For well over a year now, the sales of luxury goods have been faltering. As the crisis in the global luxury goods industry has deepened, even those situated in the upper echelon of the market – the grandmasters that had proven able to withstand the Great Recession, such as Hermès and Chanel – are experiencing plunges in profit.
While many luxury brands are cutting their revenue forecasts, Sephora and similarly situated brands have each posted a string of blockbuster sales results. Estee Lauder, the company that owns its eponymous cosmetics line, as well as brands such as Clinique and MAC, recently upped its sales forecast this spring, in response to experiencing greater demand for its products.
THE LIPSTICK INDEX
The "lipstick index" is back, Bloomberg declared earlier this year. The term, which was coined by Leonard Lauder - then-chairman of Estee Lauder - during the 2001 recession, in response to the share rise in lipstick sales, "indicating that women facing an uncertain environment turn to beauty products as an affordable indulgence while they cut back on more-expensive items," such as Gucci handbags or Chanel suits.
Not all hope is lost for high fashion brands, however. While wealthy consumers may not be shelling out for garments and accessories in as carefree a manner as they have in the past, they are demanding premium beauty goods with increasing frequency. For brands like Chanel, Louis Vuitton, and L’Oreal (whose shares soared early this month, the most in almost seven months after revenue beat analysts’ estimates on rising demand for the cosmetic maker’s high-end brands in North America) and Lancome, of course, this is a welcome phenomenon.
Premium or prestige beauty, as distinct from mass market beauty, includes makeup, fragrances and skin care products that “tend to be fancier than what you find at the drugstore,” according to the Wall Street Journal. Another difference between the two categories? Growth.
Prestige beauty in the U.S. grew 7% to $16 billion in 2015, while mass beauty grew only 2% to $21.7 billion, according to NDP Group, a market research firm based in New York. A particularly promising segment of the market, the prestige beauty segment is expected to reach over $126 billion by 2019. As for the U.S. alone, which maintains the largest cosmetics market in the world, its revenue is expected to exceed $62 billion in 2016. As for cosmetics, as a whole, the segment experienced some of “the healthiest sales growth (13%) in the market, while the fragrance category outperformed skincare for the first time; fragrance dollars grew by 4%, and skincare by 3%,” per NDP.
Premium scents have similarly kept the industry growing, while mass-market perfumes and colognes – including celebrity-endorsed products – have hit a wall. The $6.6 billion market for U.S. artisanal products and other premium fragrances is projected to grow 18% by 2020, according to Euromonitor International. Mass-market fragrances, meanwhile, are forecast to drop 15%. As such, cosmetics giants are looking to the runway. Coty Chairman, Bart Becht, said his company plans to refocus on top designer brands, such as Marc Jacobs and Gucci (Coty holds the licenses for an array of high fashion cosmetics ranges), while cutting out some other names. Elizabeth Arden, which gets three-quarters of its sales from scents, also could shift more toward premium names under Revlon.
Unsurprisingly, entities like LVMH Moët Hennessy Louis Vuitton – the Paris-based luxury conglomerate that owns Louis Vuitton, Celine, Marc Jacobs, Givenchy, and Loewe, among other brands – has emphasized its efforts in this sector. After a 70-year absence from the fragrance market, Louis Vuitton released a collection this summer. LVMH-owned Guerlain expanded into make-up this spring with its Guerlain La Petite Robe Noire collection, and sister brand, Kenzo, launched a new fragrance, Kenzo World, in August.
But LVMH’s expansion does not merely come in product roll outs. In July, L Capital Asia, the private-equity investment arm of the Bernard Arnault-chaired company, closed a $50 million deal in which it acquired about 7% of South Korean cosmetics maker, Clio Cosmetics Co., valuing the cosmetics maker at about $700 million, according to a person familiar with the matter. “The global beauty market is showing growing interest in Korean concepts and innovations,” Ildiko Szalai, London-based senior research analyst for beauty and personal care at Euromonitor International, wrote in a report on the heels of the acquisition.
And such endeavors are paying off. In terms of its existing beauty brands – all of which occupy the premium space – LVMH reported earlier this year that its perfume and cosmetics sales for the first nine months of 2016 grew 6%, totaling 3,578 million euros. Parfums Christian Dior – a cousin brand of LVMH – gained market share in all countries. LVMH’s Benefit, Make Up For Ever, and Fresh brands, similarly performed well, as did Paris-based fashion brand, Givenchy’s makeup collection. While Perfumes & Cosmetics grew by 6%, the Fashion & Leather Goods division reported a mere 1% growth. In fact, just last month, the conglomerate reported sales of Perfumes & Cosmetics were the group’s strongest division, soundly beating its Fashion & Leather Goods division.
For those brands already in the space, expansion is key. Marc Jacobs and Tom Ford have extended their presence in this segment by offering premium make-up, bath products, and even nail polishes. Christian Louboutin, the famed footwear brand, launched $50 nail polishes in 2014, and has since introduced even pricier lipstick (think: $90 a pop).
SKINCARE OVER WOMENSWEAR
Much has been made of the seeming switch in luxury spending from garments and accessories to cosmetics, and there appear to be a number of factors/explanations at play. Primarily, with the increased level of information that consumers have – thanks to the internet and social media, in particular – their awareness in terms of health is not only at a high, it is something of a trend. “People are becoming more aware that what they put on their skin seeps into their skin. There’s definitely been a rise in demand for natural products,” said Eleanor Dwyer, a research associate at Euromonitor who studies the beauty industry.
And given that wellness is a trend – as seen in the rise in $180-a-month gym memberships, spin classes, the daily $10 cold-pressed green juice, and the piles of fresh produce and hard-to-find supplements from Whole Foods – it seems only natural that an increased sense of attention to quality cosmetics come hand-in-hand with that. As Vogue noted earlier this year, “A growing percentage of individuals with high discretionary income, wellness has become an important part of the luxury lifestyle. If five years ago it was a Céline bag, today’s ultimate status symbol might just be a SoulCycle hoodie and a green juice” and premium – ideally organic – beauty products, too.
Also at play: Consumers yearning for luxury. “I think people are tired of being frugal, but they don’t have tons of excess money,” Dwyer said. “So premium beauty brands offer an entry point,” she added, a way to get a slice of Yves Saint Laurent or Chanel without a four-figure price tag.
In this way, companies are aiming to attract millennials and Gen-Zers, of course, and in order to do so, at least in terms of fragrances, they are adopting smaller sizes, such as rollerballs that come in at around 10 milliliters. That is the fastest-growing form of packaging, with an increase of 50% or more last year, according to Euromonitor data. Most other sizes either dropped or grew less than 1%.
“A younger consumer is able to discover, experiment, carry it with them,” says Karen Grant, a beauty analyst at NPD Group. “Different formats provide access to even higher-end fragrances, so then they are ready to graduate into a full fragrance.” That could then build a foundation for the future, which is significant, as licensed goods, such as fragrance and cosmetics, are a significant point of revenue for most luxury fashion brands, as they are certainly much more accessible than garments and the rising cost of “it” bags.