The Beauty Market in 2023: A Special Report on the State of Fashion

In 2022, the beauty market—defined as skin care, fragrances, makeup, and hair care—generated approximately $430 billion in revenue. Today, beauty is on an upward trajectory in all categories. It has proven resilient amid global economic crises and a turbulent macroeconomic environment. Beauty is now an industry that many people, from high-profile financiers to A-list celebrities, want to be a part of, and with good reason. Following a strong recovery from the height of the COVID-19 pandemic, the beauty market is expected to reach around $580 billion by 2027, with projected growth of 6 percent annually (Chart 1) . This figure is in line with or slightly above other consumer segments, such as clothing, footwear, eyewear, pet care, and food and beverages.

The beauty industry – a dynamic segment that is ripe for disruption – will have reconfigured itself around an ever-expanding range of products, channels and markets before this decade is out. Consumers, particularly younger generations, will spur this shift, as their own definitions of beauty will transform, as will their perceptions of everything—from the meaning of sustainability and the role of influencers and key opinion leaders to the importance of self-care—evolve. Overall, beauty is expected to be characterized by “premiumization,” with an expected 8 percent annual growth in the level of beauty premium (versus 5 percent in mass beauty) between 2022 and 2027, as consumers shift categories and increase their spending, especially on fragrances and makeup.

At the same time, we expect the landscape to become even more competitive, as a number of independent brands that successfully entered the market over the last decade attempt to scale and new challengers emerge. Intensifying competition will also cause established brands and retailers to change. In line with trend-driven dynamics in the market, 42 percent of respondents to McKinsey’s 2023 survey of consumers in Germany, China, France, Italy, the United Kingdom and the United States say they like to try new brands. Meanwhile, consumers are increasingly shopping across the board. price points and they claim that both online and physical stores influence their purchasing behavior. Their preference for omnichannel shopping is expected to continue driving the shift of traditional brands to online sales and the presence of independent brands in physical stores.

E-commerce in beauty products almost quadrupled between 2015 and 2022, and its share exceeds 20 percent, with an important journey ahead. This compares to a 2022 e-commerce share of about 30 percent in clothing and footwear, and about 65 percent in toys and games.

Several factors have driven the growth of e-commerce in the beauty sector: the expansion of beauty product offerings from online giants such as Amazon in the United States and Tmall in China; the greater digital sophistication of direct-to-consumer sales operators; the increasing importance of on-line for omnichannel retailers; and the proliferation of social selling, including live streaming, in Asia. E-commerce is expected to remain the fastest-growing sales channel, growing 12 percent annually between 2022 and 2027, but growth in traditional channels – including specialty retail, grocery retail and pharmacies – will recover after the pandemic, as consumers’ preference for omnichannel is due, in part, to their continued desire to discover and try products in the store (Chart 2). Department stores are expected to continue losing market share globally.

Structural and competitive dynamics are changing

The question of where to play will be as important as how to win, given the shifting tailwinds underlying growth. The changing dynamics will make the industry’s largely homogeneous global tactics of recent decades less effective, and will require brands to reevaluate their global strategies and introduce greater nuance and more tailored suits.

Geographic diversification will be more essential than ever. Until recently, for example, brands could focus their presence in the two most important countries in the industry: China and the United States. Both will continue to be powerful forces for the sector, with the beauty market expected to reach $96 billion in China and $114 billion in North America by 2027 (Chart 3).

But in both markets, growth will be harder to achieve for individual brands, not least because of fierce competition at home and abroad. Meanwhile, other countries and regions, including the Middle East and India, are set to step into the spotlight, offering distinct potential for specific categories and price levels. Most likely, many brands will align their geographic strategies to this new world order, which will require a series of localized strategies.

Across geographies, another growth opportunity will be products and services at the top tier of the price pyramid: the true luxury and ultra-luxury beauty market has the potential to double from around $20 billion. currently at about $40 billion by 2027.

