Beauty Is in Its Flop Era

0:07Hello and welcome to The Debrief from the Business of Fashion, where each week we delve into our most popular BOF professional stories with the correspondents who created them. I'm executive editor Brian Baskin. And I'm senior correspondent Sheena Butler-Young. The beauty category has long been viewed as recession-proof. When times got tough, consumers traditionally turned to small luxuries like makeup and skincare for comfort. But recent results from beauty giants like Estee Lauder, L 'Oreal, and Cody tell a new tale. Sales are down, layoffs are looming, and the so-called the Lipstick Index seems to have lost its shine.

0:42Today, we're diving into what's driving this slowdown. Why are consumers pulling back and what do they still want to buy? And how are brands responding? To answer all these questions and many more, we're joined by BOF senior beauty correspondent, Daniela Morissini. Hello, Daniela, and welcome back to The Debrief. Always a pleasure. Daniela, let's start big picture. Your article that prompted this episode was called The End of the lipstick index. I think the best place to start is telling us what is the lipstick index. So this is one of economists' favorite terms, I think, for those that cover the consumer goods industry.

1:18In 2008, in the wake of the global financial crisis, Leonard Lauder, who is the son of the Estee Lauder and at the time was the company's leader, coined this expression because even though the global world economy was crashing, beauty was doing really well and seemed very resilient. And his theory was that when times get tough and people are really suffering, suffering for money, they will still want small luxuries and that beauty products are the ultimate small luxury because a lipstick, especially from like a prestige brand like Chanel, is maybe$35, right? But one of their handbags is going to be$3 ,500.

1:50If you're lucky. Not today, that$3 ,500 has evolved. Can we talk about then what is so different this time around? We're in probably the third alleged recession, if you want to believe the headlines. But why are consumers not then flocking to small luxuries like lipstick right now? What's been so different? At a high level, at least. We'll get into the details. But at a high level, what's so different? So if we think back to 2008, I was going to try and make a comparison about all the fashions being different. But I think actually with the Y2K thing, people are kind of still dressing like it's 2008.

2:24But if we look back to how the beauty industry looked at that time, I think there was a lot more consolidation, right? Of course, there were indie brands, but generally speaking, the big beauty conglomerates really controlled a lot of the market. So there were just simply fewer brands for one, fewer brands, fewer choice and fewer places to buy them. You know, department stores were really king at that point, maybe a local drugstore for a more mass brand. So there was less to choose from. And also, you know, I would love to get the data on this to prove it, but I'm pretty sure that the price of beauty products has completely outpaced any other kind of inflation.

2:58Things were just cheaper. Throughout COVID, and we'll touch on this later, there was such a boom coming out of the pandemic and pricing just really went out of control. You know, it's not unusual. I mean, I said$35 for a Chanel lipstick. I think a lot of luxury lipsticks are closer to$50 now. Fragrances are, you know, often over$250. So that's the other thing is that the prices have just really, really grown. But I think the main thing that is different now versus 2008 is there's just so much more to choose from. And there's so many more places to shop like Amazon and also TikTok shop recently have become bona fide beauty retailers.

3:31They often sell these products at quite a discount. So there's too much choice. There's too many places to, you know, in terms of the product, but also where to buy them. And I also think people are really starting to feel the effects of, you know, what's going on in the economy in their wallets. You know, people are really starting to trade down in a lot of areas of their life. Does the lipstick index apply to something like an elf dupe? I mean, do people get that fun little feeling when they buy that? Or are we really only talking about the Chanel lipstick, like the real thing? This is so interesting because it seems to be a bit of a mixed bag, right?

4:01Because on one hand, a dupe brand, and I'm not saying that Elf are wholly a dupe brand, but they do offer some products that are kind of like trendy products and they're less expensive. That would seem like the perfect way to solve for this problem, right? You would think that they were going to be having a big uptick. But they still compete in the same space as all the other beauty brands. If you think about it on TikTok, on Instagram, you know, where these beauty brands live, they are all competing with each other for views. You know, they might not be going for the same customer, but they are all sort of like putting their content out and trying to get seen.

