The 10-step cleansing, exfoliating and moisturizing process that is the cornerstone of a Korean woman’s skincare regime and is, the experts say, largely responsible for her flawless complexion is an arduous and demanding practice that requires commitment and an arsenal of products.
Yet it’s a process in which Mumbai, India-based Nidhi Sharma-Punjabi believes strongly and practices religiously every night.
She does so not just because, as beauty editor of Vogue India, she’s well-versed in beauty practices, products and the science behind the Korean method.
No, this young woman is also emblematic of the New India — a vibrant space where economic improvement continues to drive rapid social change, and where skincare and beauty are becoming more and more important to large segments of the Indian population.
Despite the old adage, beauty has never really been in the eye of the beholder. In an era of rampant social media, where the “selfie” is the yardstick of individual expression everywhere, societies across the world are more appearance-focused than ever.
“People across the globe are posting online, and they want to look as good as they can up close,” said Cindy Mu, a CFA who is a global consumer research analyst on mutual fund complex Artisan Partners’ growth equity team in Milwaukee. “They’re hungry for beauty products and cosmetics, and they’re spending more on beauty — particularly in emerging markets, where income levels are rising. As growth investors, we believe this industry has great prospects.”
Yet Mu is one of the few investors in the beauty space — an industry that, despite consistent strong performance and enormous potential, has been vastly overlooked, according to Harvard Business School Professor Geoffrey Jones, who authored “Beauty Imagined: A History of the Global Beauty Industry.”
Jones believes that investors’ disregard of the beauty sector has much to do with the continued gender imbalance in the financial services industry. Men tend to default toward industries like information technology, he said, because they can relate to these more than to creams and concealers.
“But that lack of understanding and the view that there’s a certain ‘fluffiness,’ for lack of a better word, about the beauty industry completely misses the fact that this is an incredibly fast-growing industry with plenty of opportunity — one that is highly innovative, demands high marketing skills and a high degree of creativity,” Jones said. “Today, beauty has become a global phenomenon, and an industry that once had relevance only in places like Paris, London and New York has become relevant to consumers everywhere.”
From DIY to Drugstore and Beyond
Only a generation ago, few Indian women wore much makeup. They defaulted to their kitchens for skincare, mixing up homemade treatments made of yogurt, honey, gram flour (ground chickpeas) and lemon juice. Over all, store-bought brands were few.
Today, though, India is in the throes of a complete beauty revolution. “Indians are consuming beauty through every channel — they’re reading magazines, watching videos, following beauty bloggers,” Sharma-Punjabi said.
Ravenous Indian consumers now also have access to a plethora of beauty and skincare products, and brands — ranging from American drugstore to French pharmacy, from everyday Korean to prestige Japanese — have been flooding the Indian market.
More importantly, the outlook on beauty is rapidly changing in India, Sharma-Punjabi said. Larger segments of society are embracing both skincare and makeup as de rigeur and experimenting with different kinds of products — primers and essences, serums and sheet masks — and cosmetic looks.
In addition to Vogue India’s affluent readership, “there’s a growing segment of people in India with more money to spend — people who would not shy away from buying a Chanel mascara despite the price tag, and telling others that they’re wearing a Chanel mascara,” Sharma-Punjabi said.
These are the consumers that cosmetics brands are targeting and tailoring their products toward, with special formulations that are relevant to the Indian market — skin whitening products, which are in huge demand in India, and foundations for darker skin tones, to name just a few — and via celebrity spokespeople (Bollywood bombshell Alia Bhatt is the face of Maybelline in India).
Stable, Strong and Growing Returns; High Margins
With an impressive 14% year-over-year growth in 2015, the Indian beauty market experienced the greatest growth of any country, according to data from London-based firm Euromonitor.
Currently at $514 million, “the Indian market is still small,” Ildiko Szalai, senior analyst at Euromonitor said, “but it has lots of potential to grow.”
India embodies what Szalai underscores as the two greatest drivers of the global beauty industry: self-expression and individualism. Both of these, she said, “go hand-in-hand with greater disposable income, higher employment, a burgeoning middle class” and all the other traits of the booming consumer economy that is India’s.
But all across the globe, beauty has been and still is an industry that provides solid and steady returns, Szalai said. It’s a sector that held up well even during the 2008-2009 financial crisis.
According to a report from the firm Research and Markets, the beauty industry clocked in revenues of $379 billion in 2013, and that should grow to $461 billion by 2018. Skincare is particularly significant as a sub-sector, and is expected to grow to $106 billion in revenue in 2018 from $83 billion in 2013.
From an investment point of view, beauty company stocks offer very high margins, said Ron Robinson, New York-based founder of Beauty Stat, a niche beauty influencer platform that reaches over 20 million consumers.
Cosmetics, for example, are marked up by about 80%, and this contributes to strong margins given that it’s easy to store makeup and fairly inexpensive to ship it. Ditto on the skincare side, where “the pricing structure is very profitable for many brands, especially in the prestige sector for names such as Sisley and La Mer, where skincare products can start selling at $100 and sometimes go as high as $1,000, but often the cost of making those products is really not very high, which keeps profit margins high,” Robinson said.
Brand loyalty is also important in contributing to strong profit margins (Estée Lauder, for example, enjoys an 80% profit margin). However, beauty companies large and small work hard to retain their clients by innovating and keeping up with consumer-driven trends, Robinson said, be that anti-aging products, skin lightening creams and all kinds of special formulations for changing demographics.
“Today, the big urban clusters of the world are very much mosaics of different ethnicities, and they are driving current trends in beauty, makeup and fashion,” Jones of Harvard Business School said. “Historically, the non-White markets have been underserved, and there’s a huge potential to cater toward them that is driving the beauty business.”
From New Niche to Old World
To that end, a host of smaller brands in the beauty space are increasingly attracting investor interest.
These companies are niche players, said Katie Johnson, business manager at San Francisco-based CircleUp, which raises capital for early-stage companies in the consumer space, and they’re able to create targeted solutions to emerging consumer demands.
CircleUp has helped startups like Thrive Skincare, a plant-based brand for men, and The Seaweed Bath Co., access capital from different sources. Entrepreneurs who start these kinds of companies are fast to respond to consumers’ desires, Johnson said, and gather a following by leveraging technology and social media to create brand awareness.
For investors, these companies are also interesting because larger conglomerates that are constantly on the hunt for strong, niche players often buy them out.
Beauty M&A is also a growing industry, Johnson said.
Large beauty companies like L’Oreal and Estée Lauder have purchased numerous brands, both locally and internationally. That’s just one of the reasons why Harvard’s Jones believes that investors can never go wrong by buying their stocks.