In a recent piece by McKinsey & Co. outlining an agenda for the consumer goods industry, which it projects will grow at a 3% to 5% rate annually going forward, making it hard for brands to expand and it more important they steal market share, the management consultancy wrote, “The explosion of small brands has effectively paused, but the underlying drivers of consumer preferences for ‘special, different, and authentic’ remain in place.”
Prompted by McKinsey’s pronouncement about the state of small brands, for this edition of our ongoing series posing questions relevant to indie beauty, we asked 14 investors and investment bankers the following: In beauty and wellness, is “the explosion of small brands” essentially over? What are the implications for existing beauty and wellness brands big and small? How do they factor into beauty and wellness investment philosophies?
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Elizabeth Edwards Founder and Managing Partner, H Venture Partners The explosion of small brands is certainly over. It's more likely that we are in a contraction driven by the capital market as well as the category itself. It's an incredibly difficult capital market for startups and corporate innovation programs, which is leading to more brand closures than new brand starts.
Additionally, the consumer is facing high prices as a result of inflation, so fewer non-essential items are ending up in their basket. Lastly, retailers like Target and Walmart are looking at the performance of startup brands with a much more discerning eye, meaning that it's harder to get on the shelf and harder to stay there.
- Manica Blain Founder, Top Knot Ventures
Overall, I do think that smaller brands collectively are continuing to take share from market incumbents, and I think that will continue for a variety of reasons, but two in particular really stick out for me. One, as McKinsey puts it, consumer preferences for “special, different and authentic” remains in place.
But the second and crucially important piece of this for me is that you cannot underestimate the marketing and brand savviness so many of these smaller brands have in their ability to nail that mousetrap. So many of the smaller brands are succeeding in communicating their point of differentiation in a much more powerful way than the much larger market incumbents both through their own direct channels and via retail partnerships.
That said, I do think there was a pretty significant spike in new consumer brands over the last decade, and in particular over the last few years, and with that we saw far too many new entrants in the market who were overcapitalized (and overvalued) out of gates.
I think the market’s mostly seen a correction in that phenomenon, and I can say from my vantage point as an early-stage investor, I’m still seeing a lot of new brands launching, but not nearly as much as I saw in the heyday of 2019 to 2022-ish—and I think that’s a good thing. I think back in that era you saw so many more brands launch because the environment was funding that super early-stage profile of consumer brand, and I just think the appetite to invest so early and without product-market fit has waned.
From an investment philosophies perspective as far as smaller brands are concerned, I think that most astute early-stage investors are going to be weary in making an investment unless they have confidence that both product and brand are truly differentiated and that there exists a deep connection with the customer base that is evidenced by loyalty.
Recently on Nancy Twine’s “Maker’s Mindset” podcast, [Sephora North America president and CEO] Artemis Patrick shared a point of view that most beauty and wellness investors today would likely agree with and that was “the most successful brands have been the ones that have grown over time and don’t have that huge spike because usually with a huge spike comes a huge fall, too.”
- Jackie Dunklau Founder and Partner, Aria Growth Partners
I could see a slowdown in the launch of new, small beauty brands, but I think that will be driven by more limited access to capital for these brands rather than a slowdown in consumer interest. I think beauty consumers are always on the lookout for new, exciting brands that provide innovation or cater to an unaddressed problem/solution. Similarly, I think retailers are always looking for new and unique/exclusive brands.
As consumers continue to change behaviors around how they discover beauty brands and where they purchase beauty brands, there will continue to be market share shift from the bigger players to the smaller beauty brands. The bigger players will need to continue to innovate and create personalized relationships with consumers, something smaller brands do particularly well, in order to protect against market share loss.
