Beauty Has Long-Term Glow Despite Near-Term Woes

Overview:

• Beauty is a resilient category. Based on TD Cowen's proprietary analysis, we forecast a 5% five-year CAGR for the sector, inclusive of aesthetics and wellness.
• The Beauty category is increasingly incorporating wellness. We size the total addressable U.S. beauty market at US$115 billion based on consumer purchasing behaviors and demographic data.
• Today, top e-commerce and social media platforms challenge traditional beauty sellers, specialty retail needs to differentiate and value customers turn to mass merchandisers and off-price.
• Market changes impact beauty retail specialists, disruptive innovators and heritage category leaders.

Acceleration of Growth Expected for both U.S. Beauty and Wellness Markets

We believe U.S. beauty growth will likely remain stable and accelerate in the next five years to a +5% CAGR versus a +4% CAGR from 2009 to 2024 driven by:

• the hybridization of wellness and beauty,
• continued adoption of fragrance,
• innovation in haircare and
• momentum in "masstige" and prestige beauty categories versus slower trends in mass beauty.

While tariffs are a concern, we believe beauty is relatively resilient given higher margins and pricing power as well as consistent demand and replenishment given the perception as an 'essential'. We also highlight the potential lipstick effect as beauty could be a small luxury with a low ticket price. We assume beauty sales could accelerate in 2026 on increased innovation as consumers continue to gravitate toward newness.

Last year saw a decline in innovation given a greater focus by companies on marketing innovation rather than on new product launches against the uncertain macro backdrop. We estimate that close to approximately 60% of sales are driven by new product purchases (with only approximately 40% being replenishment) underscoring the importance of innovation in today's beauty market.

Emerging Trends and Shift Towards Wellness

Redefine Beauty's TAM as Consumers Embrace Wellness:

We include a proprietary total addressable market (TAM) analysis, which redefines beauty as consumer goods relating to aesthetics and external appearance and employs a bottom-up analysis based on consumer purchasing behaviors and demographic data. Our definition of beauty reflects the increasing intersection of beauty and wellness along with how the distinction will be blurred as consumers put greater focus on self-care.

Reimagine Beauty Channels as New Threats Unfold:

We also include our proprietary beauty channel and market share analysis, which reveals intensifying competition among retailers to secure the right brands with retailers that can provide the highest return on investment (ROI) best positioned to gain share in the current market. Further, our contribution margin analysis from a brand's perspective highlights the growing threat of social media platforms, while brick and mortar stores will need to offer margins higher than e-commerce platforms to attract brands.

Key channel winners we identify in the next three to five years include an e-commerce giant, specialty retail, off-price, social selling and med spas, while department stores and drug stores could be share losers.

Beauty Expert Survey Underscores the Importance of Wellness

Lastly, we conducted a beauty expert survey with approximately 12 senior industry executives from the TD Cowen Second Annual Glowing Ahead Beauty & Wellness Summit. The survey findings largely align with our key discoveries in this report. The rise of wellness-driven beauty is expected to be the biggest growth driver over the next three to five years. Further, a majority of experts believe beauty could rebound starting in the second half of 2025 (2H25) and think the beauty sector is poised to increase by more than mid-single-digit percent (MSD%) over the next three to five years.