No Concealer Needed: Global Beauty Industry Shines With Compelling Growth and Improving Profits

The pandemic has upended the global beauty market, with curtailed air travel (from where beauty firms secure a material portion of sales) and persistent mask-wearing (limiting demand for makeup) calling into question the industry's ability to recover. Further, even before the pandemic struck in 2020, several factors clouded the outlook for the global beauty market, such as China's ability to maintain double-digit growth rates and the ability of other emerging markets to grab the baton once the Chinese market cooled. Our work suggests that the pandemic should not permanently impair the global beauty market given resilient demand, and while many emerging markets outside of China do not yet have the infrastructure in place to support a vibrant beauty market, we think China has many years of robust growth ahead. To date, the country's beauty consumption has centered on skincare, with Chinese consumers just beginning to expand into makeup, fragrance, and hair care, providing years of compelling growth.

We also assess competitive advantages in the beauty space, revisiting the Morningstar Cosmetics Brand Strength Framework, entrenched relationships with retailers (physical and digital), and cost advantages. Further, given heightened focus on environmental, social, and governance, or ESG issues, we evaluate how firms are poised to manage risks associated with animal testing, packaging waste, and data security. In addition, we address if the global shift toward inclusivity could lead to the shunning of beauty products in favor of more natural looks. Finally, we conclude that while L'Oreal and Beiersdorf appear modestly overvalued, we see value in shares of Coty, Shiseido, and Estee Lauder.