Analysts And Investors Predict A Healthy Holiday Season For Beauty Despite Economic Turbulence
As the battle against inflation wages on, retailers and beauty brands are likely to be faced with strained shoppers this holiday shopping season.
Their wallets are being squeezed by interest rates that are at a 22-year high and federal student loan payments set to restart. The result is they’re pulling back on discretionary spending up and down the price spectrum. Recent earnings from mass-market retailers like Target and Walmart, department stores like Nordstrom, Macy’s and Kohl’s, and even value-based retailers like Dollar General reflect weakening demand for non-essential items.
Beauty retailers are contending with slowing momentum as they peer ahead to the fourth quarter. Following two years of supercharged sales, Ulta Beauty’s growth has been moderating this year. The specialty retailer’s sales increased 10.1% in the second quarter, its weakest sales increase in over two years. In 2022, it generated a record-breaking $10 billion in annual revenue. Declining sales, among other issues, are also plaguing many small beauty retailers that are struggling to keep their lights on.
Against the backdrop of uncertain economic conditions, for the latest edition of our ongoing series posing questions relevant to indie beauty, we asked nine retail analysts, consultants and investors the following questions: What’s your outlook for the 2023 holiday shopping season? How would you advise beauty brands to prepare for it?
- Larissa Jensen Senior Vice President and Global Beauty Advisor, Circana
While inflation is down versus year ago, consumers are still paying significantly more than they did versus pre-pandemic for everyday things. In beauty, this dynamic affects the mass beauty market more than prestige, which has seen a marginal increase in price over the last few years. That said, holiday is more important on the prestige side of the beauty business.
Holiday results over the last few years have been strong in the prestige beauty market, with the gains of each year compounded on the last. So, while we still expect growth in 2023, we anticipate a more tempered increase, especially as the holiday period stretches beyond the traditional key periods that once defined the season and we begin to see the initial impact of the student loan repayments, which will cut into the disposable income of key consumer groups.
As consumer spending power is squeezed, they will make choices that reflect what is important to them. Brands that effectively tap into this emotional connection will be in a position to win this holiday.
- Marie Driscoll CFA, Adjunct Professor at Parsons School of Design
This year consumers have been mindful when making purchase choices, weighing the value of an item, a brand and its purpose. They are not spending wildly and freely. This is likely to continue as we head into the holidays, possibly making this holiday season difficult for retailers.
We’ve seen retail sales slow of late on a year over year basis as consumers contend with several forces that will impact sales, inflation in services and experiences, the resumption of student loan payments, slowing job growth and higher interest rates. Adding to this, consumer confidence is weakening, according to the latest Conference Board Consumer Confidence report [in August].
Generally, supply chain pressures have eased for retailers and brands, and most are cautious on the back half of the year as they lap a strong calendar fourth quarter. Discounting is likely to be more prevalent for holiday 2023 than experienced since 2020.
On the Ulta Beauty second quarter earnings call with investors, CEO Dave Kimball said, “Over the last two years, unprecedented category growth and strong demand limited promotional activity. As a result, the promotional environment in 2021 and 2022 was unsustainably low. Reflecting these factors, we planned for higher promotional activity this year, but continue to expect promotions will remain well below 2019 levels.”
Barring any highly contagious and deadly viruses, this holiday season will see parties, events and social occasions, which should benefit the purchase or rental of cocktail dresses along with the right makeup to make an event special. Holiday exclusives and gift sets will be important for beauty this year. Fragrance increasingly is self-purchase, so marketing to shoppers on that basis rather than purely a gifting opportunity could drive one-for-you-and-one-for-me purchase behavior.
Beauty has evolved as a category to span wellness, self-care and luxury, enduring values that enhance self-perception and, as such, beauty will weather the spending environment than most discretionary categories. Let’s not forget the counter cyclicality of beauty or the lipstick effect that supports the small luxury purchase when more costly purchases are not an economic option.
- Neil Saunders Managing Director, Global Data
Overall, this will be a middling holiday for retail. The sector won’t be in recession, but neither will it knock it out of the park in terms of sales. Despite inflation easing, consumers are still very constrained and are paying a lot more for essentials like food and energy. This leaves them with a bit less to spend on other things. That means volumes will likely be down, even if sales growth holds up because of inflation.
Like last year, underlying performance will be uneven with some categories and retailers doing better than others. I expect beauty to be a winner as it’s still a must-have category people want to indulge in. Beauty also has a wide range of price points, so it's something people on all types of budgets can buy into.
