Show Notes:

In this episode of Unleashed, Will Bachman interviews Bart Sayer, a former senior vice president at Estee Lauder, to discuss how to analyze a cosmetics company. Bart has two quick chapters in consulting, having worked as a partner in the consumer retail practice of Booz and PWC. He then joined ELC, where he held three different roles, including SVP, General Manager of Clinique’s international business. The conversation focuses on understanding the structure of major cosmetic companies and the various types of companies encountered in the industry.

The Beauty Industry Explained

Bart explains that the beauty industry is divided into four main categories: skincare, makeup, hair, care, and body. The market is divided into luxury and mass segments, with luxury beauty expected to grow between six and 8% in the foreseeable future. Mass brands are more likely to be found in drugstores, such as Walgreens and CVs. Premium brands are more available in department stores or specialty multi, such as Sephora and Ulta, and a third channel being direct to consumer. At Estee Lauder they believed that distribution defines your equity, so prestige brands are careful about where they appear. Specialty channels like QVC and travel retail offer exposure to premium-priced and mass brands within the United States and other markets. Travel retail has been a growth vehicle for multiple brands, but it is more of a prestige and luxury phenomenon.

Ingredients in Beauty Products

The ingredients in mass and prestige products differ fundamentally. While not all ingredients are created equal, they are used in formulations that push efficacy to the furthest boundaries while maintaining safety. Prestige brands also put extra protections in place to ensure product safety for sensitive skin. The formulation philosophies vary widely across different entities. Allergy testing is also highly variable across these different entities. The difference in ingredients and formulations between mass and prestige products is significant, as is the importance of customer service and product quality. Bart discusses the importance of clinical testing in product and research development, highlighting that it is a high barrier to entry for indie brands. He also discusses the shift from paid media-led to earned media-led marketing models in the beauty industry, where companies work with contract manufacturers to access the latest ingredients and formulation philosophies. Bart emphasizes the blend model in which cosmetics companies come up with formulation philosophies, select ingredients, design tests, and select categories and subcategories. This approach is not binary, as L'Oreal has over 40 different manufacturing facilities worldwide. The marketing model has evolved from paid media-led to an earned media-led model, where companies seize organic market buzz and amplify their products on social channels.

Local vs. Global Adaptation

The concept of local versus global adaptation is crucial in the beauty industry. Brands must find a locally relevant articulation of their brand essence to convince Chinese consumers that their product is top-notch. Large media companies often have global ambassadors who can speak for the brand, but if a local face is not available, the brand may not get the traction needed. To succeed in the beauty industry, companies must balance being more reactive to market trends and being part of a locally relevant conversation. This involves being more reactive to market trends through an earned media-led approach on social media platforms and ensuring that they are part of a locally relevant conversation in terms of platforms, messaging, and talent. Bart highlights the importance of clinical testing, R&D conceptualization, marketing, and consumer insights in the beauty industry. By understanding these factors, companies can better navigate the competitive beauty market and achieve success in the ever-changing beauty industry.

Indie and Newer Brands

The conversation turns to the shift towards indie and newer brands in the beauty retail industry. He explains that the advantages of paid media are significant for big brands, but indie brands may find it less exciting to introduce new products. The reasons behind this growth include lower barriers to entry on social media channels, an agile marketing model, contract manufacturers growing their footprints, and channel partners like Sephora. When it comes to the minimum viable cosmetics companies, which can be as small as a team of five to 10, the problem with these companies is not the launch itself, but the stickiness. Many of these companies struggle with repeat purchases, which are the key to success.

Sales and Distribution in the Beauty Industry

Bart discusses the global phenomenon of Sephora, a leading premium beauty retailer owned by the LVMH group. They highlight two or three global phenomenon channels that matter from a distribution standpoint: specialty, multi-support, travel retail, and thriving retailers like Zalando and Notino. Sales and distribution are crucial for companies to compete in the market. Traditional points of distribution, such as department stores and perfumeries, have seen slower growth. It is essential to focus on newer channels and provide demonstrations and consultations to ensure a self-navigating experience for consumers. In terms of operations and supply chain, clean beauty is a key theme, as it is green and sustainable, free of parabens, sulfates, certain ingredients, and fragrances. This raises the bar for brands to prove their bona fides in terms of ingredient publishing and sourcing. Additionally, challenges in the supply chain include shelf life issues, which require stores to dispose of products at specific points, and the proliferation of SKUs. The first barrier to over-compliance is the time it takes for products to reach retailers, which can take up to a year.

