This report explores the scale, growth and shape of beauty e-commerce, with an emphasis on the market’s diversity and the role the Internet plays in product research and advice.
The global cosmetics market increased in value by 3.9% to $275 billion in 2015. Online, some $24.3 billion was spent on beauty and personal care products worldwide in 2015, up 14.4% year over year, according to Euromonitor International.
China is ahead of Western countries in terms of e-commerce share. In 2015, some 18.1% of all beauty and personal care product sales in China were made online, according to Euromonitor. For comparison, the share of beauty and personal care products sold online was 10.6% in the UK, 7.7% in the US and 6.4% worldwide in 2015.
China’s e-commerce maturity is shown also in the core beauty category of color cosmetics, where fully 21.5% of Chinese sales were online in 2015, versus a global average of 8.3%.
The online beauty market is as complex and diverse as its counterpart in physical stores. Illustrating this, we note three discrete pockets of opportunity serving different customers and different needs:
While the e-commerce channel is both sizeable and growing quickly, online shopping is about more than just making a purchase: it is disproportionately about browsing and research products. Browsing via smartphones, which tend to register low conversion rates, is exacerbating this trend.
We see the search for online beauty information falling into two major camps:
The global beauty e-commerce market is substantial, diverse and growing rapidly. In 2015, consumers spent some $24 billion online on beauty and personal care products. In this report, we consider the following:
CHINA LEADS THE PACK IN ONLINE BEAUTY SALES
To start, we briefly offer some context on the scale of the global beauty market. Despite being a huge, mature category, beauty is still showing strong growth. According to L’Oréal, the global cosmetics market increased in value by 3.9% in 2015, at constant exchange rates.
Based on L’Oréal’s estimated value of the global market at wholesale prices, we estimate that retail category sales reached $375 billion in 2015.
Worldwide, some $24.3 billion (excluding sales tax) was spent on beauty and personal care products online in 2015, according to Euromonitor International, up 14.4% year over year, stripping out currency effects. Euromonitor says Internet sales made up 6.4% of global beauty and personal care product sales last year. We estimate this share will rise to around 7.3% this year. Back in 2010, the global online share was just 3.3%.
Of the major economies we examined, China is by far the leader in terms of e-commerce share. In 2015, some 18.1% of all beauty and personal care product sales in China were made online, according to Euromonitor. We estimate this share will rise to 19.7% this year. Among major Western economies, the UK leads in terms of e-commerce’s share of beauty sales.
As a benchmark to this figure, beauty giant L’Oréal estimated that 6% of its worldwide product sales in the first half of fiscal 2017 were transacted online (the figure includes sales made through third-party retail websites).
In the graph below, we focus on the core beauty category of color cosmetics. The graph shows the extent to which China is an outlier. In China, e-commerce’s share of total color cosmetics sales increased by 1,770 basis points in the five years through 2015, compared with the global average increase of 300 basis points. However, the year-over-year increase in share in China has been slowing dramatically. An extrapolation of this trend suggests that e-commerce’s share of China’s total color cosmetics sales could plateau at around 24% in the next few years.
The color cosmetics category overindexes slightly online, relative to all beauty and personal care products, with 8.3% of category sales made through e-commerce in 2015. By contrast, male grooming underindexes online, with e-commerce accounting for just 4.8% of global sales in 2015, according to Euromonitor.
These distinctions underline the diversity and variance within the beauty and personal care market when it comes to e-commerce: as we explore in more detail below, there is no single online beauty market.
As with any e-commerce category, it can be easy to slip into viewing “online beauty” as a single market. In reality, of course, the online beauty market is as complex and diverse as its counterpart in physical stores. To illustrate that there is no single online beauty market, we profile three discrete segments in the following sections: subscription models, luxury and grocery (or mass-market, nonspecialist retail).
Subscription services have established themselves online, offering consumers regular deliveries of products, and allowing companies the consistency of recurring revenue.
In beauty, subscription models service two polarized demands:
Dollar Shave Club had 3.2 million members and turnover of $152 million in 2015, according to Unilever, which acquired the subscription firm for $1 billion in July 2016. Unilever expects Dollar Shave Club to turn over in excess of $200 million in 2016.
Birchbox had reached more than 1 million subscribers by September 2015, according to press reports. In April 2014, Forbes estimated that Birchbox was turning over at least $125 million per year, from a subscriber list of 800,000.
One big unknown in beauty subscriptions is Amazon Subscribe & Save. Amazon was early into the recurring-purchase business, but we have no recent indicators of user numbers or revenues, either in total or in beauty categories. We suspect it is a highly popular option for routine purchases, given the incrementally increasing discount for multiple subscriptions and Amazon’s excellent reputation for fulfillment.
When we checked in September 2016, Amazon was offering 13,166 beauty and personal care products through the Subscribe & Save service, representing 12% of the total 106,277 products that were available for sale through the service.
The Luxury Segment
E-commerce is a bright spot in a tough luxury market. In 2015, the global luxury market grew by just 1% once currency effects were stripped out, according to Bain & Company’s estimates, and the slowdown continued into 2016. But e-commerce has remained a high-growth channel: while at current prices and current exchange rates, the total luxury market grew by 13% in 2015, online luxury sales surged by 40%. This took the Internet’s share of global luxury sales to a little under 7%. Bain has noted that e-commerce has continued to rapidly gain ground in 2016.
