New Venturesome Manufacturers with Specialty Offerings Giving the Makeup Industry a New Look, Says Mercanti Report
MINNEAPOLIS--(BUSINESS WIRE)--
Walk into any department store, and what's the first thing that greets you? Counter after counter of makeup. In the cosmetics industry, makeup, a $6 billion to $8 billion business in the U.S., is a steady growth category, with consistent yearly gains and mounting demand.
And while the makeup segment is dominated by three giants (L'Oreal, Procter & Gamble and Revlon), smaller companies enjoying faster growth potential are beginning to proliferate and make their mark, says the newly released monthly Mercanti Chronicle report by investment banking firm, The Mercanti Group.
"Successful private equity investments in makeup companies, such as Bare Essentials (NASDAQ: BARE) and Physician's Formula (NASDAQ: FACE), have recently been realized through initial public offerings," says the study by Mercanti Principal Josh Susser.
"Further, highly experienced private equity investors have recently invested in Philosophy, SmashBox and Stila. Each of these companies is capitalizing on a makeup market in flux, where small share gains have a dramatic impact on investment returns," the report states.
Noting that today 70% of women in the U.S. wear makeup, the comprehensive Mercanti report says that entrepreneurial and start-up companies have found ways to exploit the market's fragmentation within certain channels and niches. "In the process, they have created cult followings and significant shareholder value," it says.
Other changes are afoot, the report comments. While historically food, drug and mass retailers, along with department stores, have accounted for nearly all makeup sales, consumers are increasingly turning to other sources, such as the Internet, infomercials, home shopping channels and home marketing organizations. In addition, mass merchants and growing specialty retailers now offer prestige products, creating a significant "upper mass" or "mass-tige" market for luxury makeup goods, Mr. Susser observes.
The growth of the makeup market, which takes place in increments (future gains are expected to nearly match the rate of inflation, as compared to a 5% annual growth previously), is being driven by the appeal of home shopping channel offerings, aging Baby Boomers, enhanced makeup assortments among mass retailers, attractively priced private brands and favorable fashion trends.
"One cannot deny that makeup sales are driven by fashion trends," comments the report. Mr. Susser points out that as mascara and eye liner products have been more innovative in terms of color and effect than lipsticks, eye makeup sales increased 15% from 2004 to 2006, while lip makeup over the same period decreased 7%.
At the same time, consumers are seeking makeup that is natural and has health effects that help improve both body and mind. "In general, the natural makeup trend follows the overall trend toward purchasing natural and organic personal care products for both wellness and a specific function," the Mercanti Chronicle reports. "Consumers are persuaded by makeup products that are multi-functional or that include a pharmaceutical element, so-called cosmeceuticals."
"Research shows that American women today desire their makeup to better match their look. They also want it to be all-natural, hypo-allergenic, non-comedogenic, with nutrients, sunscreen and moisturizer," Mr. Susser concludes. "When they age, they want it to make them look younger. When they are young, they want it to make them look older. What it all adds up to from business and investment viewpoints, is that if makeup companies can find a product to fit individual groups of women, there are infinite opportunities."
