Beauty, redefined

0:00If we look at brands that are really getting attention, it tends to be ones that have a way of tapping into the culture and have something that is quite distinct and easily recognizable. And that in some cases can be visual, but in other cases it can be much more about something surprising or novel in it. So things like ingredients that you wouldn't expect. Like snail mucin, which has actually been around for a while but is somewhat new to the West. You just heard from McKinsey partner, Sarah Hudson. We recently published a state of beauty report and Sarah joins me and McKinsey partner, Alexis Wolfer to talk about the trends and changing attitudes influencing the beauty industry.

0:44This is the McKinsey podcast, where we help you make sense out of the world's toughest business challenges. I'm your host for today, Lucia Raheli. Alexis and Sarah, welcome to the McKinsey podcast. thanks for having you for having us so i'm going to confess something to you which is that i'm kind of hopeless with makeup a friend of mine recently was laughing about a time that i went to the beauty counter and i got a makeover before an event and when i showed up i looked like a different human being and then unfortunately i was like never able to replicate that myself ever again at home. But for so many people, that experience of going to the department store makeup counter was for such a long time really a ritual.

1:36Do young people still engage in that ritual? What is the status of the beauty counter in today's online era? Alexis, let's start with you. People still experience what you just described around seeking out expertise and help in navigating beauty, but they don't generally do it at a department store makeup counter anymore. So department stores are often organized by brand. It is somewhat dependent on you knowing what brand you are interested in purchasing from before you even engage with the expert who is often a salesperson for that particular brand. And what we are finding is that this idea of brand affinity and brand loyalty has really been put on its head.

2:24We see consumers very infrequently these days buying the entire beauty routine from a single brand. They shop across price points. They shop across brands. They shop across retailers in a way that just a decade ago was pretty hard to imagine happening at this clip. And yet the role of expertise is still really important, right? seeking out someone who can show me how to wear something, how to apply it. But today, it's happening increasingly on platforms like TikTok, where it might not be a brand sales rep who's teaching me how to use the product, but it's somebody a couple of doors or towns or countries away who is bringing that to life.

3:06And your research suggests that consumers increasingly think about beauty in terms of the way they feel, confidence, self-care, a sense of well-being versus simply looking more dressed up or better or younger. How does your research suggest that the definition of beauty is changing? And does that have implications for what qualifies for the category, for what counts as a beauty company, in other words? So it's really changing quite rapidly. And I think it makes sense, right? Like you think about the people that you might know or imagine who had the most elaborate beauty routines five years ago.

3:47It was cleanser, it was toner, it was serums, it was, you know, all of the makeup routines. But if I asked you today about the most elaborate beauty routines, you might include things like GLP-1s or, you know, infrared sauna or cold plunge or functional nutrition and, you know, categories that weren't a part of our beauty research of yesteryear. And this was the first year that we really expanded how we defined beauty to be much more holistic and really, you know, a much broader coverage of the market to include things like services, nutrition, etc. So talk to us about the impact of beauty routines and products emanating from South Korea, which I think is called K-Beauty.

4:38You know, this is what I would maybe perhaps think of as the second wave of K-Beauty. This is really a country of origin that has consistently received high praise from across the globe of being at the forefront of skincare technology and innovation. So when we ask consumers globally, you know, who makes the best skincare products? Korean beauty is often in the top three for all consumers globally, which is pretty compelling. Some of the markers of success of K-beauty have been really sharp price positioning or, you know, perceived bargains, you might call it. This could be in bundling. It could be the mastige price points, but things that feel like good deals.

5:23We're seeing a lot of novelty. Sometimes it's a new format. Sometimes it's a new ingredient. Snail mucin would be an example. PDRN ingredients that we're seeing now would be another. I think K-Beauty has done particularly well in terms of signals of efficacy, signals of clinical backing. If you look at the way many of the products look, they look very much like a syringe in terms of the applicator. They have the lines on the side that shows the amount, like a measuring cup. It's interesting. I've bought Korean beauty products after having been exposed to them online. And obviously, the right social media influencer can now cause a product to just explode and sell out overnight.

6:11In your view, who has the power today? The brand, the retailer, the influencer? How has the rise of the digital marketplace changed that balance of power among these different stakeholders? What has changed is where the retailer dynamics are playing. Amazon is now the largest beauty retailer in the U.S. TikTok shop will be a$4 billion beauty retailer by the end of this year. In addition, we see consumers saying that they actually think all of the retailers from the mass big box players like Walmart and Target and grocery stores to premium specialty retailers like Sephora and Ulta, they think all of them are capable of and good at selling products across price points.