I would advise to get holiday collections out early as all the evidence suggests consumers are planning to start shopping earlier to spread spending across the season. Having a strong price architecture with a range of price points is important to allow as many people as possible to buy into the brand.
While some shoppers are trading down, they still want to buy into the beauty brands they, and those they are buying gifts, for love. Good marketing and campaigns are also important as consumers want to be inspired.
- Manola Soler Senior Director, Alvarez & Marsal
There is a persistent undercurrent of shifting spend towards needs and essentials versus “wants” and discretionary purchases. For holiday this year, I very much expect consumers will be seeking value, and we will continue to see disparate results across the retail landscape. Top line, the season may be healthy, but not all ships will rise as consumers become increasingly discerning.
For beauty brands, I would prioritize thinking about the timing and types of promotional activity leading into the holiday season. These activities don’t need to be limited to discounting, but could also include bundling, limited editions, even personalization opportunities. Consumers continue to want to spend on beauty, but the mix of what they buy from which brand may shift if they don’t perceive the value to be there.
In addition, we have seen an ongoing trend of both earlier holiday shopping as well as some last-minute shopping spikes, so it will be important for brands to strike a balance between attractive promotions early to catch that initial demand while maintaining stamina for a longer shopping period.
Channel mix is also something else to think about. Are brands in the right places where consumers will be shopping for holiday and are assortments designed accordingly? As consumers become more comfortable shopping for beauty, even at prestige price points, in a wider range of channels, it will be important for brands to get coverage across those channels to make sure they are in the consideration set when shoppers are making their holiday decisions. This year that may mean more mass or discount-driven channels than in previous years.
And, finally, with that diversification of channels there needs to be a clear assortment delineation to make sure that the brand is showing up in a way that feels channel-right both from a price/value and assortment mix perspective.
Overall, the beauty category has proven resilient, but brands need to be prepared for continued shifts in consumer behavior and priorities. We may continue seeing a slide into high-low shopping behavior, which means an erosion to brand loyalty. Therefore, understanding which categories and moments customers are looking to a particular brand for becomes more critical than ever.
- Franca Zanovello Founder & CEO, Zanovello Consultants
I am overall optimistic as I believe that this holiday retail season will be an exciting one and certainly up from 2022. Looking at current trends and market analysis, predictions however show only a single-digit increase versus last year for beauty retail.
Department stores particularly seem to represent the most challenging channel, while specialty stores will continue to gain the largest share of consumer spending on beauty. Also, the Amazon channel, where today many beauty brands from clean indie to luxury beauty are thriving with their own store presence, is expected to perform much more significantly this year, starting from an early kickoff of the holiday shopping with its second Prime Day in October.
Consumers will remain aware of the current conflicting economic signals and will still be guided by discretionary spending. However, thanks to a much longer holiday season, starting from early October with brands and retailers activating shopping events and promotions, combined with this year’s availability of high inventory and an exceptionally wide range of new products and brands on the market, I expect that retail shopping will be very competitive, but also exciting. Both beauty gift-giving and self-care gifting will have an exceptional holiday season.
With the current ultra-competitive and saturated beauty market, brands need to especially sharpen their marketing strategy and communication during the holiday season to stand out from the holiday noise. Since consumers are increasingly sophisticated and discerning, but with weaker loyalty for both brands and retailers, discounting and promotions alone cannot sustain brands this shopping season.
Brands should plan their holiday marketing strategy well in advance and work on a unique product offering, with innovation as well as exciting out-of-the-box experiences. We are seeing this happening especially within the prestige segment: Chanel Beauty opening a popup in a diner in Williamsburg, Brooklyn and Flamingo Estate activating a brand experience in a body shop in East Hampton.
I expect more one-of-a-kind beauty activations happening both in fall and during the holidays, when traffic is heightened. Consumers are not just open to, but seeking new brand discovery experiences where they can connect emotionally with the brand. Brands, at the same time, can gain increased loyalty and awareness.
For the beauty brands that are not able to invest in high-budget, fully immersive experiences, focusing on connecting with the consumer at every touch point is essential, especially during the holiday season. This includes the ability to provide an impeccable customer experience, both online and in store, as well as telling the brand story in a compelling way.
This holiday shopping season will truly be a dynamic time for beauty brands, both challenging and rich with exciting growth opportunities.
