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Making Sense of Makeup Sales

With reported sales of color cosmetics declining, industry insiders are asking if beauty’s power category is starting to soften — or whether the highest-growth elements just aren’t being captured.

Has the great makeup boom gone bust?

Not so long ago, the color cosmetics category was hotter than a corner booth at Frenchette. Throughout 2016, The NPD Group was reporting prestige channel year-over-year double-digit sales gains in the midteens, with certain segments, like brows and lips, growing even faster, at 37 and 21 percent, respectively, during the third quarter alone. Driven by the social media revolution and an influx of influencers, instruction and, of course, Instagram, makeup sales looked unstoppable.

But the figures now aren’t as sizzling. In 2017, color was still the largest category in prestige beauty, with sales of $8.1 billion, but year-over-year growth slowed to 6 percent, according to NPD. The picture in the mass market is even bleaker, with IRI reporting relatively flat sales year-to-date for cosmetics overall, a worrying trend when stalwarts like CoverGirl, Revlon, Almay and Physicians Formula have all staged major rebranding efforts.

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Online sales of color cosmetics seem to paint a similar picture. In 2017, the category grew 8.4 percent, according to Rakuten Intelligence, versus a whopping 38.4 percent increase the year before.

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Rakuten’s data does not include Amazon, which seems to be the brightest picture at the moment. One Click Retail reports that the e-commerce giant posted $950 million in beauty sales for the second quarter of this year, with the luxury beauty section growing 57 percent to $250 million.

These numbers have industry insiders asking whether the makeup category is indeed softening or whether the highest-growth elements of the market just aren’t being captured in the sales data, as more customers migrate from the traditional channels to newer, unmeasured ones, driven by the rise of digitally native brands like Morphe, Kylie Cosmetics and Huda Beauty, and nonendemic retailers diving deeper into the beauty game, such as Forever 21’s Riley Rose.

The answer seems to be yes — on both counts.

“We feel very positive about the makeup category, and while growth has ebbed and flowed, consumer engagement is still very high and we feel positive about current and future performance,” said Dave Kimbell, chief merchandising and marketing officer of Ulta Beauty.

“Having said that,” he continued, “elements of the category have changed. So palettes, for example, continue to be strong, but the incrementality isn’t as big. Same thing with subcategories that benefited from consumer behaviors like contouring and highlighting — they’re still big and important, but the growth is not as high.”

Ulta doesn’t seem to be suffering from the malaise in brick-and-mortar makeup sales plaguing its competitors —overall first quarter sales were up 17.4 percent. The picture isn’t as rosy for others. “Sales are definitely migrating into other channels,” said Robert DeBaker, global brand president of Becca Inc. “There’s no question that what we’ve seen from online-only and influencer brands — new brands, new channels, new ideas — have siphoned sales from more traditional channels. But I don’t believe there is an overall downward trend — it’s just harder for brands to compete if you’re only one-channel driven. You have to play outside of the traditional norms.”

But others aren’t so sure that the grass is greener on the e-commerce side of the equation. “Something is going on in color,” said one analyst who requested anonymity. “I think the digitally native brands are suffering as well. The algorithm change on Facebook has been problematic. The cost to acquire customers is really high so anyone who used that as an acquisition channel last year is suffering this year because it costs twice as much. And Snapchat is dead.”

Cosmetics manufacturers are reporting a shift in their business as well. “The number of units that brands are buying is softening a bit, but we are seeing more projects than ever before,” said Jenny Hsu, chief strategy officer at HCT Group. “Our customer base has increased year-over-year and we are seeing tremendous growth in the indie and emerging brands. The slice of the pie might be getting a little smaller, but the pie is still very big. For us, this indicates that the newness factor is still very much at play.”

While the brand and retail landscape is infinitely more fragmented, consumer interest in the makeup category still seems to be at an all-time high. According to NPD’s 2018 Makeup Usage Report, just published, the percentage of consumers wearing makeup is now 67 percent, versus 61 percent two years ago and 59 percent four years ago. “When you do the math, that translates to seven million more women wearing makeup now than two years ago,” said Larissa Jensen, beauty industry analyst at NPD. “There is still a ton of excitement around the category — they just have a lot more choices. Consumers are ravenous for makeup.”

When asked to estimate how large the unmeasured market might be, Jensen laughed. “That is the biggest black hole in our industry,” she said. “There is so much flux — it’s hard to say. But those brands must be doing something right because we’re seeing the numbers impacted and it’s not because consumers aren’t using makeup anymore.”

Still, Rakuten’s data seems to show a worrying slowdown in online sales growth as well. In March and April, makeup gained 4.6 percent and 3.4 percent in year-over-year sales, respectively. But in May, sales dipped 2 percent versus last year and in June, they plunged 17 percent.

The exponential increase in influencers and influencer-created content has also created a glut. “We’ve hit critical saturation in the influencer world and that’s driving the macro-slowdown,” said Natalie Mackey, cofounder and chief executive officer of Winky Lux. “We know that influencers convert worse now than they ever have — we see consistently diminishing returns on paid influencer marketing. It’s like Facebook — when it started, you could build an empire on cheap ads, but now it is fully priced. Influencers are valuable, but fully priced.”

The social media “survival of the fittest” dynamic has hastened the decline for the mature brands that aren’t adept at competing on Instagram, et.al. “The big guys are in trouble. They are slowing down,” said another insider who asked not to be identified. “The competition has become more heated and the brands that have been at the top are scrambling. You have smaller brands that are more authentic and quick — they are speedboats and the other brands are like huge cruise ships.”

According to data from Preen.me, in 2016-2017 there were 3,541,686 posts about NYX, 3,177,169 for Morphe and just 41,329 for Cover Girl. “There is a correlation between the brands that are successful and growing versus those that are troubled,” said Haggai Klorman, cofounder and chief operating officer of Preen.me. “They are just not playing the same game.”

That’s problematic, Klorman said, because social media conversations continue to increase around makeup. “You see certain conversations, such as around contouring, stagnating, but overall, when you look at the whole makeup conversation, it is growing day by day and new consumers are entering into it,” he said. In other words, you have to be in it to win it.

The e-commerce slowdown combined with the high price of customer acquisition online is driving many digitally native brands to develop a more robust brick-and-mortar strategy. Ulta, in particular, has pursued and launched many socially savvy brands, including Morphe, Dose of Colors, Lime Crime, ColourPop and Makeup Revolution. “Ulta is doing a good job of tapping into this,” said Rich Gersten, partner at Tengram, which revealed it had taken a majority stake in Lime Crime last month. He believes that the migration of online brands to offline will drive category expansion. “But the challenge is making sure the in-store service and consumer experience deliver.”

Winky Lux is one such brand trying to do just that. This year, the brand is opening five standalone boutiques — in New York, Chicago, Atlanta, Miami and Nashville, Tenn. — designed “to look like the Museum of Ice Cream and Sephora had a baby,” said Mackey. The selfie-tastic stores will have rotating installations, all designed to create social media impressions and help the brand garner customer data. “We piloted a pop-up last year and people who purchased there or discovered us there were three times more likely to repeat,” said Mackey. “If you have a distinct POV and you can immerse someone in that, it is a much more emotional experience than discovering a one-off product.”

The winners will be the brands that have a strong digital presence and a differentiated in-store offering and experience. “There’s so much noise,” said one insider. “You have to make an impact in a different way — you have to be fast and interesting. You have to innovate, and for bigger companies, it is just harder to do that. And that is a big part of it.”