US, China beauty slowdown hits Coty, Estée Lauder—but not e.l.f. Beauty

The trend: US beauty demand is normalizing, adding to the pressure facing companies like Coty, Shiseido, and Estée Lauder that were relying on the market’s strength to offset considerable weaknesses in their China businesses.

• Coty’s US consumer beauty sales declined in its most recent quarter, exacerbated by drug and department store closures that hurt both mass and prestige sales.
• Shiseido’s sales in the Americas fell 9% year over year (YoY) in Q3 due to slowing demand for its skincare products, although its makeup and fragrance categories posted strong growth.
• Estée Lauder’s North America net sales decreased by 1% YoY due to a combination of weak wholesale demand for its M.A.C., Tom Ford, and Too Faced brands, a highly competitive environment, and moderating prestige beauty demand.

Signs of moderation: While beauty spending has been mostly resilient thanks to the lipstick effect as well as the category’s growing association with health and wellness, consumers’ price sensitivities are gradually creeping into their purchasing behaviors.

• Roughly 4 in 5 consumers (79%) have changed their beauty buying habits in response to economic pressures, per a May survey by CivicScience.
• Those shifts include comparison shopping between brands (37%), forgoing purchases due to high prices (35%), and buying fewer items (30%).

Consumers’ desire for value is driving heady growth for affordable brands like e.l.f. Beauty, which grew sales by 40% YoY thanks to its strategy of rolling out low-cost “dupes”, complemented by savvy marketing campaigns and international expansion.

• The company’s market share increased by 195 basis points for the quarter ended September 30, marking its 23rd consecutive quarter of net sales growth and market share gains.
• E.l.f. is “the No.1 brand amongst Gen Z by a pretty wide margin,” CEO Tarang Amin told CNBC, in addition to being “the most purchased brand amongst Gen Alpha and millennials.”
• And its popularity is only growing: The brand is attracting customers across “pretty much every age and income cohort,” per Amin, leading to increased distribution deals with Target and Walmart as well as a new partnership with Dollar General to increase its penetration with rural audiences.

The China problem: E.l.f.’s outstanding performance over the past few quarters is in part contingent on the fact that the brand doesn’t sell in China—a market currently weighing heavily on Western beauty brands.

• While Estée Lauder and others blame weak sentiment among Chinese consumers for their struggles, they also face structural challenges in the region—such as the fact that younger, savvier consumers are less likely to be swayed by brand names, and are more interested in a product’s performance and value.
• Domestic brands like Florasis and Proya are gaining share thanks to lower prices as well as a better understanding of local consumers’ shopping behaviors, preferences, and product needs.
• The increased competition forced many global brands to rely on excessive discounts and promotions to spur spending, hurting their prestige and raising questions about their long-term positioning in the country.

Our take: US shoppers may be thinking more carefully about their beauty purchases, but they’re still spending at a healthy clip: We expect beauty and cosmetics sales to grow 4.8% this year, helped by fast-growing categories like fragrances, robust prestige demand, and rising sales on channels like Amazon and TikTok Shop.

But China is a different matter altogether: Global brands have to adjust the way they approach the market lest they get mired in a costly price war that erodes their brand cachet, and devote more resources to developing products and marketing strategies that align with the needs of Chinese consumers.