7:01And so as a result, like the assortments are starting to look a little bit more similar across retailers and where people are shopping is changing. The idea of consumers going into a store and browsing with an unknown product in mind is the minority today. The vast majority of trips are pre-researched in some capacity. Either I know the exact product I want to buy, or I saw it on TikTok and I want to go in store and see what it looks like, or I know the exact product I want to buy, so I'm just going to buy it. The dynamics of the retail landscape have changed quite dramatically, and it's having a significant impact on how you think about go-to-market strategy as a new brand or how you think about growth as well.

7:46We've also seen TikTok shop and social selling in general have a significant impact on how fast brands can scale. So it used to be that if you're a D2C brand, you could get picked up. you could get a lot of buzz. But what we're seeing in terms of the TikTok shop native brands is just very fast growth. And we also see that halo when some of these brands have gone into bricks and mortar. And there's a very different way of building that buzz and building that scale. Some of it is viral, some of it is natural, but there's a very specific way to be able to build that buzz and to buy that buzz. And brands are becoming increasingly savvy in terms of how to do that.

8:24So one of the things that surprised me in this report was fragrance. Fragrance has now overtaken color cosmetics, if I recall, to become the third largest beauty category. And what I found so interesting about that is that you can't experience fragrance, at least in an olfactory way, you can't experience it virtually, right? So why are people so excited about fragrance right now? So first, like, well, e-com remains the darling of beauty growth. It is worth noting that globally, two thirds of beauty sales are still happening in store. And in the US, about 50 % is still happening in store. So much of beauty is still happening in person where fragrance can still shine in that way.

9:17The other thing that's happened is just a radical change in how consumers utilize fragrance. If I think back to my grandmother, right, I could buy her the exact same perfume every year for Christmas without fail, and you knew it was going to be a hit. People had signature scents. And if you talk to consumers under the age of 40 today, They largely don't. People have collections of fragrance. They layer them to create bespoke scents. And it is really occasion-driven. So I might have the scent I use to go to the gym and another one that I use for work and one that I use for a date night or whatever it might be.

9:55We've also seen a real premiumization. We've seen niche brands and designer brands from fashion houses have a real resurgence. And we've seen that this is a category where men, particularly young men, are continuing to really engage in the category, which is helping to bolster some of the growth. So, okay, to me, there was another somewhat unexpected connection in your research. And Alexis, you alluded earlier in the conversation to GLP-1s. And the research draws a link between GLP-1s and beauty, specifically that households using GLP-1s spend an estimated 30 % more on beauty products. was happening there and how big an opportunity could this become as GLP-1 usage becomes more and more widespread for all kinds of reasons beyond weight loss?

10:54So we see a significant ecosystem around GLP-1s and it goes quite a bit broader than beauty. So this is also the merging of beauty and wellness. But then there's the side effects that were a bit more surprising at first. So hair loss, hair thinning is really fueling a lot around hair ecosystem. Some of the vitamins that help against hair loss, increasingly sophisticated products, serums, masks for hair that help with that side effect, other things like skin laxity. And that can have a big spectrum in terms of what you do about it. It can be firming creams and we see existing ones that are just changing their marketing.

11:33We're seeing ones that are actually tested on GLP-1 users, face creams, all of these kinds of products, all the way up to an increase in aesthetic procedures that can be facial, it can be body. We've seen some filler brands that have specifically been doing research on GLP-1 patients and clinical trials there to show the efficacy in that specific population. So we see this as being, you know, a very significant opportunity for all of the side effects, all of the um, conditions or nuisances that go along with GLP ones, um, way beyond nutrition, just muscle, um, a lot around appearance is very significant as well.

12:14I'm also interested in this live stream shopping trend. Live stream shopping is already mainstream in markets like China and India, but less so here in the U S or in Europe is live stream, the future of beauty shopping globally, or is this a consumer behavior that doesn't necessarily travel that's more regionally specific? So I would say it travels, but it doesn't necessarily travel as broadly. And what I mean by that is when we've surveyed consumers, we found that consumers in some markets like India, for example, are very interested in live shopping. We look at consumers in the West, it's much lower.

12:55So it's about 35 % in the US who are interested about 25 % in Western Europe. The ones that do live streaming though are very engaged in it. They typically use it for product discovery and often also for products that are one-offs. So very much special editions, very much something that you need to get today or it disappears that you wouldn't find elsewhere. You see quite a lot of that with live streaming. You see some consumers that use it for discounts, for bundled products, and things of that nature as well. So it's not just for entertainment. It is really a shopping channel for those who engage in it.

13:32There's also been just this blurring of lines between marketing and sales channels, between live streaming and then influencer sales channels like TikTok shop or Instagram, right? And then even like Amazon's live platforms, like there's this real convergence of content for sales purposes that I think it'll be interesting to see how that continues to evolve with different flavors in different countries and with different customer cohorts. So we've talked about the shift from the makeup counter to TikTok and other social media platforms, but there's another step now that may be even more uncanny, namely when AI agents become our intermediaries and start choosing our products for us.

