What’s the Story?

Today’s beauty consumers look for a high level of online interaction with brands and retailers. Given the negative impact of the Covid-19 pandemic, which has given rise to concerns around hygiene, we are seeing more beauty brands embrace new technologies such as AI, AR and VR to engage with consumers online and offer them a more personalized beauty shopping experience. In this report, we explore how technology is transforming the beauty industry and highlight the implications of its adoption for brands and retailers.

Why It Matters

Pandemic-led store closures, social-distancing measures and self-quarantines have prompted consumers to turn to the digital channel for beauty shopping, resulting in an unprecedented surge in e-commerce demand. We have seen many beauty brands and retailers report robust growth in online sales in their latest quarter or full fiscal year, as shown in Figure 1. These brands and retailers have also noted that online business remains strong despite store reopenings in the second half of 2020. Figure 1. Online Sales Growth at Selected Beauty Brands and Retailers in Their Latest Reporting Periods (YoY % Change) [caption id="attachment_124821" align="aligncenter" width="720"] For Sephora, the quarter ended December 31, 2020; for Ulta Beauty, the quarter ended January 31, 2021; for L’Oréal, the fiscal year ended December 31, 2020; for Estée Lauder, the quarter ended December 31, 2020; for Shiseido, the fiscal year ended December 31, 2020; for Sally Beauty, the quarter ended December 31, 2020; for Coty, the quarter ended December 31, 2020
*Coresight Research estimate of Sephora USA’s online sales growth
**Online sales growth for fiscal 2020
Source: Company reports/Coresight Research[/caption]  

Technology in the Beauty Industry: In Detail

The acceleration of e-commerce has caused beauty brands and retailers to rethink their strategies to better engage with consumers digitally, enabled by technology innovators. We discuss three technology areas that are supporting brands’ strategies moving forward: virtual product testing, AI and personalization, and virtual stores and events. Virtual Product Testing: Increase Consumer Engagement and Conversion Rate Although virtual try-on technology is not exactly new, its adoption has been accelerated due to the pandemic. Due to increased consumer awareness of hygiene issues related to physically trying on products, virtual try-on is becoming a must-have service in the beauty market—and the results so far have been promising. Beauty conglomerate L’Oréal was one of the early adopters of virtual try-on technology. As part of its efforts to “reinvent the beauty experience,” according to the company, L’Oréal acquired AR company ModiFace in 2018 to expand into virtual makeup and hair-color try-on services. ModiFace’s 3D facial recognition software enables try-on simulations of beauty products on photos or videos. L’Oréal has utilized ModiFace to launch virtual try-on functionality across most of its brands. Lubomira Rochet, Chief Digital Officer at L’Oréal, noted that during the pandemic, the company saw virtual try-on usage increase fivefold, reaching 1 billion user visits. Conversion rates from virtual try-on tripled.

• On February 19, 2021, nail brand Essie unveiled a virtual try-on salon that allows users to discover and try Essie nail polishes using AR. Leveraging camera technology, the web-based tool virtually applies nail polish to the user’s nails by tracking nail shape and movement of fingers. According to Essie, users can try 75 gel couture shades with the tool.

[caption id="attachment_124822" align="aligncenter" width="720"] Essie’s virtual try-on salon
Source: Essie[/caption]  

• Google partnered with ModiFace and beauty tech company Perfect Corp in December 2020 to launch its new AR beauty tool, which allows users to access virtual try-on for selected beauty products on Google Search. The collaboration extends to Google’s video-sharing platform, YouTube.
• In November 2020, L’Oréal introduced AR filters to multiple social media and video-calling apps, including Google Duo, Google Hangouts, Instagram, Microsoft Teams, Snapchat, Zoom and more. ModiFace has also previously worked with Facebook.

