Looking to build a beauty business in the post-pandemic world? It’ll cost you.
While the barriers to entry in creating a new brand are still relatively low — at least in terms of sourcing formulas and packaging, building out a backend and manufacturing products, the days of rapidly scaling such a business digitally, à la Glossier or Drunk Elephant, which sold for $845 million to Shiseido just seven years after its inception, look to be long gone.
Catalyzed by Apple’s iOS 14 privacy update and accelerated by the pandemic-induced migration to digital sales, competition across platforms has fiercened while returns on investment have shrunk, brand founders report. Add to that a proliferation of social media platforms where visibility is critical, plus a slew of celebrity beauty brands looking to monopolize the spotlight — and the great Indie heyday of the pre-pandemic era looks to be over.
“It’s changed so much in the past six-and-a-half years,” said Marianna Hewitt, cofounder of Summer Fridays, of the brand landscape. “The barrier now is that you have to break through a lot of noise — there are just so many options and it’s really overwhelming for consumers.”
“The cost of acquisition in the digital landscape has become astronomical,” agreed Divya Gugnani, cofounder of Wander Beauty and founder of Concept to Co. “Pre-COVID[-19], there were many brands really focused on building d-to-c [direct-to-consumer], and then maybe retail. When stores closed, every brand that was spending money on brick-and-mortar reallocated their budgets to digital. It became more expensive than ever.”
Trying to attract eyeballs — and open wallets — to their brands has never been more challenging or expensive, multiple founders reported to WWD.
“It’s the toughest time because of market saturation and the way the world has turned,” said Emily Parr, cofounder of HoliFrog Situational Skincare. “It’s a highly data-driven, digital-driven world now. It’s tough to scale a business and it requires a lot of money.
“The idea of having a good idea, a nice, feel-good product and launching a brand that you hope will catch fire?” she said. “Good luck.”
Before launching her brand, Parr had a public relations agency and worked with many brands that were able to leverage digital to scale relatively quickly. Today, that is no longer the case.
“Digital marketing spend is the biggest disadvantage when it comes to scaling. You really can’t, nowadays, self-fund a brand if you want to scale it, unless you have millions of personal dollars,” she said, adding that most of the marketing agencies she has worked with turned down clients with monthly budgets below six figures.
And whereas once d-to-c seemed to be the magic words when it came to attracting outside funding, today the rules are very different. “VC [venture capital] funds only want you if you have big-name retail partnerships. If you do, you have much better chances of getting backing,” said Parr. “Most brands need that backing to scale, since the [customer acquisition] costs are so high.”
So what’s changed? Privacy updates by mobile phone operators, combined with brands putting all of their marketing muscle behind digital channels, have made beauty’s virtual landscape more saturated than before the pandemic, with brands having to shell out more money for lower engagement rates.
“When I was representing other brands, return on assets was three to four times the investment,” Parr said of marketing spend. “Because of the privacy updates, as I talk to other digital marketing agencies, they told me to expect between 0.8 times and two times return.”
Parr was referring specifically to Apple’s update of iOS 14, which enables users to decide if an app can track their activity through a privacy prompt, thus directly impacting ad campaign targeting and optimization.
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As C. Devin Fitzpatrick, founder and chief executive officer of digital marketing firm CDF Consulting, put it, “The iOS updates really screwed up a lot of stuff. You almost had to start from scratch, and you can’t really benchmark what you used to do. It’s not just optimizing content, it’s optimizing audiences. Nobody sees your content, so you’ve got to repeat content every week, and now with everyone hiring content creators, the creative budgets have increased so much in the past three years.”
Barb Paldus, founder of Codex Labs, said “Instagram is completely different since the Apple changes on privacy. You just can’t get the same level of data, or the same depth of data. Even companies that were growing really quickly in 2018, 2019 and 2020, their growth has been halved, if not quartered.”
The privacy changes are “something that every brand is dealing with,” said Kendra Kolb Butler, founder of Alpyn Beauty. “The shift has changed digital and performance marketing as we know it, just because it’s harder, it’s more difficult to reach the consumer with all the protection and privacy settings and functions.”
When Hewitt launched Summer Fridays with cofounder Lauren Gores Ireland, a marketing budget wasn’t even a necessity. At the time, both were among a handful of stand-out influencers, with a combined following of over 800,000. Today, they boast 1.1 million and 295,000 followers on Instagram, respectively. “With Lauren and I having a really big presence, we were able to push sales through our own direct-to-consumer site at the time, only being at Summer Fridays and Sephora having a limited assortment.”
When Ron Robinson launched BeautyStat in 2019 with a single hero stock keeping unit, he said the barrier to entry — and consumer discernment — were both significantly lower than today. “It was much easier to get customers in, to launch and build a direct-to-consumer brand. The industry made the barrier to entry a lot easier,” he said. “Because of the rising media costs, a lot of those digital-native brands have now had to rethink their channel strategy. That’s what’s different for the brands coming to the market.”