- Cristina Nuñez Co-Founder and Partner, True Beauty Ventures
The explosion of small brands in the beauty and wellness industry is far from over. In fact, there are several factors indicating that this trend is likely to continue and even accelerate:
- Ongoing growth and innovation: The beauty and wellness market continues to expand rapidly, with indie brands outpacing overall industry growth at significantly higher rates. This suggests there is still significant room for new entrants and innovation, which is why small indie brands continue to be a huge focus for beauty retailers like Sephora and Ulta.
- Digital landscape advantages: The digital ecosystem continues to lower barriers to entry for small brands. In fact, the barrier to entry to launch a brand has never been lower. Social media provides accessible marketing platforms to build community and the algorithm to produce virality. E-commerce platforms (hello Amazon!) reduce the need for brick-and-mortar retail partnerships early on, though we believe strongly in the need for an omnichannel distribution strategy to ultimately scale successfully and exit. Lastly, this combination of DTC, e-commerce and social models allow for faster product iteration, direct input from your community and a quicker reaction to changing consumer trends and needs.
- Consumer demand for authenticity: Millennial and gen Z consumers in particular are seeking the innate characteristics possessed by small emerging brands, such as compelling founder stories and missions, products tailored to specific needs rather than mass market, and transparency and values alignment.
I think a slowdown in the overall consumer goods market negatively impacts the larger, established brands much more so than the small indies. Small brands with a niche focus are well-positioned to identify and fill gaps in the market, cater to underserved demographics and communities and innovate quickly in response to emerging trends.
In other words, they can find pockets of growth and more easily take share from larger players to grow, whereas larger, more established brands need to increase agility and speed to market, which may lead them to focus on acquiring successful small brands or consider launching their own niche sub-brands to grow market share.
While this crowded and competitive landscape is by no means an easy environment for indie brands to scale, the beauty and wellness industry's expansion and consumers' appetite for personalized, authentic products suggest that opportunities for small brands will persist. The key for both new and existing players will be maintaining agility, fostering genuine connections with their audience, and innovating to meet evolving consumer needs.
The continued growth of small beauty and wellness brands underpins our investment thesis at True Beauty for all of the reasons stated above and will be driving increased interest in early-stage beauty startups from all types of investors for years to come.
- MICHELE MIYAKAWA Co-Founder and Managing Director, Moelis
It’s hard to imagine a beauty landscape without a role for small and independent brands given the barriers to entry have not fundamentally changed and consumers continue to desire products that are special, different and authentic. However, the explosion of competition has changed the race for scale.
When there are dozens/hundreds of interesting options on the starting block, investors and buyers’ ability to deploy capital is dependent on picking winners correctly. In a world of sub-scale brands competing for consumer, retailer and investor attention, scale and size will become more prominent and definitive criteria for funding.
I think we will see investors and buyers being selective, waiting for those Goldilocks brands that are neither too big nor too small. Strategics may look inward to their existing brands while they wait for the right brand at the optimal time.
Independent brands will need to execute quickly at each moment of slight competitive edge and opportunity to gain that scale quickly and profitability. For those that are slightly ahead in the race, quicken your pace to increase the gap. It may be more of a 10k than a marathon.
- Andrew Ross Senior Advisor and Venture Partner, XRC Ventures
We don’t think that the ongoing disruption and fragmentation of the beauty space is over. The bar to survive and thrive has and will be raised significantly, but that is more of a function of the continued reset and correction back from the artificial “bubble” of zero interest rates and the explosion of newness of 2020 to 2021.
Three to five percent underlying growth is still enviable versus other CPG categories, and the margin profile is still hugely attractive. Consumers still love newness as much as “special, different and authentic,” but retailers have also learned their lesson of pushing new brands too much and fragmenting their proposition and assortment. Good, disruptive and distinctive brands will continue to get funding, retailer space and will take share.
There is still a lot of legacy/incumbent share to go after, including some first generation “indie” brands that have lost their luster. Golden rules still apply: Find a subcategory to own with a high-repeat hero product and expand from there. Get your economics right from day one. Surprise and delight your consumers through their purchase and usage journey.
