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This week’s Voices on the Ground features Dan Doulos, Market Leader for Advantage Canada. Dan shares his market knowledge on how the pandemic is reshaping the evolving prestige and cosmetics industry.

Q1 - What products and categories have experienced the most change over the crisis period? How have suppliers and retailers adapted?

The cosmetics industry can be divided into two categories: mass cosmetics and prestige cosmetics. Mass cosmetics, as the name suggests, is for mass consumption and encompasses low to mid-cost cosmetics found in drugstores, on e-commerce platforms and in specialty shops. Prestige cosmetics are the luxury brands sold in department stores, typically located in high-end shopping malls.

Both mass and prestige cosmetics in Canada underwent a period of high growth prior to COVID, and the number one category seller consistently year-over-year was lipstick. It contributed both revenue and gross margin for all retailers.

When we look at lipstick sales now, they are at the bottom in terms of sales. Top selling items are hair colouring root touch-up kits, skin creams and eyeliner, and these are mostly purchased online and account for the bulk of the sales today. The reason for this is that women are staying at home and not going out. And even when they do go out, they are often wearing a mask, so they are not looking to put lipstick on. They may don some foundation, eyeliner, and traditional skin cream. So, these sales have not dropped off. Interestingly, people are willing to spend more money now on hair care and shampoos with their leftover discretionary spend because they are cutting out higher-priced lipstick, heavy foundation, and other cosmetics products. Consumers have been willing to try premium shampoos and conditioners to ‘treat themselves’ during this stressful period.

In terms of how retailers are adapting, I think the biggest change that we have seen is in the customer experience. Customers at the higher-end bricks and mortar retailers had a very personalized, hands-on experience with cosmetics products prior to the pandemic. Practically all Canadian retailers have a special section of their stores where one can interact with associates and test the different products. This was a huge value proposition for the retailers because it allowed for multiple trials of a product. Fast forward to today, and stores are capped at the number of associates and customers on-site at any given time, and there are many restrictions around the application of demonstrations or product testing. This has really cut down on the impact that the brand and the retailer can have on the customer’s purchase experience. Smaller brands especially are getting pushed out and the retailers are aligning with larger brands that can move more product through the store. If a retailer can only have five employees and ten customers in the store at any one time, the brands that are most popular end up being prioritized, and little if any access is being granted to the smaller brands. So, the smaller brands have really tried to divert their efforts to selling online.

Even as restrictions are loosened and more customers are returning to in-store shopping, there is still uncertainty on when more customers will revert to previous behaviours, and if they even will. This is especially so for high-end malls. Because there has been a tremendous shift to buying products online, even the big brands have started making videos on how to use their products at home. For example, videos on how to colour hair, apply make-up, and layer foundation became prevalent when salons and high-end malls were shut down. This has resonated very well with consumers and it has allowed the brands to connect directly and build a closer emotional connection between their products and the consumer.

Q2 - Do you see any major threats inherent in the cosmetics space? What are retailers and suppliers doing to best manage and mitigate risks?

The biggest risk has been in counterfeit goods being sold online. Not only is this a risk in Canada, but it has become very concerning in North America and Europe as well. Suppliers, whether they are legitimate companies or individuals, are importing products from other parts of the world that are not approved for sale. What many consumers do not know is that some third-party e-commerce sites allow for companies to sell any product and put it into a mixed basket. Take toothpaste as an example. A counterfeiter will create a knock-off ‘Crest’ or a ‘Colgate’ toothpaste and send it to Canada. Someone will list it online and it will be fulfilled as a ‘mixed basket’ item. What this means is that there will be legitimate branded products for sale, but they will also be mixed with these counterfeit products. These bundles or mixed baskets will be also be available at a cheaper price to consumers. The difficulty is that consumers do not know that they could be getting a rogue or counterfeit product if they are choosing a mixed basket of products. What happens is that these products, while legitimate for sale in other markets have not been approved for sale in Canada. Thus, impacting revenues for local businesses. Commonly, these will be overstocked or expired products, so companies will often be very keen to either offload them at such low prices, without realizing they are not approved for sale.

Interestingly, a technology has been created where products can be identified based on who the supplier knows they sell to in Canada. An AI system will crawl through the  internet, searching sites that have the supplier’s products listed that are not on their own list, and the AI will automatically shut down the site’s payment system so that the consumer will not be able to purchase the item. Counterfeiters are catching on and combating this technology by opening several different sites at once. When the payment system from one site gets shut down, they open the next site. It is almost a game that brands need to play in trying to stay ahead of the counterfeiters, and the third parties who buy in bulk and then ship it globally to sell online.

The Cosmetics Alliance of Canada has been following this risk very closely, well before COVID, and both mass cosmetics and prestige are really starting to be impacted now that more shopping is done online. The total value of the counterfeit market globally is $4 trillion dollars. To help fight this risk, Advantage Group Canada created a ‘Voice of the Industry’ program in partnership with the Cosmetics Alliance of Canada. Through our program research, we found that counterfeit products were the biggest concern to all cosmetics brands within Canada, as they are cutting into revenues and are posing major ethical risks to suppliers and retailers. We will be sharing our program insights with Health Canada so that they can continue to work to improve their security and screening when these products are entering the country.

Q3 - What new innovations have been created in the prestige and cosmetics space? What can we expect out of these innovations in the period following the crisis?

The biggest innovation right now is in beauty kits being sold online. Think of these as meal kits, but with a variety of cosmetic products instead. Typically, these kits will include a colour palette for eyes, face powders, concealer, and eyeliner. Depending on the season, retailers will promote these kits and create a basket to entice consumers to purchase. However, the biggest drawback that retailers have voiced is that because consumers cannot sample these products before purchasing, they are seeing more product returns. When consumers go online and start interacting with different colours to purchase with their kit, colours reflected on the website need to be exact because if the colour does not turn out to be the colour perceived, (even by a slight shade), consumers will often return it. This ties back to the difficulty in crafting a quality customer experience with these products when the store environment has drastically changed.

Another popular innovation is in virtual education and customer service. Brands and retailers are collaborating to teach consumers how to apply makeup either through video or by utilizing virtual reality to view how a product will look when applied to the consumer. Each brand has created a team that educates retailer teams about their brand and how their products work in practice. The brands even train the retailer teams on how to promote their products. If customers have specific questions about the product, they will also advise the retail teams on how to best answer them and provide support. If I am shopping online for example, and I need assistance, e-commerce site associates can help me directly via chat or video on specific products, and they can also direct me to ‘how-to’ videos that the brand has created. This model has shown to be very strong, and retailers outside of prestige and cosmetics such as fashion and apparel have adopted a similar model.

Lastly, many brands have begun to shift away from working with celebrities on product endorsements. This was happening before the crisis had started, as many consumers have adopted mainstream social media applications such as Snapchat, Instagram and Tik Tok. Brands and retailers are now able to identify and partner with ‘influencers’ through these platforms. Influencers are people who express expert-level knowledge of a product or a niche (such as foundation, colour palettes, etc.) and use video, photos, and other media to connect with consumers. Influencers create creative, interactive campaigns with brands and retailers which have proven to be very effective to drive in-store and online traffic. For example, they would request consumers to post videos and photos of how they are using their products to win prizes such as free products or store gift cards. In fact, one of the biggest influencers today are consumers’ own children. Children will talk about new products with their parents and effectively ‘influence’ their purchase decisions. This has been noticed with more traditional and start-up brands that are targeting 15 to 20-year-olds.