4:29And it's really hard to get seen. So even if you have a more affordable product that more people can afford, you still have to get people to come and look at you and come and interact with you. When you're hearing about these big prestige brands, you're thinking that they're catering to the 1%. But, Daniela, that's not always the case. It seems like a lot of their customers are coming from the middle. Is that right? Yeah, I think, you know, prestige beauty brands, generally speaking, it's not always the richest of the rich that is their customer. Oftentimes it is a more middle class or what, you know, what is referred to as an aspirational customer.

5:00And I remember when Olaplex, which is a hair care brand, when they went public a few years ago in their IPO prospectus, they kind of touted that more than half of their customers made over$100 ,000 a year. Which when you think about it in the total wealth spectrum, you know, that household would be squarely in the middle class or kind of aspirational customer bracket. those shoppers make up a really big part of the beauty economy. They're very, very important. Can we talk about some of these recent results, by the way? So they run the gamut. You have Cody, Estee Lauder, and even the powerhouse that is L 'Oreal that all are seeing declines across the board in their earnings.

5:34Can you talk about the extent to which is this company specific or is this all, is everybody on the receiving end of this lipstick index being irrelevant? I would actually say the companies that have been the most impacted so far are Lauder, Cote, and actually Shiseido, which is a Japanese conglomerate. And they have their own namesake line, which is Shiseido. They have some skincare and some makeup that's prestige, but they also own brands like NARS, the cosmetics line. And they also own Drunk Elephant, which is a prestige skincare company as well. And Estee Lauder, similar thing. There is Estee Lauder, the brand that we know, but then they also own so many other brands.

6:10So they own Dessiem, which is like the ordinary, but then they have Tom Ford, they have La Labo, they have La Mer. And with Coty, they do own quite a few brands. I think like they have CoverGirl, for example, but they also do a lot of fragrance licensing deals. So Coty, I think like they make Chloe perfume, for example. So a lot of fragrances run through Coty. They have the Gucci perfumes as well in the Gucci beauty business. So you can't use a really broad brush to paint any of this. So there's big, big conglomerates, brand specific struggles and also just the market as it is. But can you talk a little bit about the results that have been so bad?

6:44Just generally speaking, we see all these numbers down. Can you unpack some of that? What are the trends that you're seeing? So obviously, because I follow this so closely, I would say even maybe three quarters ago or, you know, nine months ago, I started to see like a little bit of deceleration. And there was different things that different companies were blaming. So they might blame we're lapping a really hard comparison base because we had such a blockbuster year in the previous period. Or they might say retailer de-stocking, which basically just means, you know, they're ordering less. sometimes they would blame travel retail you know the travel retail market especially in China has been really sluggish so it was all kind of disjointed for a point and and the deceleration was much more noticeable a company like Estee Lauder who we've like discussed very often before but I think what started to change as we got into this year is pretty much every company was either swinging to a loss or if they were still growing like L 'Oreal are still growing but they're growing closer to like four percent whereas it used to be like double digits right and generally they're starting to say the same things.

7:44And one thing that I've heard from pretty much every one of these companies is the US is starting to soften. The US is the world's biggest beauty market. China is number two. And historically, it's just been so resilient. And customers seem to just have this insatiable appetite for more products and more newness. And I think that is something that's really starting to come into focus is that American, and specifically middle class, like American middle-class shoppers are starting to buy less beauty products, and that's having big knock-on effects. And they're really, this applies across categories, right?

8:16I mean, as you described before, these conglomerates are, they're playing in fragrance, skincare, haircare, makeup. And with a few exceptions, they basically said across the board, sales are softening, right? Yeah. No one is safe. I mean, fragrance seems to be this quite well-insulated category. So for example, Pooj, which is a Spanish company and they do own Charlotte Tilbury and they own Dr. Barbara Stem, but they're like predominantly a fragrance company. They are still doing quite well. They've only been on the public markets for a year. So again, comparison basis can't directly compare. So that category does seem to be quite well insulated, but generally speaking, it's across all categories.