- Josie Buck Principal and Investment Director, Venrex
Despite the shift in market dynamics, I believe there’s still a huge opportunity for small brands in the beauty and wellness sectors. We may not see an “explosion of small brands” to the same extent as we did in the previous decade, but there continues to be explosive growth on offer for truly breakthrough beauty brands.
While there are decreased growth tailwinds across the consumer goods industry, the beauty sector is big and resilient. Importantly, it is supported by a highly engaged consumer base who want to try new products and are willing to pay for quality and innovation.
Small brands can capitalize on this, but, as we all know, it’s incredibly competitive. Much of what would have been considered differentiators in previous years are now table stakes. In my opinion, it is more important than ever that small brands have a reason to exist and have an effective way to cut through the noise to reach their consumers. What do they offer that is not already available in the market? Do consumers care? Do they have a disruptive, distinctive and creative way to reach consumers?
At Venrex, an early-stage VC fund, we continue to be bullish about beauty. We know that breakthrough founders and companies rarely stop to consider single-digit changes in the macroeconomic environment. Charlotte Tilbury did not decide to wait a few years to launch her Magic Cream just because national retail rents were at an all-time high. We would love to any speak founders building the leading beauty brands of the tomorrow.
- MADELINE KAPLAN Partner, Selva Ventures
Over the past years, the beauty market has gotten more crowded. While it’s become easier than ever to start a beauty business, that doesn’t necessarily mean there is a need for an “explosion” of new brands. The emerging brands that will stand the test of time must have a strong business model (good underlying unit economics), product excellence and an effective strategy for finding and retaining customers.
Coming out of a zero-interest-rate environment, the bar for investing in early-stage consumer brands has been raised. At the same time, the rise of health and wellness has continued to be a priority for both consumers and strategics. Both big and small brands will have to work hard to continue to bring newness to these categories and uniquely solve problems. If able to survive in this tougher environment, brands will be in a much better position to succeed in the long term.
- Anna Whiteman Partner, Coefficient Capital
As long as new discovery and distribution channels for beauty and wellness products continue to emerge, there will always be an outlet for small brands to cultivate an audience, generate product-market fit and scale to a point that makes them attractive targets for investment.
In beauty and wellness specifically, the rise of TikTok and YouTube as discovery platforms has given rise to countless creator forward brands, and the emergence of TikTok Shop and Amazon as trial outlets has generated meaningful early traction for many of these brands. Comping to 2023, Harris Williams recently found that personal research and in-store browsing as a means of product discovery declined year-over-year, while social media platforms increased in influence, a shift that favors newcomers over incumbents with more existing on-shelf presence and marketing dollars to dominate traditional search.
Additionally, as consumers have come to demand more and more efficacy from brands in beauty and wellness specifically, younger brands have tended to be at the forefront of formula or ingredient innovation. These brands are building products from the ground up rather than getting bogged down by complex existing supply chain dynamics.
While I do expect consistent innovation and novelty at the younger end of the market, these brands are going to have to think differently about strategies for scale than their predecessors. Ultimately, new discovery and trial platforms are just that, and brands will have to be prepared to enter a new era of maturity to build out proof of brand loyalty, diversify into new (often expensive) channels and remain consistent with new product innovation all the while.
Some of the best brands that we’ve seen scale on TikTok for example have tried to manage their exposure to this channel to the likes of 10% to 15%. To the extent that younger brands can really utilize early traction on digital platforms to learn about their audience and their values, they can redirect these insights towards launching more tightly edited and thoughtful retail opportunities in service of scaling more efficiently and sustainably over time.
I think this means that investors will put added value on proven customer loyalty, business models that manage toward profitability earlier in their lifecycles and a strategy of incremental, data-driven scale for small brands as they mature into medium to large-scale brands.
