Digitalization of the cosmetics industry

The cosmetics and beauty industry is one of the oldest in the world. For decades, this industry hasn't changed its sales approach, resulting in significant market consolidation and the dominance of a few major players. However, the emergence of widely available technologies that enable manufacturers to reach their customers anywhere in the world has prompted cosmetics brand owners to realize how such changes are transforming the cosmetics industry in the "global village."

The rapid pace of digital transformation and the need to establish a closer and more personal relationship with consumers has driven cosmetic companies to adopt advanced digital technologies such as artificial intelligence (AI) and augmented reality (AR).

For example, one of the leading companies in the cosmetics market, L'Oreal, in its quest to transform into a digital beauty company, acquired the leading augmented reality makeup provider "ModiFace" in 2018. ModiFace specializes in AI and AR and digitally maps an individual's face to help users discover and choose products that best suit their needs.

Elizabeth Arden, in partnership with "YouCam Makeup," offers a virtual makeup application that allows consumers to "try on" products before purchasing them through a virtual interface and then buy them directly from the company's website.

Companies like Estée Lauder have introduced online tutorials to support the launch of new skincare products. They developed a Facebook Messenger chatbot to help customers select products, including live consultations with skincare experts.

However, research suggests that too many choices or excessive segmentation of offerings and overwhelming customers with information made possible by new technologies can be counterproductive, leading consumers to doubt what truly meets their needs.

Digital Shades of Success

The global beauty industry ended 2020 with a value of $483 billion, and the latest data for the first quarter of 2021 shows its value has reached $511 billion. With an annual compound growth rate of 4.75% worldwide, the cosmetics industry is predicted to exceed $716 billion by 2025 and reach $784.6 billion by 2027.

In most major markets, before the pandemic, 85% of cosmetic products were sold in physical stores. With the closure of prestigious retail locations due to health measures, approximately 30% of the cosmetic market shifted to online purchasing.

Changes in consumer habits due to new behavioural rules imposed by the health crisis have led to a surge in "above-the-mask" makeup sales. Sales of eye makeup in the second quarter of 2020 increased by 204% compared to the same period in 2019. On the other hand, lipsticks were among the first casualties of the pandemic, with sales on Amazon falling by 15% and prices dropping by 28%.

The digital transformation revolution has also impacted the beauty industry, with beauty and makeup-related content such as makeup tutorials, skincare guides, and cosmetic product recommendations becoming some of the most viewed content on platforms like YouTube. Leading beauty and makeup YouTubers have millions of followers. For example, Mexican beauty vlogger Yuya had 24.6 million subscribers on her channel in April last year.

Therefore, it's not surprising that leading cosmetic brands, whether they have been in the market for a long time or are relatively new, are spending more money on digital channels and considering more intensive use of the latest digital technologies that are driving the fourth industrial revolution.

Some major players like P&G, Johnson & Johnson, and Shiseido have introduced their technologically innovative systems. For instance, Shiseido's "Optune," a skincare system with IoT (Internet of Things) capabilities launched in mid-2019, integrates a mobile app that uses artificial intelligence to detect the user's skin condition. It then provides a personalized serum formula tailored to the user's skin type and changes in their environment. Currently, "Optune" offers over 80,000 possible combinations.

Stores as Digital Playgrounds

All of this has led to changes in retail itself, with specialized stores that resemble digital playgrounds opening up. An example is LVMH's Sephora, which, with its "Color IQ" system and "L'Oreal Makeup Genius," allows users to virtually try on makeup using a customization concept.

A trend that's already popular in consumer electronics is "Unboxing" videos, which companies use to promote their products and users to provide more detailed reviews of their experiences with a specific product in practice. In the cosmetics market, consumers can combine cosmetic subscription services like Birchbox with influential monthly "Unboxing" videos, bridging the gap between virtual and physical experiences.

What Lies Ahead? Cosmetic companies should invest in their big data analysis teams, as business success will increasingly depend on timely information about changes in consumer habits. On the other hand, the rapid growth of mobile apps, skin-scanning systems, "smart" mirrors, and other technological innovations in the race for customers can "miss the mark" if investments in such technologies are primarily motivated by the need to surpass or keep up with the competition rather than addressing consumers' actual needs.