Five disruptive themes

The coming years will be a dynamic time for the beauty industry, full of opportunities and new challenges. Its high profitability, with profit margins before interest, taxes, depreciation and amortization (earnings before interest, taxes, depreciation and amortization, or EBITDA) of up to 30 percent, will continue to attract new founders and investors. With limited spaces available in the beauty industry palette, successful brands will adapt to the changing rules of the game and ensure a unique and differentiated value proposition in the midst of a saturated market with increasingly sophisticated consumers. The key dynamics will be the following:

• Redesigning the growth map. Slowing growth in China, coupled with increased local competition, means the country will no longer be a universal growth engine for the industry. As a result, the US market will become even more important with strong growth, especially in the coming years. This market will become a competitive battleground for established brands and potentially a more promising place for new entrants. The Middle East is expected to drive growth over the same period, with India emerging as a new hot spot long-term.
• The rise of wellness. As consumers increasingly use beauty products and services not only to look good, but also to feel good, it is expected that the boundaries between beauty and wellness continue to spread, with the combined opportunity representing nearly $2 trillion globally for brands, retailers and investors. Products inspired by wellness — such as skin care and makeup with probiotic and Ayurvedic ingredients, ingestible supplements, and beauty devices like LED face masks — have already captured the attention of consumers who are embracing greater self-care and mindfulness in their Post-pandemic daily routines. Combining wellness and beauty will only increase in the coming years, in line with a compound annual growth rate (compound annual growth rate, or CAGR) expected of 10 percent through 2027 for the wellness industry. This trend will represent an untapped opportunity for many, with first-mover advantage for those who get it right.
• The influence of Generation Z. The Gen Zers They scrutinize brands as part of their search for value. Nearly half of Gen Z respondents in our study say they have thoroughly researched product ingredients and their benefits before purchasing them, similar to Millennials (and compared to only a third of Gen Xers and a fifth of the Baby Boomers). Beyond the effectiveness and transparency of the products, the Gen Zers They require brands to credibly represent something. In addition to their focus on sustainability, diversity and inclusion, Gen Z highly values ​​brands that have an authentic, accessible image and a story that goes beyond the products, and that welcome consumers into a broader community. . Using beauty products and services to feel good and express their authentic identity rather than adhering to specific cultural ideals, this cohort challenges norms not only around the definition of physical beauty, but also gender and categories. of products.
• The imperative to scale. Although several new and independent brands have benefited from increasingly lower barriers to entry over the past decade, it remains difficult for many to grow beyond a successful initial run to achieve significant scale. Of 46 brands founded in 2005 or later, with global retail sales between $50 and $200 million by 2017, only five surpassed $250 million in global retail sales five years later, in 2022. Only two achieved global retail sales of more of $750 million. To scale successfully, brands must focus on omnichannel expansion and internationalization. Category expansion appears to be most effective when a brand has grown to a certain size and when the expansion enhances and protects the brand’s unique value proposition.
• The recalibration of mergers and acquisitions (Mergers and Acquisitions, or M&A). Amid growing interest in the beauty industry from various players – from “strategies” to private equity funds – mergers and acquisitions will continue to play a key role in the industry. As seen in recent years, both conglomerates and financial investors will seek deals to invest in promising brands. But negotiations will not be the same as when the cost of capital was low. In the short term, mega deals are likely to be few and far between in response to market turbulence. Additionally, the criteria for M&A targets will shift from focusing on independent, high-growth “brands of the moment” to brands with a portfolio of innovative products and a demonstrated ability to grow profitably, sustainably and long-term.

The coming years will offer all the right ingredients – from agile channel combinations to consumers eager to explore new products – for the beauty industry to continue growing. Beauty leaders and aspirants alike will have many opportunities to thrive by developing and executing tailored strategies that reflect the changing world of beauty.

The full report on which this article is based is available in English, The State of Fashion: Beauty (PDF–10 MB).