Top Five Takeaways from Day Two of Cosmoprof North America 2017 The Fung Global Retail & Technology team is attending Cosmoprof North America 2017 in Las Vegas held this week from July 9 to 11. Cosmoprof is the leading B2B beauty trade show in North America, which draws over 33,000 attendees and 1,015 exhibitors from 39 countries. In addition to the trade show, Cosmoprof North America also offers a three-day education program where industry experts share insights and key trends in the beauty industry. Below are our top five key takeaways from day two: 1) The digitalization of the supply chain is expected to shape the future of the beauty industry 2) Technology has continued to advance in the beauty category 3) Influencers, influencers, influencers 4) China is becoming the largest beauty market in the world 5) Indie brands work to gain scale and compete with mass brands The Fung Global Retail & Technology team is attending Cosmoprof North America 2017 in Las Vegas this week from July 9 to 11. Cosmoprof is the leading B2B beauty trade show in North America, which draws over 33,000 attendees and 1,015 exhibitors from 39 countries. In addition to the trade show, Cosmoprof North America also offers a three-day education program where industry experts share insights and key trends in the beauty industry. 1
Below are our top five takeaways from day two: 1) The Digitalization of the Supply Chain Is Expected to Shape the Future of the Beauty Industry Digitalization is improving the transparency and efficiency of the supply chain for the beauty industry as it is with the apparel sector. Thomas Kull, Associate Professor of supply-chain management at Arizona State University, noted that an important aspect of digitalizing the supply chain involves using predicative technology and big data to improve the traceability of beauty products along the supply chain. Beauty companies need to be more transparent about elements of their manufacturing processes, such as animal testing, packaging materials and the potential use of harmful ingredients. Consumers are now more educated and have more access to more specific information. For example, consumers have the power to determine the percentage of recycled materials in beauty packaging. On the positive side, brands can leverage their clean production processes as a marketing message for consumers that care about environmental causes. Data is also paramount. Because of the accessibility of real-time data, companies are able to make business decisions based on real-time analytics versus historical information and average estimates which have been relied on in the past. Kull described data as an equivalent of natural resources for companies in another era. Companies built vast monopolies based on natural resources in the past. Now they can build monopolies based on data. Businesses can potentially pivot their business models based on data findings. There has been a trend of servitization across industries, which represents the shift from selling products to selling services. For example, GE switched from selling airplane engines to airlines to selling thrusts or the use of airplane engines. Real-time communication between devices has allowed GE to collect usage data from its airplane engines and bill airlines based on the accumulative usage. 2
2) Technology Has Continued to Advance in the Beauty Category The advancement of augmented reality (AR) technology in beauty has allowed consumers to try on products in a fairly realistic setting. The magic mirror experience has evolved from a static picture to a realistic video that can adjust product color based on the lighting environment where the consumer is trying on the products. The increasingly accurate and realistic try-on experience is based on color mapping technology which can adjust the color of lipstick according to the analysis of the lighting environment using the colors of users eyes and hair as references, according to Parham Aarabi, Founder and CEO of Modiface. Modiface has created several applications incorporating AR. The company developed a step-by-step personalized live makeup tutorial that teaches people various beauty techniques. It has also layered gaze-based analytics to track consumers affinity with different products when they try them on. Conversion rates improved by 27% when brands use this consumer preference information to make product recommendations, according to Modiface. Artificial intelligence (AI) has made mass customization possible for the beauty industry. Smart foundation match app Match & Co. uses AI technology to analyze and predict foundation color change for consumers over time and invite them to rematch their color every few months. Consumers foundation color changes by 20% each year, according to Match & Co. Match & Co s app will notify users to do a rematch. The company is collaborating with Bare Minerals to offer made to fit personalized foundations. 3
3) Influencers, Influencers, Influencers At Cosmoprof we met with Tribe Dynamics, an industry leader in measuring social influencer engagement. Tribe Dynamics measures how consumers respond to brands on social media through earned media value or EMV. The company measures and discovers which brands are being talked about the most. The beauty industry is effectively using the power of social influencer marketing more than any other method of marketing. The company estimated that the beauty industry was at least 3 5 years ahead of other industries using social influencer marketing because the cost to publish and create a message is almost zero today, and because the rise of content being created is exponential. Tribe Dynamics has discovered brands before they went viral using its analytics. NYX and BECCA cosmetics are examples of two cosmetics brands that used social influencer engagement to grow their brands to multimillion-dollar brands. NYX does not pay its influencers, and BECCA cosmetics was underperforming when YouTuber Jaclyn Smith posted a video about their product. The company experienced a one-day sales record, showing the tremendous power of social media and influencers. The company has since collaborated with Smith on an entire line of beauty products including BECCA x Jaclyn Hill. BECCA cosmetics has since been acquired by Estée Lauder for over $200 million in October 2016. NYX has grown organically through unpaid social influencer engagement to become the number-three cosmetics company in social engagement with EMV over $50 million and year-over-year growth on social media engagement of 97% from February 2016 to February 2017. 4
