There is no escaping the fact that social media platforms have helped propel the beauty industry in recent years, making the array of products more visible than ever before. These platforms have bought us closer to the celebrities we are obsessed with mimicking, and the rapid rise of the coveted Instagram influencer has given us more reasons to feel inferior in our own skin. This is all coupled with thousands of hours’ worth of YouTube tutorials each demonstrating how we too can transform ourselves from mere mortals into Wonder Woman look-a-likes.
Occasionally, our desire to look more like our preferred stars goes too far and convinces us to take extreme measures – the 2015 Kylie Jenner Lip Challenge immediately springs to mind. However, we are not the first generation to go to extreme lengths in the name of beauty. Our 18th-century friends from across the pond in America were known to favour the warm urine of young boys as a treatment for erasing freckles and swallowed pills containing sanitized tapeworm larvae as a method of losing weight. The 16th century corset needs no explanation. Whilst both the Greeks and Romans bathed in crocodile excrement which they believed improved their complexions. The desire to be beautiful is as old as civilisation, as is the discomfort we are prepared to endure in search of the Holy Grail.
The real commercialisation of the beauty industry began in 1909 when Eugène Schueller founded the French Harmless Hair Colouring Co. This later became L'Oréal and under their umbrella of world renowned brands are lines such as Maybelline, Garnier and Lancôme to name but a few. L’Oréal sold seven billion products last year. To put that into context, that is one product for every person on the planet – beauty really is big business.
Evidently, the discomfort we sometimes endure has not proved enough to discourage us from spending an estimated $445 billion-a-year globally on skincare, make-up, hair-care products and perfumes. Whilst this amount is enough to make your mascara run, global expenditure is reportedly growing by over 5% a year, almost twice the rate of GDP for the world's developed economies. This growth is primarily being driven by richer, ageing baby-boomers with increased disposable income and the growing nascent middle classes in developing countries. These irrefutable thematic trends are likely to remain in existence for a significant period of time and act as a tailwind to industry performance.
China, Russia and South Korea have turned into huge markets. Americans are believed to spend more each year on beauty than they do on education, while Brazilian women are estimated to spend 11 times more than their income on beauty products compared to their British counterparts. In India, sales of anti-ageing creams are growing year on year and although the industry's customers are predominantly women, it is increasingly marketing itself to men too.
That’s not to say that there aren’t challenges facing the industry. Global beauty companies have been experiencing disruption by the shift in consumer behaviour that online shopping and social media has caused. The retail industry as a whole is in a transition period and the most resilient business are focusing on increasing direct to consumers sales, in order to compensate for the decline in retail traffic at the once glorious department stores.
We are also demanding greater transparency from manufactures, both on the ingredients that go into their products as well as the evidence behind the claims they use to market them. This is a trait that Estée Lauder recently learned to its detriment when its share price took a 10% hit on the news that it had been falsifying claims used in its advertising campaigns concerning the effectiveness of a number of its products. That being said, with revenues growing 13% year-over-year, demand for the company’s products remains high and the market scandal is likely to be a short-lived blip.
At Ravenscroft, the investment management team are strong advocates of thematic investing. We believe in buying high quality businesses that are aligned with our long-term trends at (or below) their intrinsic value and holding onto these for the long term. Whilst the recent marketing scandal makes for brilliant headlines, let us assure you that there is nothing ‘false’ about strong and robust business models and balance sheets and the ability of companies with these attributes to deliver long-term growth and returns to you, our investors.
For us, companies such as L'Oréal, which is held within our Global Blue Chip strategy, give us exposure to innovative cosmetics for everyday consumers. All segments of the company have a strong culture of innovation with leading teams of scientists working on dermatology, toxicology and biopharmaceutical research. With mass market, luxury and professional ranges, we believe that the company is in an ideal position to tap into the pockets of many consumers in both new and developed markets. L'Oréal is truly global and has an ever increasing presence in emerging markets; Asia, Latin America, Middle East and Africa – making it strongly aligned with our emerging consumer theme. With that in mind, we feel that the brands that you use in your wash bag could well be worth holding within a well-diversified investment portfolio.
“The most beautiful makeup of a woman is passion. But cosmetics are easier to buy.”
― Yves Saint-Laurent
This article appeared in Investment Week in July 2018 and an edited version appeared in GYOne in the same month