- Christine Conway VP, Cult Capital
The consumer packaged goods sector saw explosive growth with the direct-to-consumer boom, driven by low interest rates, a surge in venture capital and consumers’ shift from services to goods during COVID-19. In this environment, major players raced to acquire promising small brands, betting on their growth potential to fuel portfolio diversification and maintain competitive relevance.
McKinsey's analysis notes that from 2018 to 2022, venture capital investment into small CPG brands exceeded $7 billion, while strategic acquisitions became the preferred growth route for larger brands eager to absorb the unique capabilities these new entrants offered. Yet, as interest rates rose, the CPG M&A landscape evolved. McKinsey’s 2023 report highlights how the era of high-growth acquisitions has paused as investors shift from growth-at-all-costs toward more conservative, value-driven acquisitions.
In this new phase, companies are more selective, prioritizing brands with resilient growth profiles and efficient marketing engines. McKinsey projects that high-value M&A will likely decline temporarily until rates stabilize, but there’s an ongoing appetite for brands that exhibit sustainable growth, ideally exceeding 75%, with strong consumer loyalty and digital capabilities.
For Cult Capital, this industry shift validates our approach. We have always focused on high-growth brands with efficient, sustainable marketing, brands that don’t just rely on DTC momentum but have a proven ability to drive lasting consumer interest. As McKinsey’s findings underscore, brands that leverage strong organic growth and operate efficiently remain prime acquisition targets, even as CPG consolidation resumes selectively. The DTC boom and the rise of social media may have created a crowded marketplace, but those with resilient, differentiated strategies will continue to attract strategic interest amid broader market consolidation.
The COVID period gave the industry a “grace period,” as consumers shifted their wallets from experiences to goods, temporarily fueling the CPG sector. As these dynamics unwind, the focus will be on durable growth assets that can adapt to evolving consumer preferences without excessive capital burn, reflecting a long-term, value-centered vision for the consumer goods sector.
- TINA BOU-SABA Investor
While I don't agree with the authors that the explosion of small brands has completely "paused," I think it is fair to say that it has significantly decelerated. I began investing in emerging brands 10 years ago, and the environment has changed dramatically over the past five years. It's still relatively easy and inexpensive to launch a brand, but it's become vastly harder and more expensive to scale one. Virtually all inputs, from cost of goods to marketing to labor, cost more, and investor dollars are exceedingly difficult to come by.
Today, it is almost impossible to grow a bootstrapped brand, and as a result, the ability to raise growth capital has become a real competitive moat. Emerging brands in 2024 generally have a highly experienced founder(s) and/or a creator, celebrity or influencer with an established audience to build upon. This was not the case in 2015 to 2020. (Side note: We could argue that in the 2010s, the DTC craze made it too easy for startup brands to raise capital, leading to oversaturation.)
The implications here are nuanced, with many puts and takes. For existing beauty and wellness brands that are growing and profitable or that have access to growth capital, less competition from new brands is generally good. However, the new competition that existing brands face is likely to be more sophisticated and better funded, which is a challenge.
For investors, I think that this means fewer small bets and more concentrated portfolios. I will use my own investment strategy as an example here. I started off as an "angel investor," and I was fortunate to invest alongside other investors in a number of highly successful beauty brands.
As the industry evolved, I saw that that level of diversification was no longer optimal, and that providing more support to a smaller group of companies better aligned with industry dynamics. We could debate the minimum capital required to get a brand launched and then up and running in at least two channels of distribution, but it's fair to say that it's much, much higher than it was pre-2020.
Investors today need to ensure that they and potentially their co-investors are able to adequately fund their companies to get to that point, in other words, to ensure that they have a fighting chance.
- CLAIRE CHANG Founder and Managing Director, IgniteXL Ventures
The beauty industry is poised for continued evolution, driven by two key factors: relentless consumer demand for innovation and significant demographic shifts.
Perpetual innovation: Consumers' quest for more effective and innovative solutions remains insatiable. While established brands often face limitations in their ability to innovate rapidly, this creates a fertile ground for small, agile brands. These emerging players are well-positioned to develop and introduce new, innovative and superior solutions that meet evolving consumer needs.