4) China Is Becoming the Largest Beauty Market in the World We had the opportunity to hear a presentation by Tony Shan, Senior Business Development & Merchandising Manager and the Head of the New York office at VIP.com. VIP.com operates in the Chinese e-commerce market and has a member base of 300 million members. That compares to the Chinese population of 1.38 billion and 450 million Chinese online shoppers. VIP.com had revenues of $8.2 billion in 2016 and is one of the top-three e-commerce sites in China. The company offers end-to-end solutions including operations, marketing, logistics and customer service, and has a global footprint with 10 offices around the world and 28 warehouses globally. In 2016, China overtook the US to become the largest beauty market in the world. Rising income levels are changing preferences. With the rise of the upper middle class and increase in spending power, the Chinese consumer market presents many opportunities, disproportionately benefiting international brands and verticals such as beauty. The company s customers are loyal, with an 80% return rate among shoppers, and are highly sticky. VIP.com s customers are also predominantly women, as they control the purchasing decisions; 80% of the customer base are women. Chinese consumers are adopting e-commerce faster than in the US and Europe: online sales in China grew 36% year over year in 2015, faster than in the US at 14% and in Europe at 12%. The faster growth in China is mainly due to the larger population of online shoppers and the leapfrogging of e-commerce relative to physical retail. In addition, there were 340 million mobile shoppers in China in 2015, comprising 82% of total online shoppers, according to iresearch. This is forecast to reach 510 million in 2018, or 91% of total online shoppers. Some 90% of VIP.com s shoppers come via the mobile channel. 5
Chinese shoppers differ from their Western counterparts in a number of ways: Chinese consumers are more likely to shop on their mobile phones, given the high mobile internet penetration rate in China. Chinese consumers search for products directly on e-commerce sites, while Western consumers typically use search engines as the starting point. Customers expectations: Chinese consumers are typically more demanding. When shopping online, they typically expect next-day delivery compared to western consumers who are receptive to different service levels. At the same time, Chinese consumers are price sensitive and aware of brands premium pricing. Established in 2008, the platform has built long-term relationships with over 19,000 brands and accumulated 100 million customer members. Vipshop is ranked as the thirdlargest B2C online platform in China, with revenues of 40.2 billion in 2015. 5) Indie Brands Work to Gain Scale and Compete with Mass Brands While indie brands have an appeal to consumers as they look for up-and-coming and new and exciting products, small and indie beauty brands struggle with how to take their brands to the next level and scale their businesses. We heard from several beauty brands including Jouer Cosmetics and FAB skincare, as well as the perspective from retailers dermstore.com and QVC. A number of the brands agreed that PR is very expensive for young brands in the beauty space, particularly considering the return they bring in. Jouer Cosmetics, in particular, talked about the success it has seen by instead focusing on social media and utilizing influencers and micro-influencers to spread the word about their brands and products. QVC has several platforms for beauty products, its main QVC television channel which features beauty amongst other categories, a 24-hour beauty channel which is broadcast on Facebook and online at beautyiq.com, and its website. Beauty IQ is geared toward a younger audience and tends to skew toward social brands. The core QVC channel is broader with a larger audience. DermStore was launched by a dermatologist as a 6
skincare-focused platform. The company has evolved to include color cosmetics and is looking to further evolve and expand into haircare and fragrances. In terms of the brands it selects to be on its platforms, QVC prioritizes storytelling, particularly since the channel is about demonstration, and storytelling is integral to that. Indie brands can be niche and often have a compelling story about how the company and/or product came into being. They are often begun to fill a particular need. The company is highly structured and measures brand productivity in dollars per minute it pays close attention to what its customers want, and dollars per minute is the customer voting in real time. In addition to being a platform to sell products, QVC offers brand exposure and marketing. 7
Deborah Weinswig, CPA Managing Director Fung Global Retail & Technology New York: 917.655.6790 Hong Kong: 852.6119.1779 China: 86.186.1420.3016 deborahweinswig@fung1937.com Shoshana Pollack Senior Analyst Jing Wang Research Associate Hong Kong: 8th Floor, LiFung Tower 888 Cheung Sha Wan Road, Kowloon Hong Kong Tel: 852 2300 4406 London: 242 246 Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0)20 7616 8988 New York: 1359 Broadway, 18th Floor New York, NY 10018 Tel: 646 839 7017 FungGlobalRetailTech.com 8