Beauty, the industry that helps women camouflage their flaws, is going through a correction of its own.

This story first appeared in the May 15, 2009 issue of WWD. Subscribe Today.

During their presentation at the WWD Beauty Forum, the Demeter Group’s Jani Friedman and Strawn Cathcart offered tactical advice to lead beauty brands’ through the industry’s current adjustment.

“There’s been a huge proliferation of brands in the U.S. over the last 10 years,” said Friedman, a managing director at Demeter Group. “There were very low barriers to entry. But the landscape is changing dramatically and the consumer spending is going down so unfortunately some of [the brands] aren’t going to make it.”

Brands that can no longer make a go of it on their own must either find financing or find a buyer.

Responding to an audience member’s question about what deals may be on the horizon, Friedman said: “You’d be surprised by how many companies in this environment are nervous. They didn’t have a long-term plan. They were sort of rising with the tide and now they are in a situation where it’s a bit dire.

“Brands need to adopt a radically different strategy to win and stay alive in this economy,” added Friedman, suggesting they focus on high-growth sectors, fast-moving distribution channels and on building a lean and flexible organization.

Sharing the investors’ point of view, Cathcart, a vice president at Demeter Group, said investors are de-risking, “putting a premium on cash flow over growth.” He added the Demeter Group, a San Francisco boutique investment banking firm, anticipates a wave of consolidation in what is currently a highly fragmented industry. “A lot of strategic [buyers] out there have conservative balance sheets, they have holes in their portfolios — white spaces they want to buy into,” said Cathcart, naming the Estée Lauder Cos. Inc.’s investment in the Indian ayurvedic brand Forest Essentials, and Procter & Gamble Co.’s purchase of the Frédéric Fekkai hair care brand and DDF skin care, as examples.

In Friedman’s view, the strategic buyers are hunting for skin care brands, and private-equity firms are more taken with naturally positioned ranges.

Natural, which Friedman defined as “good for me, good for the environment,” is now a $7 billion industry, and sales continue to climb — recession or not — 10 percent a year. Other sectors of growth include cosmeceuticals, which hit the $17 billion mark last year and is on pace to reach $21 billion by 2012, and the ethnic market, which in the U.S. has broadened to include Hispanic and Middle Eastern women. Friedman shared statistics that forecast by the year 2042 more than half the U.S. population will be of ethnic descent. “It’s an enormous opportunity,” said Friedman, noting several retailers have rolled out initiatives to court women of color, including Wal-Mart Stores Inc.’s store of the community merchandising program and Sephora’s women of color initiative, which launched in 2006 with the introduction of Carol’s Daughter into its stores. When ethnic beauty and general market beauty purchases are added together, women of color spend about $9.5 billion.

These three sectors — namely natural, cosmeceuticals and ethnic beauty — may help reignite U.S. beauty sales, which Friedman said totaled $51.3 billion in 2007, and are expected to decline $1 billion by 2012, as consumers continue to trade down to lower-priced options. The global beauty industry, however, weighed in at $291 billion in 2007, and is projected to grow 16 percent over the same time period, she said, with Brazil, Russia, India and China fueling much of the growth. According to Friedman, between 2001 and 2006 the BRIC countries accounted for one-third of total growth in beauty.

But consumers, the world over, continue to rein in spending. Cathcart said, “[Consumers] are hunkering down and saving more.”