Digital Disruption: Reinventing the Cosmetics Industry?
Cover Art by Eman Azrak
Inevitable Shift to a Digital-Based Shopping Journey
Over the past several weeks, numerous prominent corporate pioneers in online media, entertainment, and commerce have announced significant measures to reign in costs. Recent statements from Facebook, Amazon, YouTube, and Disney, among others, may lead one to believe that the digital disruption of traditional markets may have reached its limits.
More likely, however, these firms are simply reigning in costs to better align with growth in sales and revenue. As the Boston Consulting Group Experience Curve tells us, it is better to sacrifice profits for market share in the early stages of a growth sector. The firm incurs those losses to "buy" market share, which over time allows it to become the low-cost producer or provider of a service in that sector, ensuring it achieves the highest profit margin among its competitors. But this requires a firm to not get too far ahead of the curve by overinvesting in a growth market experiencing unexpected slower growth.
Disruption in the Cosmetics Industry
There is no doubt that the post-pandemic world, where the consumer is now free to enjoy traditional shopping and entertainment venues, has put a dent in the growth rate of online entertainment and commerce and stock prices of those digital disruption pioneers. However, this is simply a pause in an inevitable consumer shift to online transactions in commerce and entertainment. Indeed, even today, there are significant pockets of industries where digital disruption is radically shifting the competitive infrastructure of that sector. Perhaps nowhere is this more apparent than in the cosmetics industry.
Digital disruption in cosmetics has disrupted the industry in three ways. First, it has pressured legacy and luxury cosmetics companies that have been slow to adopt a digital strategy and continued to rely on "bricks-and-mortar" focused marketing, advertising, and sales. Second, it has given rise to many new cosmetics companies and turned them into global competitors. Using digital marketing, these new cosmetics companies are transforming how consumers browse their options for cosmetics, experiment with each by "trying them on" digitally, and eventually make a purchase. Third, it appears to have the potential to blur the boundaries between the luxury and mass market segments of the cosmetics industry as the shopping journey turns increasingly digital.
Legacy Cosmetics Under Pressure
The June 2022 bankruptcy of Revlon Consumer Product Company highlights the contrast between the newly emerging digital-based shopping experience cosmetics firms versus the brick-and-mortar-dependent legacy cosmetics firms targeting the mass segment of the cosmetics market. Most commentators described Revlon's bankruptcy as driven by excessive debt, pandemic-driven supply chain issues, competition from celebrity-backed cosmetic brands, and the slow devolution of big-box retail shopping venues. The reasons for Revlon's bankruptcy are complex and beyond the scope of this essay. But it is telling that I found little commentary regarding Revlon's slow adoption of online marketing initiatives even as its traditional sales outlets suffered a decline in foot traffic.
This omission is especially curious because of the digital disruption in the cosmetics industry. This disruption is being driven by firms utilizing a digital go-to-market strategy that combines social media marketing and advertising with new augmented and virtual reality technologies to replace the face-to-face shopping experience. These digital disrupters are either legacy cosmetic firms that have adopted a digital go-to-market strategy to supercharge their existing retail sales channels or new firms that are almost exclusively focused on digital marketing and sales with little dependence on traditional retail outlets.
Rise of New Digital Competitors
Established in 1969, Sephora is hardly a newcomer to the cosmetics industry. But it may have been the first cosmetics retailer and manufacturer to fully adopt all aspects of digital marketing to complement its physical retail presence. Sephora made its first step into digital marketing in 2010 when it introduced an online forum for customers to "talk" with each other and with Sephora associates about Sephora's products and cosmetics in general. Today, it offers a virtual reality mobile platform and in-store virtual reality kiosks that allow the consumer to explore products, try on each product virtually, and then complete the purchase. In essence, it has established a digital platform that virtually captures all aspects of the consumer's shopping journey, from exploration to try-on to purchase.
Source: Sephora
Scores of newly established cosmetic firms, unrestrained by legacy physical retail outlets and relationships, have successfully adopted an entire course of social media platforms and the virtual platform that captures the consumer's journey pioneered by Sephora. Among these newcomers are ColorPop, Glossier, e.l.f Cosmetics, and Too Faced. Many of these firms complement their virtual shopping journey by creating virtual shopping malls that carry different cosmetics lines offered by the manufacturer. In addition, these firms have developed social media advertising campaigns using everything from Facebook, YouTube, Instagram and TikTok that have achieved massive consumer reach. A case in point is e.l.f. Cosmetics' 2020 TikTok campaign for a primer cosmetic product that generated over one-billon views in three days.
The digital disruption outlined above has allowed new entrants to achieve a global competitive presence targeting consumers in the mass market segment of the cosmetics industry. These consumers can now enjoy personalized, albeit virtual, attention to their cosmetic needs. Heretofore, such a customized shopping experience was limited to the consumers of the luxury cosmetic market segment who expect the personal, face-to-face attention of a make-up professional typically found on the first floor of almost any high-end department store.
Blurring Boundaries Between Luxury and Mass Market Segments?
Digital disruption has not only created new, globally competitive cosmetics companies, but it could also begin to blur the boundaries between the mass and luxury market segments. Many luxury cosmetic firms, such as Lancome, Chanel, and Dior have adopted online digital strategies and variations of virtual shopping experiences. But I wonder, if cosmetics firms targeting the luxury market segment move too aggressively to an online shopping experience, they may reduce the perceived value received of their luxury brands in the minds of their customers.
As a young boy growing up in Japan, I remember tagging along with my mother to the high-end department stores in Tokyo. Upon entering the store, I was amazed by the vast array of luxury cosmetic counters and the scores of staff who hovered over customers as they delicately and patiently applied their company's cosmetics. I do not expect this phenomenon to disappear, as there will always be a market segment of consumers that considers this personal attention in their shopping experience a critical element of the value they receive for the premium prices they are willing to pay.
Implications Beyond the Cosmetics Industry?
But it does raise an interesting question about the future of the cosmetics industry. If consumers continue to gravitate to online shopping experiences and the augmented reality technology behind the digital go-to-market approach is further refined by the cosmetic firms, it may be only a matter of time before the consumers of the luxury cosmetics segment begin to feel comfortable replacing the personalized attention found in high-end department stores with a virtual assistant. It will be interesting to observe how manufacturers of luxury cosmetics adjust their marketing and shopping experiences to meet this challenge to their brands and the value they hold in the minds of their customers.
Indeed, the type of digital disruption we are now seeing in the blurring of boundaries between market segments in the cosmetics industry may be a sign of things to come in global markets for luxury goods, fashion apparel, and many other consumer packaged goods markets. One thing is for sure: as a digital-based go-to-market strategy moves toward the mainstream of business practices, addressing the challenges of digital disruption will increasingly demand the time and attention of senior business leaders responsible for setting the strategic direction of their firms.
