Make up in Paris - Top Ten Trends and Disruptors in Digital Beauty

1. TOP TEN TRENDS AND
DISRUPTORS IN DIGITAL
BEAUTY
Make Up in Paris
June 10, 2016

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4. 10 DISRUPTORS, THREE THEMES
1. Online:
• Primarily about research.
2. Stores:
• Experience is all.
3. E-Commerce opportunities:
• Subscription, luxury and grocery.

5. THEME 1: ONLINE
• Online is disproportionately about research
and browsing.
• Smartphones have made it more than ever
about browsing: lower conversion rates,
because of “downtime browsing” with little or
no intention to buy.

6. SMARTPHONES DRIVING “DOWNTIME
BROWSING”—WITH LITTLE INTENTION TO BUY
Online Conversion Rate, 4Q15
Smartphone Visits as % of All
Visits
4.4
3.8
1.5
3.5
0 1 2 3 4 5
Desktop
Tablet
Smartphone
Overall
%
19.9 20.3
22.9
25.6
28.6
0
5
10
15
20
25
30
4Q14 1Q15 2Q15 3Q15 4Q15
%
Source: Monetate Source: Monetate

7. Demand for an information-rich
experience fulfilled by apps offering
“scientific” advice and social media
offering human recommendations.

8. INFORMATION-RICH ONLINE EXPERIENCE
1. The App as a Beauty Tool:
Facial Mapping
• Virtual makeovers and try-ons
• Factual, scientific, algorithm-driven advice
• ModiFace, a Toronto-based company with a background in building 2-D
and 3-D facial simulations, offers multiple apps
• Sephora Pocket Contour: facial contour analysis
• L’Oréal Makeup Genius: magic mirror-type experience
1

9. INFORMATION-RICH ONLINE EXPERIENCE
1. The App as a Beauty Tool:
Color Matching Goes High-Tech
• Sephora + Pantone = Color IQ
• IMAN Cosmetics determines a user’s
“color signature” after taking a headshot
• ShadeScout matches the Pantone shade
of colors from photos
1

10. INFORMATION-RICH ONLINE EXPERIENCE
1. The App as a Beauty Tool:
Smartphones as Personal Beauty Consultants
• Smartphone apps are capable of:
– conducting skin analysis
– making product recommendations
– performing virtual cosmetic testing
• Allure SkinBetter applies
dermatologist-grade scanning
technology to identify skin issues
• Visada analyzes skin lines and spots
from a selfie, to provide makeup
recommendations
• Plum Perfect determines skin tone,
hair type and eye color to make
recommendations
1

11. INFORMATION-RICH ONLINE EXPERIENCE
2. Social Selling for Beauty Products:
The Human Element in Digital
• 50% of beauty shoppers rely on
beauty videos on YouTube when
making a purchase (source:
Google).
• With YouTube’s help, beauty
brands provide beauty products
for product placement/trial.
• Regular shoppers sharing their
finds through “beauty hauls.”
Zoella
2

12. INFORMATION-RICH ONLINE EXPERIENCE
2. Social Selling for Beauty Products:
The Human Element in Digital
Beauty on
Source: Pixability, 2015
2
45.3 bil.
Total beauty video
views to April 2015
123 mil.
Total beauty
subscriberships
1.8 mil.
Total beauty videos
Mature and male
beauty are high-
growth areas

13. INFORMATION-RICH ONLINE EXPERIENCE
2. Social Selling for Beauty Products:
The Human Element in Digital
Beauty brands on YouTube:
• 215 beauty brands present on YouTube.
• 2.1 billion brand-owned beauty video views…out of 45.3 billion total beauty video
views.
• So brand-owned videos have <5% share of beauty video views.
• Top-viewed branded beauty channels range from Chanel to Dove to Dior to
Sephora: massmarket and luxury.
• 2016: L’Oreal launches “authentic” unbranded content-sharing site, Fab Beauty.
• 2016: L’Oreal and YouTube launching an online vlogging school.
Source: Pixability/Company reports
2

14. THEME 2: STORES
• In-store retail is more than ever about experience.
• Particularly essential for beauty categories, where
tangibility can be essential.
• But shoppers want experience on their terms: some
16% of US consumers decide to shop where sales
associates will leave them alone until sought out for
help (Mintel, 2015).

15. 85%
• Of US shoppers
prefer to shop
in stores
because they
like to touch
and feel
products
90%
• Are likely to
make a
purchase when
they receive
assistance
from a
knowledgeable
store associate
63%
• Say if an item
is the same
price at
different
retailers, they
choose where
to shop based
on overall
experience
DIGITIZATION CAN HELP DELIVER THE
EXPERIENCE SHOPPERS EXPECT
Source: Timetrade, 2015

16. In-store tech can play a role in
enhancing the experience, offering
service, and bringing the
information consumers are used to
getting online, into stores.

