Global Beauty Industry: Geared beneficiary of COVID-19 vaccine discovery
Sleeping Beauty: Embracing the resilience of the global beauty industry. Two weeks back, we published CIO Perspectives – Pandemic Fatigue: Time to position portfolios for vaccine discovery (24 August 2020), urging investors to embrace some optimism and position their portfolios for potential COVID-19 vaccine discovery. Industries that suffered the most during the pandemic will, conversely, be the biggest beneficiaries when a vaccine is found. We recommended Athleisure, as well as the restaurant, hotel, casino, and leisure segments (under Tourism theme) as our preferred “Vaccine Discovery” plays.
As the global equity rally continues to broaden and gather pace, we are adding another investment idea to our “Vaccine Discovery” thematic basket: The Global Beauty Industry – which comprises of (a) Cosmetics, (b) Skin Care, (c) Personal Care, and (d) Fragrances.
As Figure 1 shows, the beauty industry has been highly resilient through the cycles and even the Subprime Crisis has failed to dent its trajectory. Since 2005, the industry has registered a compound annual growth rate (CAGR) of 5%. In 2019, total retail sales hit a high of USD499b, with personal care products accounting for the lion’s share of 49%, followed by skin care products at 28%.
Geared beneficiary of vaccine discovery as society returns to normalcy. The sales of beauty-related products plummeted across the board when the pandemic first took hold. Mass closures of department stores, coupled with enhanced social distancing measures, clearly dampened demand. To add salt to the wound, the rapid implementation of “work from home (WFH)” practices across the globe has also negated the necessity of using beauty products as employees remained holed up in their homes.
However, if the pandemic is a transitory event, the recent slump in demand for beauty products will without question be equally transitory. A rebound is around the corner.
In fact, this is already evident in the US as data show that total cosmetic store sales bottomed in April. Interestingly, the average ticket size surged 33% from USD61.99 in February to USD82.25 in April and we believe this is likely due to pent-up demand. As the virus curve continues to flatten in the US and overall work/social life returns to normalcy, we believe that demand for cosmetics (and other beauty-related products) will continue to rebound.
Figure 1: Retail sales in the global beauty industry have been resilient
Figure 2: Cosmetic store sales in the US have bottomed
Source: Bloomberg, DBS
Figure 3: Average ticket size in cosmetic store sales has surged
Source: Bloomberg, DBS
Beyond Pandemic: How the beauty industry is evolving in the post-COVID 19 world. We believe that in the post COVID-19 world, the following changes will take place in the global beauty industry:
From in-store to online: According to McKinsey, in-store purchases accounted for up to 85% of beauty-related products in the pre-COVID-19 world and the breakdown is as follows (from a product and customer segment perspective):
For the Cosmetics segment, 76% of Baby Boomers purchase their goods in-store while only 23% purchase online. Conversely, for the Millennials segment, the split is more equal – with 58% purchasing in-store and 42% purchasing online.
For the Skin Care segment, 83% of Baby Boomers purchase in-store while online purchases account for only 16%. Similarly, the proportion of in-store purchases is also higher for the Millennials at 64% while online purchases account for 35%.
The above data show that regardless of age groups, in-store purchase is the preferred choice for customers, be it the Baby Boomers , Gen Xers, or Millennials. This could be attributed to the fact that customers prefer to sample the product on the spot before making their purchase.
But this trend could soon be evolving. The pandemic has resulted in the closures of beauty product stores throughout the world and some of these closures are permanent. To deal with the new environment, beauty product brands will increasingly shift their sales from in-store to online – a trend which is also prevalent in other parts of the retail industry.
From Cosmetics to Skin Care: Even with the arrival of a vaccine, the phenomenon of “work-from-home (WFH)” is here to stay. Not only have companies realised that “WFH” is equally effective in terms of workers’ productivity, this practice will also help companies reduce their operating expenses via reductions in office rental costs.
With “WFH” becoming part and parcel of life, the use of cosmetics will increasingly become less important for employees around the world since they no longer need to commute to the office as frequently as before. Instead, consumers are likely to divert their discretionary spending from cosmetics to skin care (or personal care) instead.
“Pampering Oneself” will be the new mantra in the post-COVID world.
Figure 4: Cosmetic sales – In-store vs online
Figure 5: Skin care product sales – In-store vs online
Beautified and Justified: Why the global beauty industry is attractive. Listed below are two reasons why the global beauty industry is attractive from an investment perspective:
Strong secular tailwinds: The global beauty industry is a play on the Millennials/Gen Z consumption trend. Rising income and growing emphasis on personal well-being within this group will drive demand for beauty products in the years ahead.
Lucrative margins: Companies are increasingly diversifying their operations into beauty products for one simple reason: This industry is lucrative. As Figure 6 shows, the operating margin for the global cosmetics/personal care industry stands at 18.0% and this is substantially higher than global equities (at 9.4%) as well as the global Consumer Discretionary sector (at 5.2%).
The industry has been outperforming global equities over the years and we expect this positive trend to persist (Figure 7).
Figure 6: Global beauty industry enjoys lucrative margins
Source: Bloomberg, DBS
Figure 7: Outperformance for beauty industry to persist
Source: Bloomberg, DBS
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