Generational shifts driving opportunities: Structural changes in consumer composition and decision-making are opening new avenues for growth:
- Gen Z and gen alpha: As these younger generations mature, they're seeking brands that resonate with their unique values and preferences. This demographic shift is creating opportunities for new brands that can authentically speak to these consumers' distinct needs.
- Gen X and longevity: Interestingly, we're observing increased interest from gen X consumers in longevity-driven clinical skincare solutions. Some of these cutting-edge products are emerging from biotech innovations, blending science and beauty in novel ways.
These examples highlight the exciting structural shifts in the consumer landscape that are creating opportunities for emerging brands. As the beauty industry continues to evolve, those who can anticipate and respond to these changing demographics and consumer preferences will be well-positioned for success. In this dynamic environment, the beauty industry's future belongs to those who can innovate consistently and connect authentically with evolving consumer needs across generations.
- ODILE ROUJOL Founder, Fab Co-Creation Studio Ventures
The explosion of small brands was very much linked to easy pre-revenue and pre-seed funding by angels and VCs. Now, with the high interest rates, funding has become far more difficult. I encourage the founders of my portfolio brands to bootstrap as much as they can and achieve milestones before looking for conversations with consumer tech VCs.
Also, the low cost of acquisition on social media for DTC companies that reduced barriers to entry changed dramatically during the COVID period. What's also changed is retailers' appetite to have emerging brands on their shelves and use them to generate traffic and pressure global brands into negotiation. There’s a limit to the brands and SKUs you can put on retailers’ websites and in their stores.
However, I believe the future leaders of the beauty industry are still emerging brands that answer the needs of their community to provide a sense of belonging and innovative products, and they can scale fast in certain channels such as TikTok Shop and Amazon. It’s important that brands carefully choose their “flagships” and retail partnerships. There are new requirements for talent that can successfully leverage new channels and have retail media superpowers.
- Lizzie Francis Partner, M13
There’s no question that the beauty and wellness space, along with consumer goods as a whole, is undergoing a transformation. Innovation and shifting consumer demand are reshaping how brands—both large and small—operate. Platforms like Pietra are enabling new and existing brands to navigate this shift more efficiently. For instance, Pietra has empowered over 300,000 entrepreneurs, saving more than $10 million in operational costs compared to traditional competitors, while helping source $15 million worth of products and packaging.
When it comes to the question of whether “the explosion of small brands” is over, the reality is more nuanced. While the marketplace has seen a flood of indie beauty and wellness brands in recent years, I believe we’re entering a period where differentiation will become even more critical.
Consumer demand for unique and specialized products will remain, but the barriers to entry are lower than ever, thanks to platforms like Pietra. Established brands will need to innovate rapidly, potentially launching new product lines or seasonal extensions, and they too can benefit from the efficiencies Pietra provides such as creating 1 million product designs with AI in its Design Studio.
For existing brands, both big and small, this evolution brings new challenges and opportunities. Smaller brands that fail to adapt quickly might struggle, but those who leverage the right tools and technologies—like Pietra’s AI-powered solutions or Passport Shipping's cross border solutions to reach their global customers and advocates—can continue to thrive by offering something fresh. Larger brands have the advantage of scale, but will need to be more agile than ever, taking cues from smaller, more nimble competitors to meet growing consumer expectations for personalized and high-quality products.
At M13, we believe that artificial intelligence will continue to power this next wave of commerce. It allows companies to reduce costs, streamline operations and innovate faster. Brands that embrace this shift, whether they are established giants or emerging disruptors, will have a clear advantage. As investors, we look for technology companies that understand this dynamic, who support companies and brands who embrace this first-mover technology approach to business operations and innovation.
If you have a question you’d like Beauty Independent to ask investors and investment bankers, please send it to editor@beautyindependent.com.