14:22Your research suggests that AI platforms could drive as much as 35 % of e-commerce transactions in the next three to five years. What happens to beauty when you're no longer just marketing to humans, but also to the agents who are acting on our behalf? So if we think about the words and what gets picked up by the LLMs and by the agents, it's very different from many of the more traditional marketing words that we use to appeal to humans that tend to be much more appealing to emotions, appealing to brand image, all of these kinds of things where the LLMs are much more picking up on functional words on how is something used?

15:09What are the ingredients in it? What are the ingredients that are not in it? And they're also picking up on a much wider range of sources. So they're pulling in feeds from many different places. It's really important to be able to adjust the marketing and the content to be able to get picked up properly by those algorithms by the agents. Because increasingly what we're seeing is on retailer websites, there are agents, and these agents are then curating a list of products. And if your product is not getting picked up by that agent or by that LLM, you're not even in the consideration set to begin with.

15:45When we think about beauty, a lot of the beauty categories are what I'd call high engagement categories. And so they're ones where consumers really want to choose, want to research, want to understand, but not to have something picked for them. So I don't think that a lot of the beauty categories will go fully agent to agent in the future. Some of the more personal care categories may do so in the future. Some of the more household product categories, if I think of something like toilet paper. That's much more likely to be a replenishment purchase where you're happy to just tell your agent to buy me more toilet paper.

16:20But even if we don't go to fully agentic to agentic autonomous, the influence is still incredibly important. And when we've asked executives, they're already seeing a drop in terms of the effectiveness of their SEO, SEM, the traditional digital marketing ways of doing things. And many are starting to shift to track the optimization for the LLMs, which we call GEO. The other thing that we're tracking is the impact of instant and quote unquote, perfect price comparisons across retailers and beauty with agents and how that is going to continue to democratize the shopping choice. This idea of I've decided that there's a product I want to try, help me find it for the cheapest price possible, or there's a product I love or I think I want to try and I'm open to waiting to purchase it until it's on promo.

17:15I think those types of behaviors are going to cause real pricing pressure. And as we think about the retailer landscape, it will presumably cause even less differentiation across retailers when products have to be offered at the same prices across all. So let's turn to the how, in other words, what beauty brands that are out competing are doing differently. When you looked at brands that are gaining momentum, gaining share, what separated them from brands that are stalling or just not faring as well? So if we look at brands that are really getting attention, it tends to be ones that have a way of tapping into the culture and have something that is quite distinct and easily recognizable.

18:04And that in some cases can be visual, but in other cases, it can be much more about something surprising or novel in it. So things like ingredients that you wouldn't expect. We've seen for a while building community has been really important for certain brands, making consumers feel like it is very much a brand for them. And in that way, it's not necessarily about a certain type of person, but just really feeling like the brand is in line with their ethos and with them, essentially. So that's been really important. If we think about more of the kind of tactical or marketing side of it, brands that have been doing really well have been doing a good job of engaging in content creation, working with content creators.

18:53Often TikTok is a place where they're getting a lot of traction and being able to scale. And many of them have then started the journey of going into bricks and mortar and ensuring that they're picking the right partners that works for their brand and for their specific value proposition. And can you make this real for Russ, in other words, both of you partner with beauty brands every day. Any tangible examples that could help leaders understand what these changes might look like in practice? So one of the companies that I've been working with has been really focused on learnings from China and what they can then bring to their larger brands from that inspiration, the social selling.

19:37They've been doing quite a lot more in the West as well, experimenting with things on TikTok, like initial launch of the product on TikTok before it goes into wider distribution, having special editions of the product, limited drops, and have gotten quite a lot of success with a few of their brands so far. They're really trying to understand what is the role of social selling in TikTok shop across the portfolio, and it can vary for different brands. One of the brands that comes to mind is one that plays in more of one of these novel ingredient chapters. And I think what's been really interesting is like, how do you explain that?

20:15And how do you tell the real story to consumers? And for this particular brand, they also distribute through professional channels. And so having really different audiences in terms of, you know, plastic surgeons and dermatologists and med spa owners, but also end consumers who are buying the product. And what we have found is that, you know, being able to tell a really clear story when consumers have so much information today, right? They're able to do such an extraordinary amount of research to understand products and ingredients. And so being able to tell the really simple, targeted, personalized story of why this is going to work for you as the bar for efficacy just continues to rise and consumers continue to ask more and more of the brands at a sharper and sharper price point, and they have the ability to get that product or that information pretty easily, the really clear, personalized, digital marketing-led, but omni-channel strategy is so critical.

21:17Alexis and Sarah, thanks so much for joining us. That was a great discussion. Thank you so much for having us. Thanks a lot for having us.

21:31Thank you.