By: Oliver Goulden, FounderSix
The beauty industry, particularly in the U.S., doesn’t seem to be slowing down anytime soon. The first half of 2023 alone saw prestige beauty industry sales totaling a staggering $14 billion, marking a 15% rise when compared to the same duration in the previous year. This leap outpaced even the robust growth of the mass beauty market, which posted a 9% increase and generated $28 billion, as reported by Circana.
This economic vitality has seen a growing trend among established manufacturers who are making strategic moves to buy up beauty startups, typically those with a strong brand, niche product offerings, an engaged customer base, and promising broader market potential. By deep-diving into this emerging trend, we may uncover the potential strategic benefits and opportunities these large firms see in these relatively smaller, often digital-first brands.
Branding and Storytelling
Manufacturers, traditionally focused on production efficiency, often lack the expertise in building and nurturing brands. Acquiring beauty startups, with their established brand identities and compelling narratives, becomes a strategic move to infuse freshness and resonance into a manufacturer’s portfolio. These startups bring not just products but stories that resonate with consumers on a personal level. By integrating these narratives, manufacturers can leverage the emotional connection that startups have forged with their audiences, elevating the overall brand perception and creating a more meaningful connection with consumers.
Efficient DTC Operations
Direct-to-consumer (DTC) operations require a skill set that extends beyond the traditional manufacturing realm. Beauty startups excel in this area, leveraging digital platforms, personalized experiences, and agile supply chains to engage with consumers directly. Manufacturers, recognizing the strategic importance of DTC in the modern market, acquire startups to harness their expertise in creating seamless online experiences. This move allows manufacturers to capitalize on the growing trend of consumers preferring to purchase directly from brands, enabling them to establish a more direct and intimate connection with a customer base.
Increased Margins
Manufacturers mostly rely on wholesale revenue, find themselves facing lower profit margins. Acquiring beauty startups with a strong direct-to-consumer presence enables manufacturers to shift their sales strategy, selling products directly to consumers. This shift provides an opportunity to capture a larger share of the retail price, thereby significantly increasing profit margins. By bypassing intermediaries in the supply chain, manufacturers can optimize pricing strategies, offering consumers competitive prices while simultaneously boosting their own profitability.
Broadening Product Portfolios
Beauty startups often bring novel product or service propositions to the table. They break away from tried-and-tested formulations, addressing emerging trends in skincare, hair care, make-up or wellness that are yet to be fully realized by dominant firms. By acquiring these startups, established manufacturers can quickly and seamlessly enhance their product portfolios, offering fresh, innovative solutions to both consumers and the other clients they manufacture for consumers
Innovation and Flexibility
Beyond the core reasons mentioned, manufacturers benefit from the inherent entrepreneurial spirit of beauty startups. Startups, unburdened by corporate bureaucracy, often foster a culture of innovation and flexibility. Acquiring these agile entities injects a fresh perspective into the manufacturer’s operations, fostering a culture of creativity and adaptability. This infusion of innovation not only enhances product development but also propels manufacturers to respond swiftly to evolving market trends, ensuring they stay ahead in the highly competitive beauty industry.
As was evident in the first half of 2023, the U.S. beauty industry is a lucrative one, bubbling with opportunities for those bold enough to seize them. The trend of established manufacturers buying beauty startups is a testament to their adaptive business strategies and an inclination to stay ahead of the curve in a highly competitive industry.
However, the success of such acquisitions ultimately hinges on how well these large firms can maintain the uniqueness and creativity of these startups, which makes them attractive in the first place. While the financial strength and industry influence of these established businesses are undeniably powerful, their ability to nurture the innovative spirit and branding identity of the startups they acquire will play a significant role in realizing the benefits of such strategies.