- Tina Bou-Saba Co-Founder and Managing Partner, Verity Venture Partners
Inflation is trending down and unemployment remains extremely low. On the other hand, interest rates are rising—note Macy's warning on credit card delinquencies in its recent Q2 earnings report—which is particularly challenging for low- and middle-income consumers, and federal student loan payments restart this fall. In addition, housing prices are near all-time highs. So, as is usually the case, there are many puts and takes, and the impact on holiday retail performance is hard to predict.
What we do know, however, is that the beauty category remains quite healthy. We heard this from Ulta during its recent earnings report, and even Macy's and Kohl's called out beauty as a strong-performing category, despite other challenges in their businesses. We can contrast this with other consumer categories, such as footwear, for example (note Foot Locker's recent weak earnings report).
With that in mind, I would advise beauty brands to plan for a solid holiday season. No doubt it will be promotional, as the holiday season always is. Brands should prepare for the season to start early, and they should map out a strategic cadence of brand-appropriate promotional activities such as BOGOs, percent discounts and GWPs (if they have not done so already).
This is not the time of year for major product launches, but it is a great time for fun and unique bundles and gift sets. Shoppers love well-priced and beautifully packaged gift sets from their favorite brands. I think that gift offerings in the sub-$50 price range are particularly important this year. Brands should highlight value in their holiday marketing, where appropriate.
Lastly, don't forget self-gifting. This is especially important in the beauty space in which it's so easy for a shopper to add an item that represents a small indulgence or a self-care moment into their cart.
- Wizz Selvey Founder and CEO, Wizz&Co
Last year both the U.K. and the U.S. saw a late surge in bricks-and-mortar retail sales despite economic turmoil and dips in consumer confidence. This year I predict a brighter holiday season from farther out, but it’s about beauty brands listening closely to their customers and subscribers to ensure they get their strategy right. Gift sets and limited editions, as always, may add extra weight to draw customers in as people hone in on treating their loved ones to a little luxury this winter.
If there is a late surge in orders, brands should ensure they have the capacity to send those in good time before key gifting dates and warn customers of deadlines in advance. It’s really about tone of voice, exclusives, offers, timing and delivery services all aligning to bring added value.
- Rich Gersten Co-Founder and Managing Partner, True Beauty Ventures
Beauty remains such a resilient category, so I would anticipate a reasonably strong holiday season. According to Circana, prestige beauty was up 15% last quarter (and up in both units and sales). This suggests strong momentum continuing for the balance of 2023.
When I look at last holiday season, the economic environment was very bearish and investors were assuming an inevitable recession for 2023. For this reason, I would think comparisons to last year’s holiday season should be favorable for many brands.
We always counsel our brands not to run deep sitewide discounts for holiday season. Clearly, there needs to be value for Black Friday and Cyber Monday, but I hope that brands do not discount to the same levels as a year ago as a “race to the bottom on price” doesn’t benefit anyone in the long term. Offer unique kits and bundles with a value more than deep sitewide discounts.
- Andrew Csicsila Partner and Managing Director, AlixPartners
Meeting the challenges of this holiday season demands attention from beauty brands.
Current inflation pressures necessitate careful pricing strategies, finding the equilibrium between affordability and perceived value. It's crucial to establish transparent communication when adjusting prices to uphold consumer trust.
Regarding marketing expenditures, a focused approach is needed. Beauty brands will need to consider channeling resources towards digital platforms, harnessing social media and influencer partnerships for efficient visibility. Crafting compelling content and narratives should underscore any brand's value proposition.
While Black Friday and Cyber Monday will remain pivotal, today’s dynamic landscape calls for flexibility. Stretching out promotions across multiple days can alleviate online congestion and cater to early-bird shoppers. Precise data analysis will be invaluable for refining discount structures.
The shift towards online retail is without a doubt affecting retailer profits today, prompting strategic alliances. Beauty brands can collaborate with retailers to enhance the online shopping experience, capitalizing on their digital capabilities while addressing shrinking margins. Broadening distribution channels through hybrid models, and amalgamating online and physical presences can also fortify customer relationships.
Lastly, embracing multichannel strategies is paramount. Creating seamless experiences spanning physical stores and digital platforms nurtures customer loyalty. Therefore, beauty brands and retailers alike should leverage data-driven insights to customize offerings.
In summary, this holiday season both brands and retailers should refine pricing strategies, harness digital avenues and foster collaborations. Embracing multichannel approaches, empowered by data-driven insights, can not only surmount current challenges but also forge enduring connections in an evolving marketplace.
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