The data above are for all luxury goods, and we expect the online luxury beauty segment to outperform similarly. Moreover, we expect e-commerce’s share of total sales to be substantially higher in beauty than in the overall luxury market for a number of reasons:
The Grocery Segment
In markets such as the UK and the US, e-commerce is the fastest-growing channel for grocery. This is relevant for beauty, as grocery retailers are a major channel for mass-market beauty products: the sector’s share of sales can reach almost 40%, depending on the product and the region. So, when grocery sales start migrating online, so, too, does a significant chunk of beauty sales.
In the US, online grocery is now growing fast from a very small base. In 2015, Mintel found that 31% of US grocery shoppers had bought groceries online in the past year, up from 19% in 2014—representing a 63% increase in participation.
In the US, just 1.4% of all sales of fast-moving consumer goods (FMCGs), such as mass-market beauty products, were made online in June 2016, according to market-measurement service Kantar Worldpanel. This is largely because American grocery retailers have been slow to move online. In the UK and France, where online is a well-established channel for grocery retailing, the share of FMCG sales doing through e-commerce is much higher.
Major US grocery retailers such as Walmart and Kroger are now pushing online. We expect grocery e-commerce to boom in the US market, and this will incorporate the mass-market beauty brands often bought at grocery stores.
We expect beauty products to be overrepresented in online grocery shopping baskets. Within grocery, fresh foods tend to underindex online while packaged, branded products tend to overindex online: since there is little need for shoppers to see, feel or test packaged products from known brands, they are more likely to feel comfortable buying those products online.
E-commerce is the fastest-growing grocery channel in major markets such as the US and the UK. For beauty brands, this indirect migration online means they will need to consider how they are going to continue putting their products in front of shoppers. And these brands will find pure plays such as AmazonFresh, Ocado (in the UK) and Chronodrive (in France) a source of growth.
Pinning down the biggest online beauty retailers is problematic, given the fragmented global landscape and limited disclosure among both specialist stores that sell online and major pure plays that sell a range of goods beyond beauty products.
In 2015, the world’s biggest store-based beauty specialist retailers were, in descending order, Sephora, Ulta and Bath & Body Works, according to Euromonitor. In the US, the top three were the same companies in a different order: Ulta, Sephora and Bath & Body Works.
In 2015, the world’s three biggest online retailers or marketplaces were Amazon, Alibaba Group and eBay, according to Euromonitor. We estimate that Amazon’s global gross merchandise volume (or GMV, the value of all goods sold) was approximately $168 billion in the year ended December 2015. Alibaba Group’s retail GMV was $485 billion in the year ended March 2016. On eBay’s marketplaces, GMV was $78.1 billion in the year ended December 2015.
While the e-commerce channel is both sizeable and growing quickly, online is about more than just making a purchase: it is disproportionately about research and browsing—with an average of only three in every 100 site visits converting to a purchase. And on smartphones, conversion is much lower than average. We attribute this principally to “downtime browsing” on smartphones: consumers often turn to their phones just to fill the time, with little or no intention of purchasing.
As smartphones garner an ever-greater share of website visits, average online conversion rates are likely to fall even lower. So, for consumers, the online channel will become even more about getting information and researching products or purchases rather than buying.
Shoppers Want Information-Rich Online Experiences
We see the search for online beauty information falling into two major camps:
“Scientific” Information: The Smartphone as a Beauty Tool
The smartphone is now a tool for personalized beauty advice and recommendations. Among the surfeit of beauty apps, two prominent types are those that allow the user to color match and those that allow the user to virtually try on makeup (via augmented reality). Here are some significant apps and app providers:
It is rapidly becoming commonplace for major brands (such as L’Oréal and Rimmel London) and retailers (such as Sephora and Feelunique) to offer function-filled apps. These serve a dual purpose of affirming the brand or retailer as a beauty expert while boosting shoppers’ confidence that they are choosing the right products—which can be especially important when purchasing online.
Human Information: Social Media
Social media, and especially video on YouTube, provides a human counterpart to the science-based advice offered by beauty apps. Beauty shoppers regularly share their “hauls” (i.e., purchases) on YouTube, and the site has made stars of many beauty-themed vloggers, including English fashion and beauty vlogger Zoella.
Research shows that YouTube is a significant source of information for many shoppers. Google, YouTube’s parent company, found in a 2012 study that 50% of all beauty shoppers watch beauty videos on YouTube while they are shopping for products.
Meanwhile, research firm Pixability found the following in its April 2015 study of beauty on YouTube:
As the data below show, brand-owned beauty videos accounted for less than 5% of the total beauty video views on YouTube by April 2015—suggesting that consumers are interested primarily in seeking out authentic, authoritative or impartial videos, and that it is not easy for beauty brands to muscle in on online video.
Consumers’ apparent indifference to branded content has not stopped major beauty firms from venturing into video and other forms of social media content. For instance, in 2016, L’Oréal launched an “authentic,” unbranded, content-sharing site called Fab Beauty, and partnered with YouTube to provide an online vlogging school.
With some $24 billion spent on beauty and personal care categories online in 2015, e-commerce is already a substantial channel—and it is still growing quickly. But there is no single online beauty market: the channel is a collection of subcategories and subchannels. Different subcategories are migrating online at different speeds and Internet sales are splintering off to online retailers that range from luxury goods brands to online grocery retailers.
Moreover, the online channel is disproportionately about research, advice and browsing. The increasing penetration of smartphones is amplifying this, and so driving down online conversion rates, as many people turn to their phones for downtime browsing when they have little or no intention of purchasing.
In response, brands and retailers are offering a growing suite of science-based advice through smartphones. A complement to this is the human element of social media, especially video—but the majority of beauty-related video content is generated by users rather than by brands.