17. EXPERIENCE IS EVERYTHING
3. Digital Stores
• Sephora Flash ultra-connected boutiques. First is at 66, Rue de Rivoli in Paris.
• An edited selection of products, alongside a digital catalog of more than 14,000
products from 150 brands.
• Perfume testers with an NFC (Near Field Communication) tag provide shoppers with a
multitude of information on the fragrance by simply placing the tester on the connected
screen.
• NFC-reactive screens can bring some of the information consumers are used to getting
online into the store.
3

18. EXPERIENCE IS EVERYTHING
4. Magic Mirrors
• In-store experience through technology.
• Samsung OLED magic mirror: multiple use cases including virtual beauty try-ons.
• May 2016: First commercial use, in a hair salon.
• Panasonic’s Interactive Mirror: “After analysing your skin condition and pointing
out fine lines, age spots and other issues it recommends cosmetics and
treatments.”
4

19. EXPERIENCE IS EVERYTHING
5. Wearable Tech and 3D Printing
• In future, products made or personalized before your eyes.
• Early areas of wearable-tech in beauty include:
– nail decoration
– tattoos and conductive makeup
– combining beauty and technology to empower the disabled
5

20. EXPERIENCE IS EVERYTHING
5. Wearable Tech and 3D Printing
• Open-source desktop 3D printer with a sub-$200 price tag that can
print makeup such as lipstick, lip gloss, eye shadow, blush, nail polish
and brow powder
5

21. EXPERIENCE IS EVERYTHING
6. On-demand Beauty Services
• Apps such as Beautified, BeautyNow and Glamsquad allow users to
search for nearby salons and book last-minute appointments using
geolocation-based technology.
• Sits within a landscape of service-focused apps and intermediaries,
from Just Eat to Deliveroo to Uber.
• Beauty services is a fragmented market—many small, independent
players.
• Platforms such as this consolidate the sector at the front end.
6

22. EXPERIENCE IS EVERYTHING
7. Shoppers are Digitizing Stores
More Than Retailers Are
• Shoppers are turning stores digital with their smartphones.
• 45% of beauty consumers prefer to search for product
information in-store on their mobile device rather than ask for
assistance from a sales associate (Mintel, 2015).
• And 90% of US smartphone users use their smartphone in stores
while shopping.
7
42
48
54
90
0 10 20 30 40 50 60 70 80 90 100
Checking Reviews
Looking Up Product Information
Price Comparison
Any Smartphone Use
%
Percent of US Smartphone
Owners Using Their
Smartphone In Store, 2015
Source: SessionM

23. THEME 3: E-COMMERCE
OPPORTUNITIES
• Growth and opportunities in three distinct
segments.
o Subscription—for habitual purchases and
trialing.
o Luxury—a strong channel in a struggling
market.
o Grocery—set for strong growth.

24. E-COMMERCE IS A DIVERSE CHANNEL
Internet’s Share of Color Cosmetics Sales, 2010-15
8.2
10.0
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
2010 2011 2012 2013 2014 2015
%
Western Europe US
Source: Euromonitor International

25. “Beauty online” is more nuanced
than being a homogeneous
channel.

26. E-COM OPPORTUNITIES
8. Subscription Models
• Consumers find value in avoiding the drudgery of shopping for
everyday commodity items
• They appreciate the benefits of curation
• Many consumers use subscriptions to treat themselves to a monthly
gift
• Consumers love the convenience and dependability of the services
• Retailers love subscription models as a source of recurring revenue
8
1 Mil.
Subscribers
2.2 Mil.
Subscribers ?
Source: Company reports

27. E-COM OPPORTUNITIES
9. Luxury E-Commerce
E-commerce is a bright spot in a weaker luxury market:
• Total luxury CAGR to 2020: 2-3%.
• Luxury e-commerce CAGR to 2020: 15%.
• Beauty offers a better fit to e-commerce than other luxury
goods: no concerns about fit, habitual purchases, and small
size.
9
E-Commerce Share of Global Luxury
Goods Sales (Percent) and YoY % Change
Source: Bain & Co.
1.3 1.7 2.2 2.6 2.9
3.5
4.5
5.8
7.7
9.8
12.0
16.8
0
5
10
15
20
25
30
35
40
45
0
2
4
6
8
10
12
14
16
18
04 05 06 07 08 09 10 11 12 13 14 15E
% Share of Market (Left Axis) YoY % Change (Right Axis)

28. US: % of Grocery Shoppers Who Bought
Groceries Online in the Past Year
US: Online’s Estimated
Share of CPG Sales
19
31
0
5
10
15
20
25
30
35
2014 2015
%
+63%
0.8
2
3
4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2014 2015 2016E 2017E
%
Source: IRI/Fung Global Retail & TechnologySource: Mintel
E-COM OPPORTUNITIES
10. Online Grocery
10

29. E-COM OPPORTUNITIES
10. Online Grocery
• In developed markets, up to 39% of
BPC products are sold through
grocery stores.
• Online is the fastest-growing
channel in grocery: it will be a
principal growth channel for
massmarket BPC brands.
• In the US, online CPG sales will make
up more than half of total CPG sales
growth to 2018 (source: IRI).
Indirect disruption for beauty brands:
• Brands need to consider how they
are going to continue putting their
products in front of shoppers.
• And they will find pure plays such as
AmazonFresh a source of growth.
10
Grocery Retailers’ Share of
Sales, 2015 (Percent)
16.0
27.1
38.5
12.2 12.5
29.5
0
5
10
15
20
25
30
35
40
Color Cosmetics Skin Care Men's Grooming
%
Western Europe US
Source: Euromonitor International

30. 10 DISRUPTORS, THREE TAKEAWAYS
1. Information-rich online and app tools to help
customers research and decide.
2. Experience-rich stores, leveraging technology
to bring information into the store.
3. E-commerce is a diverse channel with discrete
opportunities.

31. Find our research at www.fbicgroup.com
And soon at www.fgrt.com