Estée Lauder has also been racing to innovate with AR technology. According to Fabrizio Freda, CEO and President at Estée Lauder, the beauty company’s virtual services (including AR try-on) carry a higher conversion rate up to 10 times the average, as well as a higher average order value. MAC Cosmetics, an Estée Lauder brand, launched a virtual try-on feature in partnership with Perfect Corp’s YouCam app in the first quarter of 2020, which creates photorealistic simulations that can be tested on different skin tones and adapted to different textures, with more than 200 shades of lip and eye colors. Demonstrating the appeal of virtual tools to consumers amid the pandemic, the company reported that the tool saw a threefold increase in consumer engagement over the eight-week period ended April 20, 2020. Ulta Beauty is another major player at the forefront of using technology to engage with consumers online. During the pandemic last year, Ulta Beauty expanded its virtual try-on tool, GLAMlab, beyond makeup to include hair color and false lashes and extended its shade library to include more than 11,000 shades. In its earnings call on May 29, 2020, the company reported that guest engagement with the tool during its first quarter of fiscal 2021 increased nearly five times. Implications Virtual try-on in the beauty market represents an excellent use case for AR in retail, as it provides consumers with a convenient and safe way to try or experience beauty products before making a purchase. In the current era of growing e-commerce, companies that have integrated AR into their business are well positioned to gain a competitive edge. According to a survey conducted by commerce experience platform Nosto in October 2020, 45% of US and UK beauty consumers aged 16–35 said that virtual try-on features on an e-commerce site would make them more likely to place an order. Data from AR tech startup Vertebrae found that global retailers using AR are enjoying a 19% spike in customer engagement amid the pandemic, and engagement with AR has resulted in a 90% increase in customer conversion rates, on average. According to a Coresight Research survey of US consumers in November 2019, beauty is one of the most popular categories among consumers who use social media as part of the shopping process, with 51.5% stating that they use social media to discover or research beauty products and 41.3% using social media to purchase beauty products. Although the survey was conducted before the pandemic, we expect that 2020 will have only served to increase the importance of social media in consumers' shopping journey for beauty products. Beauty brands are increasingly working with social media platforms to offer virtual try-on services in order to drive brand and product exposure to a broader audience, particularly younger generations. For example, YouTube is one of the go-to sites for beauty consumers, who often seek out makeup tutorials or product reviews. By offering virtual try-on services through the video-sharing platform, particularly with embedded e-commerce functionality, beauty brands can provide a holistic online shopping experience, from discovery to purchase. In addition to benefits of increased engagement and conversion rates, virtual try-on also collects a variety of data points around facial characteristics, which helps brands and retailers to analyze the types of products that shoppers are more likely to buy based on specific facial features, possibly resulting in more accurate prediction models and inventory decisions. Brands and retailers can also leverage consumer data to personalize the shopping experience. AI and Personalization: Provide Customized Beauty Solutions Personalization in the beauty space has come under the spotlight in 2020, driven by increasing demand for tailormade formulas. Heightened focus on inclusivity is also pushing brands to recognize the need for products that are relevant to today’s consumers. Beauty brands and startups are able to leverage AI to create skincare and cosmetics products that cater to different needs. During this year’s virtual CES event, L’Oréal announced the launch of its AI at-home personalized cosmetics device, Perso, which was first unveiled in January 2020. The Perso device use AI and a motorized system to blend and dispense customized skincare and cosmetics formulas based on real-time data and trend analysis. Yves Saint-Laurent Beauté (YSL) will be the first brand to adopt the technology: The app-controlled smart at-home device, “YSL Rouge Sur Mesure, Powered by Perso,” will be launched in September 2021. It allows users to develop their own versions of YSL’s signature lipstick. Perso utilizes an app and a connected hardware device with color cartridge sets from YSL. To create the desired shade from more than 5,000 combinations, users can pick from a ready-to-use color wheel, match to an outfit using photo capture or choose the shade stylist, which is an algorithm-based function infused with YSL’s color expertise that provides recommendations. [caption id="attachment_124823" align="aligncenter" width="720"] YSL Rouge Sur Mesure, Powered by Perso
Source: L’Oréal[/caption]   Over the years, L’Oréal has developed different personalized beauty technologies, including SkinCeuticals’ customized D.O.S.E serum, Lancôme’s foundation machine that is used to help consumers to find the perfect foundation shade to match their skin tone, and La Roche-Posay’s sensor clips that measure the skin’s exposure to UV and pollution. AI has also been widely used to provide skin diagnostics and skincare recommendations. In September 2020, Perfect Corp released its upgraded AI skin-diagnostic solution to include more tracking metrics, including moisture, oiliness, redness, acne, spots, wrinkles, texture, dark circles and more. The technology instantly analyzes eight skin-health metrics for consumers and allows skincare brands to offer personalized product recommendations that meet their specific skin concerns. The solution generates an overall skin score for customers to use as a baseline in tracking their skin health and monitor improvements over time. Announced on March 2, 2021, Japanese beauty brand Decorté became one of the first brands to adopt Perfect Corp’s technology in the US on its e-commerce site. Direct-to-consumer (DTC) beauty brands are often pioneers in customized beauty. Two notable examples are as follows:

• Function of Beauty enables consumers to take a quick quiz on its website to determine a personalized formula for hair products. The company reported strong month-over-month growth between January and April 2020 despite reduced advertising spending. Function of Beauty also unveiled its customizable skincare line in October 2020.
• Customized serum brand Atolla saw a significant increase in customers who had rarely shopped online for skin care before, notably Gen Z and Baby Boomers, between mid-March and April 2020, according to the company.

