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Retail

The beauty market in

2023: A special State
of Fashion report
May 22, 2023 | Article

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The glow of the beauty

industry has proved hard to
resist, attracting many new
companies and investors.
Brands must make
di!erentiating choices to "nd
success in this shifting and
increasingly competitive
landscape.

McKinsey & Company – Listen to…

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Special Report

The State of Fashion: Beauty

 Full Report (83 pages)

I
n 2022, the beauty market—de"ned as
skincare, fragrance, makeup, and
haircare—generated approximately $430
billion in revenue. Today, beauty is on an
upward trajectory across all categories. It
has proven to be resilient amid global
economic crises and in a turbulent
macroeconomic environment. Beauty is
now an industry that many people, from
top-tier "nanciers to A-list celebrities,
want to be a part of—and with good
reason. Following a solid recovery since
the height of the COVID-19 pandemic, the
beauty market is expected to reach
approximately $580 billion by 2027,
growing by a projected 6 percent a year
(Exhibit 1). This is in line with or slightly
higher than other consumer segments
such as apparel, footwear, eyewear, pet
care, and food and beverages.

Exhibit 1

Sidebar 

About the authors

A dynamic segment that is ripe for

disruption, the beauty industry will have
reshaped itself around an expanding array
of products, channels, and markets before
this decade is over. Consumers,
particularly younger generations, will spur
this shift, as their own de"nitions of
beauty morph while their perceptions of
everything—from the meaning of
sustainability and the role of in$uencers
and key opinion leaders to the importance
of self-care—evolve. Overall, beauty is
expected to be characterized by
“premiumization,” with the premium
beauty tier projected to grow at an annual
rate of 8 percent (compared with 5
percent in mass beauty) between 2022
and 2027, as consumers trade up and
increase their spending, especially in
fragrance and makeup.

At the same time, we expect the

landscape to become even more
competitive, as a range of independent
brands that successfully came to market
over the past decade seek to scale and as
new challengers emerge. Intensifying
competition will prompt incumbent brands
and retailers to change as well. In line with
the trend-driven dynamics in the market,
42 percent of respondents to McKinsey’s
2023 survey of consumers across China,
France, Germany, Italy, the United
Kingdom, and the United States say they
enjoy trying new brands. Meanwhile,
consumers are increasingly shopping
across price points and report that both
online and o%ine stores in$uence their
shopping behavior. Their preference for
omnichannel shopping is expected to
continue to fuel legacy brands’ shift online
and independent labels’ move into a brick-
and-mortar presence.

E-commerce in beauty nearly quadrupled

between 2015 and 2022, and its share
now exceeds 20 percent, with signi"cant
runway ahead. This compares with a 2022
e-commerce share of approximately 30
percent in apparel and footwear, and
around 65 percent in toys and games.

A number of factors have fueled e-

commerce growth in beauty: the
expansion of beauty o!erings from online
giants like Amazon in the United States
and Tmall in China; the increased digital
sophistication from direct-to-consumer
players; the steadily growing signi"cance
of online for omnichannel retailers; and
the proliferation of social selling, including
livestreaming, in Asia. E-commerce is
expected to continue to be the fastest-
growing sales channel, at 12 percent per
year between 2022 and 2027, but growth
in traditional channels—including
specialty retail, grocery retail, and
drugstores—is expected to pick up
postpandemic, as consumers’ preference
for omnichannel is partly driven by their
continued desire for in-store discovery
and trial of products (Exhibit 2).
Department stores are expected to
continue to lose market share globally.

Exhibit 2

Structural and
competitive dynamics
are shifting
Where to play will become just as
important a question as how to win, given
the changing underlying growth tailwinds.
The changing dynamics will render the
industry’s largely homogenous global
playbooks of the past decades less
e!ective and require brands to reassess
their global strategies and introduce
greater nuance and tailoring.

Geographic diversi"cation will become

more essential than ever. It was just
recently, for example, that brands could
focus their footprints on the industry’s two
top countries: China and the United
States. Both countries will remain mighty
forces for the industry, with the beauty
market expected to reach $96 billion in
China and $114 billion in North America by
2027 (Exhibit 3).

Exhibit 3

But in both markets, growth will be harder

to come by for individual brands, not least
due to "erce local and foreign
competition. Meanwhile, other countries
and regions, including the Middle East
and India, are ready to step into the
limelight, o!ering distinct potential for
speci"c categories and price tiers. The
likely upshot is that many brands will align
their geographic strategies to this new
world order, which will require a variety of
localized playbooks.

Across geographies, another growth

opportunity will be products and services
in the top tier of the pricing pyramid: the
true luxury and ultraluxury beauty market
has the potential to double, from around
$20 billion today to around $40 billion by
2027.