Demand Forecasting and Planning

The quality of demand forecasting and demand planning is crucial for brands to succeed in the market. However, timing issues, such as missed sales opportunities, can lead to SKU proliferation, which can be particularly problematic when trying to create buzz and excitement with limited edition collections. This is especially true during holidays, where brands often try to sell through but struggle to get the quantities right. To address this issue, brands have tried to err on the side of less sell-through, create FOMO, and focus more on product pack differentiation. SKU periphery proliferation is another issue, as brands need to find a balance between getting new out there while staying consistent and building out their portfolio.

Controlling Floor Space in Department Stores

In department stores, cosmetics brands have control over their floor space and signage, which they can use to their advantage. In prestige beauty, department stores house prestige brands, who have armies of store design, visual merchandising, and staffing. These departments are equipped and kitted out, allowing them to control everything from layout to uniforms and training regimens. While department stores may have secondary placements closer to the cash till, they are generally operated by the brands themselves, providing a clear extension of their control. Overall, the success of a brand depends on its ability to balance newness with existing strengths and build a strong portfolio.

The Lucrative Nature of the Beauty Industry

The cosmetics industry is a highly lucrative business with operating profits ranging from 10 to 25%. Gross margins can be 65% or more, depending on the brand and the type of product. Highest gross margin categories include skincare and makeup, which are lower price points and more costly to manufacturers. However, there is always a "cogs revolution" or war on the cost of goods to ensure that costs are kept down. To improve gross margin, it is essential to increase price realization, pricing up appropriately for innovation, and optimizing the mix for margin. Focusing more on creative heroes can lift ships and give breathing room for investing in marketing investments and creating brand desirability. Premiumization trade trends are continuing across categories and subcategories, and optimizing the mix for margin is crucial. Bart suggests that while gross margin is a good starting point when dealing with prestige brands, it's important to focus on price realization, optimizing the mix, and playing with third parties to reduce manufacturing inputs and costs.

Timestamps:

03:30: Structure of the Cosmetics Industry and Market Segments

05:26: Specialty Channels and Distribution Strategies

07:58: Differences Between Mass and Prestige Brands

10:06: Analyzing the Cosmetics Industry: Product and Research Development

13:44: Marketing and Consumer Insights

18:33: Sales and Distribution Channels

22:49: Operations and Supply Chain

31:57: Gross Margin Analysis and Financial Performance

Website Links:

#1, Beauty Market Outlook:

https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/the-beauty-boom-and-beyond-can-the-industry-maintain-its-growth

#2, FDA Regulations of Cosmetics:

https://www.fda.gov/cosmetics/cosmetics-science-research/product-testing-cosmetics

#3, Risk of Indie Beauty Brands:

https://cosmeticsbusiness.com/how-indie-beauty-brands-can-break-america#:~:text=Indie%20brands%20are%20greatly%20influencing,and%20most%20likely%20through%202025.

#4, Beauty and Travel Retail:

https://wwd.com/beauty-industry-news/beauty-features/tackling-beautys-travel-retail-conundrum-estee-lauder-loreal-clarins-bulgari-dfs-heinemann-1236682262/

#5, Green Beauty:

https://www.forbes.com/sites/meimeifox/2023/12/22/green-glamour-12-clean-beauty-brands-leading-the-eco-revolution/

#6, Beauty & Supply Chain Challenges:

https://www.voguebusiness.com/beauty/new-ingredients-higher-prices-reformulating-beauty-in-the-supply-crisis

#7, QVC and Beauty:

https://entm.ag/1wEfOci

#8, Love, Indus (company referenced by Will and I during the discussion):

https://loveindus.com/collections/shop?gad_source=1&gclid=Cj0KCQiAkJO8BhCGARIsAMkswyiVNdA36DRltbku4DqHeLj-dAbZxAfsVOWmkyEP6Ah9bsxaNi3L4g4aAqP4EALw_wcB

Unleashed is produced by Umbrex, which has a mission of connecting independent management consultants with one another, creating opportunities for members to meet, build relationships, and share lessons learned. Learn more at www.umbrex.com.

596. Bart Sayer, Looking Beyond the Mirror: The Business and Science of Beauty.

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