauty conglomerates are taking notice:

Masahiko Uotani, CEO of the Tokyo-based Shiseido “accelerated innovation in rapidly evolving digital tools & customized products are a priority”

Ms. Yuko Nakamura, Global Director of skin care R&D at P&G, “in the category of personal care, consumers are becoming a lot more diverse, and there is increased demand for personalized solutions.”

While personalization has long been toted as the next major wave in consumer, and in some cases scoffed for its grand promise to capture the hearts and wallet-share of consumers in a scalable fashion, let’s remind ourselves of a small coffee shop with humble origins in Seattle that did just that. Now the coffee titan, Starbucks, sits on a $85B market cap, offering 87,000 custom ways to order a drink. In comparison, Function of Beauty claims 300 million combinations for their custom shampoo and conditioner set. Arguably, coffee is similar to beauty in the sense that coffee also represents a high frequency, accessible price point, commands large margins, rests in an unassuming space, great word of mouth (pun intended) tradition, and an ingredients based product. Starbucks pioneered the mass personalization movement as it was successful in winning over the trust and loyalty of its customers in a scalable fashion.

CPG and cosmetic companies have long operated based on, and thrived due to, full control of the beauty stack — manufacturing, distribution, advertising, and trend-setting. But times are changing. We’re now enjoying a renaissance period where technology has shifted the power back to the consumer, who has a strong hand in shaping, if not controlling, the beauty stack now and in the future. Beauty conglomerates are experiencing stalled growth — foot traffic to malls has slowed down radically, heritage brands don’t resonate with consumers like they once did, and digitally native beauty brands carry massive persuasive reach and ability to understand and know how to speak to this is new consumer base. In 2016, L’Oreal agreed to buy IT Cosmetics for $1.2B in cash, given the factors described above and the cash corporates have accumulated in the recent bull market, we can expect to see more attractive M&A activity by strategics on the horizon. Hopefully these acquisitions will not only generate growth, but they will apply the lessons and integration from social networks + video + data to other consumer segments as well.

— — — — — — — — — — — — — — — — — — — — — — — — — — — —

More beauty reads & podcasts:

Bloomberg (podcast — recommending subscribing!): Material World: How Tech is Changing Your Beauty Routine

Fung Global Retail & Tech: Deep Dive: Active M&A in the Beauty Space Fuels Future Growth

CBInsights: Beauty & Grooming Webinar

NPD: Category and Generational Shifts are Altering the Prestige Beauty Landscape

NPD: Social Media Tied to Trends Adding the Most Dollars to the Makeup Category

NPD: U.S. Prestige Beauty Industry Adds $1 Billion in Sales, Grows 6 Percent in 2016

Tubular Labs: The Millennial Women — Get to Know Her

Nielsen: Looking Good: Appealing to Ethnic Consumers in the Beauty Aisle

Robin Report: Through Online-Only, House Parties and Peer-to-Peer Platforms, Forward-Thinking Beauty Brands Are Skipping Traditional Retail Altogether

Forbes: How Social Media Influencers Turn NYX and Becca Into Multimillion-Dollar Cosmetic Brands

Emarketer: Millennials Dominate US Beauty Market

Business of Fashion: Will Customised Beauty (Finally) Work?

Business of Fashion: How to Build a Beauty Brand in the Digital Age

HBS: Birchbox: the beauty of data

Allure: Becca Cosmetics: 7 Things You Need to Know

Racked: The Way We Buy Beauty Now

Digiday: Conde Nast sees commerce opportunities in branded subscription boxes

Glossy: Glossy 101: How fashion and beauty brands use SaaS in influencer marketing

Glossy: Personalizing e-commerce: Top takeaways from the Glossy Summit

WWD: Beauty’s New Digital Craze: A Custom Approach