Five disruptive
themes
The next few years will be a dynamic time
for the beauty industry, "lled with
opportunities and new challenges. Its high
pro"tability, with EBITDA margins of up to
30 percent, will continue to attract new
founders and investors to the space. With
limited spots available on the beauty
palette, successful brands will adapt to
the changing rules of the game and
secure a uniquely di!erentiated value
proposition amid a saturated market and
increasingly sophisticated consumers. Key
dynamics will include the following:

The redrawing of the growth

map. Slowing growth in China, along
with increased local competition, means
the country will no longer be a universal
growth engine for the industry. As a
result, the US market will become even
more important, with strong growth,
especially over the next few years. This
market will become a competitive
battleground for established brands and
a potential green pasture for new
entrants. The Middle East is expected to
fuel growth over the same period, with
India expected to emerge as a new hot
spot in the longer term.

The rise of wellness. As consumers are

increasingly engaging with beauty
products and services to not only look
good but also feel good, the lines
between beauty and wellness are
expected to continue blurring, with the
combined opportunity representing
close to $2 trillion globally for brands,
retailers, and investors. Wellness-
inspired products—such as skincare and
makeup with probiotic and Ayurvedic
ingredients, ingestible supplements, and
beauty devices like LED face masks—
have already captured the attention of
consumers embracing greater self-care
and mindfulness in their postpandemic
daily routines. The melding of wellness
and beauty will only become more
pronounced in the years ahead, in line
with an expected CAGR of 10 percent to
2027 for the wellness industry. This
trend will represent an untapped
opportunity for many, with "rst-mover
advantage for the players that get it
right.

The in"uence of Gen Z. Gen Zers

scrutinize brands as part of their search
for value. Nearly half of Gen Z
respondents in our survey report
conducting extensive research on
product ingredients and their bene"ts
before purchase, similar to millennials
(and compared with only one-third of
Gen Xers and one-"fth of baby
boomers). Beyond product e&cacy and
transparency, Gen Zers demand that
brands credibly stand for something. In
addition to their focus on sustainability,
diversity, and inclusion, Gen Zers greatly
value brands that have an authentic and
approachable image and a story that
goes beyond products, and that
welcome consumers into a wider
community. Engaging with beauty
products and services to feel good and
express their authentic selves rather
than adhering to speci"c cultural ideals,
this cohort is challenging norms not only
around the de"nition of physical beauty
but also around gender and product
categories.

The imperative to scale. While the past

decade has seen a number of new and
independent labels bene"t from steadily
lower barriers to entry, growth beyond a
successful initial run to achieve
meaningful scale remains elusive for
many. Out of 46 brands founded in or
after 2005 with global retail sales of
$50 million to $200 million by 2017, only
"ve exceeded $250 million in global
retail sales "ve years later, in 2022. Only
two achieved global retail sales of more
than $750 million. To scale successfully,
brands must focus on omnichannel
expansion and internationalization.
Category expansion appears to be most
e!ective when a brand has grown to a
certain size, and when the expansion
enhances and protects the brand’s
unique value proposition.

The recalibration of M&A. Amid

continuously increasing interest in the
beauty industry from a variety of players
—from “strategics” to private equity
funds—M&A will continue to play a
major role in the industry. As seen in
recent years, conglomerates and
"nancial investors alike will pursue deals
to invest in promising brands. But
dealmaking will not be the same as
when cost of capital was low. In the near
term, megadeals will likely be few and
far between in response to market
turbulence. In addition, criteria for M&A
targets will shift from a focus on high-
growth independent “brands of the
moment” to brands with an innovative
product pipeline and a demonstrated
ability to grow pro"tably, sustainably,
and over the long term.

The years ahead will o!er all the right

ingredients—from agile channel mixes to
consumers eager to explore new products
—for the beauty industry’s continued
growth. For beauty leaders and
challengers alike, there will be plenty of
opportunities to $ourish, if they develop
and execute tailored strategies that re$ect
the changing world of beauty.

Download the full report on which this

article is based, The State of Fashion:
Beauty (PDF–10MB).

ABOUT THE AUTHOR(S)

Achim Berg is a senior partner in McKinsey’s

Frankfurt o&ce, Sara Hudson is a partner in
the London o&ce, Kristi Klitsch Weaver is a
senior partner in the Chicago o&ce, Megan
Lesko Pacchia is a partner in the New Jersey
o&ce, and Imran Amed is the founder, editor
in chief, and CEO of the Business of Fashion
and an alumnus of McKinsey’s London o&ce.

The authors wish to thank Anita Balchandani,

Dimpy Jindal, Natalia Lepasch, Amaury Saint
Olive, Alexis Wolfer, Alex Workman, and
Andreas Zampouridis for their contributions to
this article.

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