8:53Yes. What about retailers like Sephora and Ulta and like emerging platforms like Amazon and TikTok? How does this trickle down to them? Can we unpack that a little bit? Yeah, absolutely. I think what was interesting is in LVMH, so Sephora's parent company in their last quarter earnings, they housed Sephora under this division with a couple of other stores, but it failed to grow as a division. And Sephora, I think, is still seen as like the premier beauty retailer in many countries across the world or in many markets. So the fact that they weren't able to grow, Alta has had some quite well documented struggles.

9:24You know, they've switched up their C-suite. They rolled out this big kind of immersive event called Alta Beauty World. You know, they're all trying different things to get people in store. And I think nobody likes to admit it. But, you know, if you go back, so let's go back to 2008, right? You had this big shift where department stores stopped being the primary place for beauty shopping and it became your specialty retailers. So your Sephora's, your Mecca's, your Alta's. And now I think we're seeing not a complete departure, but Amazon and TikTok shop are really becoming quite a competitive threat for a lot of retailers.

9:54And the retailers are no longer in a strong position where they can say to brands like, hey, if you go on Amazon, we won't sell you anymore. Historically, they were able to do that. I think that's starting to break down. A lot of the prestige lauder brands are on there. You know, it's really hard to stop brands from going on there because it's such a good volume game for them. It's been remarkable to see because on the fashion side, Amazon and TikTok are nowhere when it comes to the prestige side of the business. And yet in beauty, they've convinced, as you said, Lauder to list most of their top prestige brands on Amazon, right?

10:24Yeah. And I think this is one of the differences. And I was thinking about this earlier. It's around replenishment, right? If you think about how often you buy a new pair of jeans versus how often you'd buy a new tube of mascara. Brian, I know you go through a lot of mascara, but for most people. So much mascara. you know, the replenishment is so much higher, right? And so if you know that you like, you know, X mascara, and you just don't want to go all the way down to Sephora and get it, or you don't want to go onto the website and have to log in and what have you, like, the idea of just going onto Amazon and having it delivered in the UK, you can get it in one day, right?

10:56So one day delivery, one click, like, oh, that's pretty appealing. And it seems like customer loyalty is also something that's been undermining the lipstick index. As you said, replenishment has gotten so easy, but there's also so much selection that it seems like customers are just as happy to move on to the next brand. As you were talking about the lipstick index, I was thinking about the decline of department stores. So like around the 2008 recession, when you would go to have that experience and you would want to feel good about yourself in a recession, part of it was probably not just the$35 Chanel lipstick, but also the experience of the Chanel counter and being courted and walked around by the sales associate and having a full-on prestige experience.

11:36The decline of that probably also plays in here as to why the lipstick index isn't relevant because most people are not looking for that experience anymore. They're going to Amazon. I think, yeah, that's true. And if you think about it, like basically everything that helped the beauty industry, like swell to the heights that it did, you know, in 2021, 2022, a lot of that was things like social media and like the ease of TikTok shop. All those things that really helped it get super bubbly and super frothy is now kind of choking it out because there was this point where there was just constant new brands being launched.

12:07Every investor I know, even if they historically only invested in fashion or food and bev was now like we're going to invest in beauty too so there's all this dynamism flowing into it and now it's kind of at this gridlock point where it's just so hard to stand out it's so saturated and people are just kind of to your point like they're very flighty they'll try something one time and they'll be like yeah that was okay what else is there for me to try and it reminds me of um so when I was still working in consumer press and I would be working on magazine pages about trans my editor might give me an assignment and it could be something as specific as like find me eight cleansers that have like goat's milk in right so I would go and I'd find her the goat milk cleansers and they'd come back and they'd say but they have to be new they have to be launched in the last three months and I always thought that was really weird because I was like if I know this brand makes a great one and it fits the brief why can't we include it but in the beauty industry there is such an obsession with newness just like constantly launching new products and I've heard before that most beauty companies about 30 percent of their earnings comes from new launches right so constantly churning out all this newness, new products all the time.

