Digital transformation is impacting all sectors of the US (and global) economy today, but nowhere is it more apparent than in the consumer products space. Brands are feeling the burn from all sides. In the front office, they are dealing with increasing competition, decreasing loyalty, and changing consumer expectations while in the back office, they are trying to address operational issues that limit their ability to respond: aging, inefficient supply chains; outdated technology systems; and siloed organizations. At West Monroe, we see first-hand how companies are responding to digital pressure in the context of mergers and acquisitions. Is consolidation (platforming) the right decision? Or is separating an emerging brand from an aging giant better?
In this blog, we will focus on the beauty and personal care sector where the decision isn’t so clear.
SAM: Beauty brands are unique relative to other brands like apparel and footwear. They bring with them a physical, experiential component that is difficult to replicate on a phone, tablet, or laptop. Thus, they appear to be more resilient to the breakdown of the brick and mortar retail channel we see in other sectors. At the same time, this is an industry where the giants, like Estee Lauder, Revlon, and Proctor & Gamble, have held their market positions for so long by out-marketing smaller, independent brands. Digital, and particularly social media, is leveling the playing field. Independent brands now have the ability to capture the consumer cheaper and faster by delivering timely, relevant, not to mention – cool, content. We’ve seen both sides of the coin, let’s dig in!
TOM: You raise interesting points, Sam! First, we must consider the general principle of scale, which makes the case for consolidation to be the trend in beauty and personal care as it is in so many other industries. Supply chain cost synergies, from R&D, to sourcing, manufacturing, and through distribution, are achieved only when volume gets high enough to drive substantial cost savings per unit. In addition to supply chain efficiency, consolidated brands also achieve cost savings in their workforce by leveraging shared services. On the other side of the ledger, beauty and personal care giants have also dominated merchandising and topline wins by squeezing out small competitors on the shelves of the large retailers and on the glossy magazine pages consumed by their target demographic. While these trends seem to point to a virtuous cycle for continued consolidation in the sector, what we’ve been seeing with our clients lately is that the game is changing in terms of the marketing and merchandising dynamic. As sales and marketing activities have become digital, cheaper, more responsive, and have brought brands into more personal and emotional one-on-one relationships with consumers, the smaller brands are winning through their speed and depth of connection to their consumers – in particular, the younger demographic.
XIN: Tom, you’ve hit the nail on the head. The rise of social media has become a driving - and in some cases - an instrumental factor in the success of emerging cosmetic companies. Glossier is a clear example of a brand that has garnered a cult-like following through their predominant and expert use of social platforms like Instagram and Facebook. What these smaller, independent brands have mastered is the ability to build a culture of beauty:
These factors have the combined effect of creating a communal experience that fosters an emotional connection with the audience through every picture, post, or snap. They are able to establish and grow a fiercely loyal customer base, which has resulted in double digit growth between 2009 and 2014, outperforming the overall beauty industry’s growth four times over.
As ecommerce continues to revolutionize retail and how we shop, I think social media will integrate more seamlessly into mainstream marketing channels and lower the cost of entry for more new brands to gain traction. While we see this increasing trend towards fragmentation in the beauty space, I believe there will also be a counter-reactive ripple at the other end of the spectrum, where the beauty giants are jostling to revamp their aging image and capture momentum with tech-savvy generations. One effective tactic would be through acquisitions and in fact, this activity has picked up, as exemplified in the cases of Becca, Too Faced, IT Cosmetics and NYX, all of which have been acquired by beauty conglomerates in the past couple of years. In fact, there were 62 acquisitions in the beauty industry in 2016, up 38% from the year before and it’s likely this momentum will continue.
TOM: Xin and Sam, I know you agree that retail is undergoing significant disruption – possibly in no sector more than in beauty. If I consider our brief discussion above combined with what we are all seeing at our clients in this space, I think it is fair to say that both multi-brands and independents should be moving to address the disadvantages inherent in their positions. I suspect we’ll continue to see consolidated brands coming to us looking for digital transformations to compete with the marketing and user experience benefits held by niche competitors. Conversely, the smaller brands will be looking to us for solutions on managing cost despite their smaller scale – be it through supply chain visibility and responsiveness, superior supplier/manufacturing relationship management, automation through back-office operations, SKU rationalization, or any other optimization initiative we support through Operations Excellence.
Learn more about West Monroe's work in the beauty and personal care sector and how we took Algenist, a newly independent company, and made it a standalone brand.
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