Yahoo Finance As spending on beauty slows, consumers shift to premium products
US beauty sales slowed in the first quarter of 2024, but consumers are still looking for premium products.
A recent report by Circana found that the prestige beauty industry category saw revenue grow by 9% year over year in Q1. In comparison, the mass market beauty category — typically drugstore brands — grew by 2% during the same time period.
Prestige cosmetics mainly consist of brands sold in department stores and boutique-style shops like Sephora (LVMUY) and often belong to a higher echelon in terms of presentation, ingredients, and pricing. In 2023, sales in the category reached $31.7 billion.
"We're seeing a very strong Q1 in the prestige cosmetic space," Orveon CEO Neela Montgomery told Yahoo Finance (video above). Orveon owns cosmetics brands bareMinerals and Laura Mercier.
According to Montgomery, Orveon experienced "strong, double-digit, and double the rate of category growth" in the first quarter of the year.
"But you talk about the broader market — and this is a sort of 'lipstick effect' that people often talk about in beauty — we're seeing that prestige is growing at a much faster rate than the mass beauty market," she said, adding: "Those at the higher price points and more luxury positioning and iconic products such as ourselves continue to do well."
The lipstick effect refers to the notion that consumers will still spend money on small luxury items even during economic downturns or when they are low on personal funds. While overall spending on cosmetics is finally normalizing after several strong years of sales growth, consumers are still spending money on prestige items.
According to a 2023 McKinsey & Company report, the "premiumization" trend in beauty and fragrance is expected to continue in the coming years. McKinsey anticipates the prestige beauty category will grow 8% per year between 2022 and 2027, versus a 5% growth rate for mass beauty.
Sephora, a subsidiary of parent company LVMH, had a standout first quarter as the retailer continued opening more stores across the US amid high demand. Rare Beauty and Fenty Beauty, two celebrity-owned companies, are among the most popular cosmetic brands at stores like Sephora and are considered fast-growing.
"We have seen a slowdown in the total category," Ulta Beauty (ULTA) CEO Dave Kimbell told investors at a retail conference in April. However, he noted, "There's a lot of positive signs about how they're engaging with our new brands in stores, online, connecting with our business."
Given the "dynamic" environment for beauty spending, the prestige category is a focus area that Ulta needs to drive improvement on, Kimbell said, adding that the retailer actually "saw strength in mass ... and then [was] more challenged in prestige."
"We have, on the prestige side, 1,000 new points of distribution in prestige area that is having some impact on our business," he said. "But we're confident in our ability to go through. Our intent, of course, over time is to gain share in every part of our business."