13:06Well, I see it, but it's also a missed opportunity, right? Because beauty is a high replenishment category, wouldn't it be better to recruit people into hero products and convince people to use one thing time and time again, rather than fanning out 20 new launches in a year? I don't know. That sounds pretty hard. I was going to say it's like Brian's favorite phrase is like, they're the victim of the very thing that made them successful. One of your favorite things, I think applies here. We'll be back with more of The Debrief right after this.

13:39Well, let's talk about how this has played out at one specific brand. Tell us about the rise and fall of Drunk Elephant. This is really interesting. So Drunk Elephant was really one of the first brands to talk about clean beauty. So they had a very clear proposition that there was these six ingredients they weren't going to use and the products were all going to be super fun and super playful and super eye-catching but very premium like these are quite expensive products you know I think over 60 dollars for a lot of them at the absolute like peak of their kind of fame and their excitement they were bought by Shishado and the brand continued to do quite well in specialty retail but last year they had this huge uptick that I think no one could have seen coming and they really became like the poster child brand for what people called Sephora tweens so this was people going to their local Sephora.

14:23And I would say in the UK where we have Space NK, I saw this as well. You'd go in store and it would just be like overrun with preteens. And, you know, they'd be like clothes lining you to get to the lip balms or whatever. You know, it was it was chaos in there. And Drunk Elephant, despite not being a brand for kids, at least not in the allowance I was being given as a child, you know, a pricey brand and the products are quite strong. You know, it's anti-aging, it's anti-agging, just stuff that kids don't need. Kids seem to really like it. And they had a lot of buoyancy because of that. So the brand started to struggle.

14:54Their sales were down about 65 % last quarter. And I remember at the end of last year in the sort of annual earnings wrap up, the CFO of Shishado just sort of made this comment about, you know, we need to refine our audience with this brand a little bit. And some of the analysts I spoke to sort of took that to mean that actually courting kids or sort of allowing the brand to become so popular with kids maybe had turned off their core customer, who was likely an older millennial or Gen X or boomer woman. So what she said exactly was, what is this brand about? What does it do for me? We need to communicate that with consumers.

15:27A lot of analysts, as you've already said, sort of interpreted that as them acquiescing to the fact that they had gone too far and courting this very, well, this fickle consumer to the extent that Gen Z is still growing up. Like what you're using at 21 is not what you're going to be using maybe at 41. And so I think when brands do that, if you're not a Gen Z brand, it can be risky. And it sounded like an admission that they might have gone overboard. Yeah. And that's actually a good point because it's also it's not just the tweens, right? Like to your point, Sheena, it was also people in their 20s.

15:56Like, I think they have these bronzing drops that went super viral on TikTok. I think Alexelle said she liked them. And then they just had an issue where they couldn't keep them in stock, right? Yeah, it really is that frothy sugar high you were talking about before that just has completely gone away. So, you know, we talk a lot earlier about this idea of being spoiled for choice and maybe there's too many choices that consumers have and that's leading to a fatigue. But to your point, Daniela, like innovation is important in beauty. How do you think brands can balance being innovative without overwhelming people to the point of burnout?

16:26I think this is such a delicate dance, right, especially if it's a public company and they have shareholders who want to see innovation all the time and that they want to see those big blockbuster launches always coming. I think the way I would approach it is, you know, I hate to say it's such a cliche, but there is a degree of kind of going back to basics and figuring out what was it that originally made our brand stand out and made us different. What was it that we were offering that we can say is different, even if it's only a little bit different, but different from all the other brands on the shelf, right?

16:54Figuring out what you do that nobody else does and how you can do it better and communicate it to people better as well. And I would say, you know, really try and think about the replenishment side of things. To me, that is just like one of the greatest things about the beauty industry. It's like you have high margins and you also have very high replenishment rates. And people form these really strong emotional connections with products, you know, for better or for worse, right? So I think targeting that and actually starting to refocus your messaging and your marketing more about like routine building rather than just try this new thing.