All of the costs have shifted Sharon Chuter — founder of Uoma Beauty and Uoma by Sharon C. — into survival mode.
“We’re living in one of the most challenging ecosystems we’ve seen in beauty in a decade,” she said. “There’s a recession happening for the consumer, the industry itself is in complete disarray because of oversaturation and the proliferation of celebrity brands cheapening costs — the retailers are now focused on the celebrity brands and not on actual innovators,” she continued.
“We’ve seen the digital marketing landscape completely shake up. Right now is really a time of uncertainty, and it’s a time for the brands that exist today to double down on who you are,” Chuter said.
She noted that if she was advising a fledgling entrepreneur today, her main piece of advice would be to wait. “I would say to them, ‘pause, wait a few years, let everything settle.’ It’s a lot of turbulence, a lot of change. Be very focused on your bottom line, this is not the time to start looking for ambitious growth. This is time to wait out the storm.”
Another big difference has been the proliferation of platforms. While Instagram and YouTube ruled the beauty landscape five years ago, TikTok is a top contender today, with newer entrants like Twitch, BeReal and Roblox all vying for attention.
“Everybody’s trying to figure out what’s next: is the new frontier the Metaverse? Is it TikTok? TikTok is a very tricky platform because it’s winner-takes-all, it’s not a business platform to sustain your business every day,” Chuter said.
She posited that TikTok’s new paradigm of virality — causing brands to sell out of months’ worth of inventory in a matter of days or hours — also creates a supply chain dilemma.
“In June, we went viral three times, and now everything’s out of stock. Sometimes, virality is both a gift and a curse,” she said. “The reality is, you cannot plan for it. If you invest money and pay someone, it’s not going to necessarily go viral. It has to be organic, you cannot forecast for it. But you’re acquiring a lot of customers and a lot more data. Between July and August, we doubled our email list, but from an inventory perspective, it does create challenges. You can’t just stockpile all of your products thinking one might go viral.”
As far as content goes, it’s content made by creators — not the brands themselves — that moves the needle the most. Brit Starr, senior vice president of strategy at CreatorIQ, said brands with big budgets are reaping rewards with rising engagement rates.
“Consumers became a lot more selective about the creators and brands that they align themselves with,” she said of social media’s shifting landscape. “We’re continuing to see increased investment in influencer marketing, increased attention to how to appropriately measure and understand the impact of your efforts so you can make the most informed decisions.
Data from Tribe shows that only 19 percent of beauty brands spent less than $200,000 on influencer marketing annually, with nearly half of brands expanding their influencer marketing teams. Starr added, though, that sales alone aren’t an accurate metric for measuring returns on social or influencer campaigns.
“The more creator content that is being generated about your brand, and the more creators are talking about your brand actively, the more consumers are searching for your brand online. That desirability aspect is super interesting,” Starr said. “Sales are a huge factor. You can do that directly through affiliate marketing, but also indirectly by having a bigger picture of your return on creator spend via the measurement of all of these areas.”
That emphasis on creator-led content has just added to expenses for brands. “Instagram is now really heavily favoring content creators, and every brand I’ve spoken to now just feels like they’re sucking on Instagram,” Gugnani said. “When you were investing in a brand, you would want their engagement to be at least 0.5 percent. Now, if you look at the average brand in the d-to-c space, people’s engagement rates are a fraction of that.”
Alpyn Beauty takes a “full-funnel approach” to digital marketing, according to Kolb Butler. “It’s impossible to predict what’s going to hit and what’s not. Everything’s important: top, mid and bottom. When things shift, whether it’s to Meta, to TikTok or whatever is performing, it causes us to just be more focused in certain areas and optimize where we can,” she said. “But the landscape is changing day-to-day, almost minute-to-minute.”
Businesses also have to cut through the clutter on search engines, not just on social media. “Pay-per-click is still very strong, and you’re seeing great returns on assets,” Fitzpatrick said. “There are branded keywords and non-branded keywords. When you go into a retailer, all of those retailers are trying to capture brand search,” she said. “But when you’re trying to penetrate the market with non-branded keywords, there’s a million brands out there.”
Minimum order quantities across manufacturers have also risen, making it more costly for beauty start-ups to create smaller inventory runs.
“There are so many brands in the market, so many have financial backing, and they’re doing bigger production runs. That raises the bar for everybody,” Parr said. “When I first started HoliFrog, 5,000-piece runs were standard. Now, that’s up to 10,000. When you launch a brand, I imagine it’s very hard to find a lab that will do less than 10,000-piece runs per sku. That’s a big financial investment.”
“The advantage is that, assuming everything lines up and you’re doing everything right, the potential for lightning in a bottle is there,” Parr continued. “But the brands that are able to do that are few and far between.”