It’s not a secret that markets are currently going through an economic downturn that is likely to last several years, making raising funds harder than in the last decade. Over the last few months, down rounds have become the new norm for big companies like Klarna and Stripe that had previously raised large amounts. However, there is one sector that appears to be immune to economic cycles and market changes, making it perfect for investment: the beauty industry.
The beauty sector has proven to be resistant to economic turmoil and financial crises for the last few decades. This notorious exception led Estee Lauder to coin the term Lipstick Effect to describe it, referring to the time when consumers are still ready to spend money on small indulgences during economic downturns, recessions or when they are personally going through financial difficulties. Despite consumers not having the means for bigger luxuries, they will replace those moments of joy with little luxuries like a new face cream or lipstick.
ON Beaute founder Chanella Buck explains how in recent years beauty products have transitioned from a ‘nice to have’ to become a consumer staple. Even in uncertain economic times, people are still willing to pay to look good, particularly in the age of social media. They might no longer be willing to splash on expensive clothes or other items, but they will still spend money on beauty products, even if they might go for a more affordable brand than they did in the past.
New Millennial and Gen Z generations are known for always wanting to look good and feel their best, indirectly making the beauty sector a solid investment space. We saw that even during the pandemic, despite not being able to go out and socialise with people in real life, people still wanted to look good on video and zoom calls with friends, family and colleagues.
Beauty brands tend to attract higher levels of loyalty from consumers than brands in other sectors. Once a product works for someone, they are likely to stick with it for a long time, especially if it is targeted at specific skin problems. In turn, this results in beauty brands having better chances of receiving recurring revenues, and companies being able to upsell new products in existing lines and grow their customer base. In addition, high loyalty also means higher margins and the ability to develop Direct to Consumer (D2C) business models, which generate much higher margins than traditional retail channels.
For investors, an investment into a beauty brand that people love can be a worthwhile opportunity. Raphael Babalola, co-founder of Temple, emphasises how recent acquisitions in the market show that it doesn’t take long for big players like P&G, Unilever or Estee Lauder to be interested in purchasing small brands that are doing well. Recent examples of this include Edgewell’s purchase of DTC razor brand Billie for $310 million, or Helen of Troy’s acquisition of texture hair brand Curlsmith.
Renude co-founder Pippa Harman noted that despite beauty being a mature market, it has been slow to move online and adopt new technologies. Harman said that “businesses are only now starting to see a new market opportunity created in online beauty experiences, so it is a perfect opportunity to invest in the innovative technologies that will revolutionise the space”.
Estee Lauder's lipstick effect theory was right: the beauty sector continues to prove its resilience to market cycles and economic downturns, with many opportunities for willing investors. From customer loyalty, to societal trends and adoption of new technologies, there are many factors that make the beauty industry an investment opportunity, even in times as challenging as these.
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SFC Capital and The Red Tree are currently running the third edition of The Beauty Accelerator™. The UK’s most exciting emerging independent beauty brands are invited to apply for the chance to receive £150,000 equity investment from SFC Capital plus the knowledge and expertise of The Red Tree applied over the course of a 12-month collaborative partnership. Applications for The Beauty Accelerator™ will close on Friday 30th September 2022.