17:26Here's a flash viral trend. Like, I think that could be one way to approach it. What are some brands that are doing that right now? oh dear this is an ominous pause right here i think there are some brands that are thinking about things quite creatively and you might be surprised to hear me say this given the conversation we had last time i was on here but like let's look at mac cosmetics for example they are really trying to re-engage with their customer base and definitely trying to bring in younger customers and one way that they did this is they brought out a new iteration of a lip gloss that they've had for a very long time and they brought out like a kind of like a lighter version of it that kind of speaks to the current trend.

18:03And they did this campaign about Nepo babies, because they were saying that this lip gloss is the baby of the old edition. And oh, you know, the lip gloss was born famous. And I thought that was quite an interesting way to keep that product, the lip gloss that a lot of customers probably will have used for a very long time, and then also bring in like a newer element to it as well. The other one that I think is interesting is Kiko, which is not a brand that's super well known in the US. It's really big here in Europe. This is an Italian cosmetics brand. And over the years, in the last two years, they've been very slowly, but surely doing a bit of a premiumization strategy.

18:39So it's quite an affordable brand, but they've been actually increasing their prices, getting rid of promotions. They used to do a lot of their sales on promotion and they've replaced the promotions with in-store services. So, okay, you can't get the product 70 % off anymore, but you can get a 15 minute makeover for free. And I think that's been quite interesting to kind of just increase like the touch time with the customer a little bit and keep people in store and keep them engaged for a bit longer. Charlotte Tilbury seems like another good example. I was thinking about that campaign from earlier this year, Legendary for a Reason, you know, targeting dupes.

19:13And to me, that's very similar to what you said before about how brands have to remind people about why they're special rather than saying, here's something new, here's something new, here's something new. Yeah, I thought that was great. And I thought it was wonderful because she was really tackling a problem head on. I think Charlotte Tilbury is probably one of the most duped brands, partly because their products are quite innovative, but also the packaging and everything. Like I've seen so many brands try and knock them off. And I thought it was interesting that rather than try and explain away like, oh, this is why we're so expensive and look at this formula versus this formula, they kind of just like took another approach to it.

19:47And they were like, yeah, this we are expensive. We are this, but like we're legendary for a reason. And you're paying for my artistry because, you know, Charlotte, the founders and makeup artist of many years, you're paying for my expertise. You're paying for my artistry. And we're not going to kind of budge on that. I also love that you mentioned Mac, because I think a lot of this is cyclical, right? Like, I think we get very excited when we see things boom and then bust or there's so much momentum right here and then it goes away. And it's like the department store example. Like we moved away from that for a while, but there was some value there to the beauty counter.

20:16Now we're coming back to that or rationalizing a lot of these highs and lows. I think that's altogether not a bad thing. So where do we think this is all headed? I mean, how deep is this slump going to get and what finally pulls the industry out of it? I think it's going to continue. We're going to continue to see kind of like disappointing earnings for a while, just until some of those comparison bases are like completely lapped. I think that people are becoming a lot choosier. There was an analyst I spoke to who referred to it as considered moderation. so you might cut back on one area of your life so you can splurge in another there's no reason that people won't pick beauty to be their splurge and i think the conversation has become more about value and people are really really attuned to perceptions of value you know there's a luxury retailer here in london called harrods and they love saying that their customer is not price sensitive they're value sensitive and you know that that might seem crazy when you think that they sell so many things for like$10 ,000 or whatever.

21:13But I think it's not necessarily about the price tag. You have to find other ways to communicate value. And brands that do that better than others have the best chance of sort of making it through this era and still kind of coming out on the other side. Absolutely. Daniella, this was excellent. Thank you so much for joining us today. I think that's a nice point to end on. Value. I love that. Value. It's all about value. Thank you so much. all about the value. Please be sure to check out Danielle's articles, The Beauty Slowdown Explained and The End of the Lipstick Index at businessoffashion.com.

21:48These and other stories are available to BOF professional subscribers only, and you can find the links in the episode notes. You've been listening to The Debrief, produced and edited by Olivia Davies and Eric Rhea. I'm Sheena Butler-Young. And I'm Brian Baskin. We'll be back next week with a new episode. Thanks so much for joining us and be sure to follow us wherever you get your podcasts. quote experiment!!! —