Implications Beauty products are no longer standardized. Skin diagnostic tools are evolving from basic skin types such as oily or dry skin to advanced analysis across a variety of metrics, which emphasizes the need for hyper-personalized skincare products. The appeal for personalization is high among consumers. Nosto’s survey indicated that 66% of US and UK beauty consumers aged 16–35 are more likely to buy from brands that use technology to provide personalized product recommendations. Also, 58% of respondents said that they are more likely to buy from brands that offer an online quiz-like experience to recommend the right products to fit their unique needs. Despite the high costs, beauty brands are investing in technology as a way to differentiate themselves from the competition and attract consumers by emphasizing their innovations and expertise. Personalization enables brands and retailers to stand out by better connecting with consumers and fulfilling their specific needs, thus driving brand loyalty. Some customized skincare products even adopt a subscription service. For example, Curology is a skincare brand that offers custom-formulated solutions, and shoppers can choose the type of subscription they would like to have. We believe that customization and personalization will play increasingly significant roles in the development of beauty brands’ offerings, with product development set to be more directly driven by consumer demand and data. Virtual Stores and Events: Make the Shopping Experience More Immersive Beauty brands and retailers are incorporating VR technologies into their e-commerce stores to bring aspects of physical retail to online shopping. Where two-dimensional traditional websites are flat, consumers can “walk through and explore” products shown in virtual stores in a three-dimensional experience. Additionally, due to in-person events being restricted due to the pandemic, brands have been hosting immersive virtual events to interact with shoppers. Beauty brand Charlotte Tilbury launched a holiday-themed interactive VR shop in November 2020, and the shop has since become a permanent fixture on the brand’s website. The brand leveraged a VR solution by tech startup Obsess to allow viewers to browse Charlotte Tilbury products, guided by a video avatar of the brand’s founder, Charlotte Tilbury. Moreover, shoppers can virtually try on products, receive personalized recommendations and attend live events such as makeup tutorials. The Obsess technology has been used by brands such as Sam’s Club, Dior and Tommy Hilfiger. Obsess stated that immersive online shops have been shown to drive discovery, engagement, clickthrough, session duration, average order value and conversion for leading brands and retailers. [caption id="attachment_124824" align="aligncenter" width="720"] Source: Charlotte Tilbury[/caption]   US clean-beauty brand bareMinerals hosted a shoppable Virtual Villa event on its e-commerce site on March 2, 2021. The seaside villa consisted of virtual storefronts and multiple rooms featuring various video content from a range of beauty experts. The tour through the villa was guided by videos of celebrity Hailey Bieber, a bareMinerals clean-beauty ambassador. Users could watch video content, participate in interactive activities and purchase products in the virtual storefront, which linked to the brand’s website. Fenty Skin, skincare brand of celebrity Rihanna, used VR and livestreaming to host its launch party in July 2020. Attendees of the virtual party could click to enter different rooms, including a “bar”, a “spa” that showcased products, and a “living room” that featured livestreams from Rihanna and other celebrities. Implications Virtual events and storefronts are still in their infancy and may lose some relevancy when the pandemic eases. However, post pandemic, we see reality technology as providing an opportunity for brands to further connect with consumers, complementing their existing marketing strategies. VR recreates aspects of physical retail through the incorporation of music, store displays and product merchandising to offer a memorable, immersive shopping experience. With innovation in technology continuing to step up, brands can more closely mimic the in-store experience. Another benefit of virtual storefronts or events over in-person experiences is the ability they provide brands to reach a wider audience, as anyone who has access to the Internet can join. Online storefronts or events can face challenges in keeping attendees engaged. Beauty brands should focus more on the experience side than the hard sell. For example, brands can invite influencers and celebrities to interact with viewers, or they can add gaming functions as a fun and entertaining element. The integration of games can help brands build the perception that they are innovative and edgy to appeal to younger demographics. High-end beauty brand Tatcha ventured into popular Nintendo game Animal Crossing back in August 2020 with its own virtual island, “Tatchaland,” to celebrate the launch of its new cleanser. Gamers who visit Tatchaland can interact with the avatar version of Tatcha’s founder and learn more about the products.

What We Think

The Covid-19 pandemic has accelerated digital innovation in the beauty industry, as consumers are embracing online shopping more than ever before. In recent earnings calls hosted by beauty conglomerates Estée Lauder and L’Oréal, both companies identified digitalization in beauty as a key trend going forward and expressed confidence in ongoing e-commerce momentum. Technologies such as AR and VR were once considered niche but have been gaining great traction recently. A growing list of beauty brands are investing in AI, AR and VR to elevate the online shopping experience for consumers. Implications for Brands/Retailers

• Beauty technologies are becoming a “must have” in brands’ e-commerce strategies, as they drive traffic, increase consumer engagement and boost conversion.
• We see virtual product testing as a trend that will stick post pandemic, online but also in stores, due to increased consumer awareness around hygiene; they are reluctant to touch or try on products that others have already touched.
• Instead of in-house innovation, brands and retailers can partner with existing or emerging beauty tech startups to speed up AR deployment at lower costs. They could also consider moving the virtual try-on experience from their own apps to mainstream social media platforms or e-commerce platforms to increase product exposure to a broader audience.
• Consumers are becoming accustomed to increasing levels of product personalization, and the one-size-fits-all approach does not work in the beauty space. Personalized beauty is therefore likely to be a key differentiating factor for brands to increase consumer loyalty.
• We view virtual stores or events as a complementary marketing approach to store-based retail. We expect that the future shopping journey will continue to be omnichannel, so brands should look to provide immersive shopping experiences both online and offline.