3 key themes for the Health & Beauty market in the coming year
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3 key themes for the Health & Beauty market in the coming year
The Health & Beauty industry assessment report & roadmap
Context
The health & beauty industry, worth over £5 billion annually in the UK, encompasses a wide range of products, from nutritional supplements to makeup and toiletries. This dynamic and highly competitive industry is subject to constantly changing consumer needs and market trends.
Founded in 1969, the Health & Beauty Association (H&BA) connects with the commercial teams from health and beauty suppliers in the UK, including senior sales and marketing executives, to provide a unique forum for members to discuss and debate ways to adapt to changing customer and consumer needs.
Throughout 2020, the health & beauty industry suffered significant disruptions and changes due to the COVID-19 pandemic. Paired with other external environment changes, such as Brexit and the resultant uncertainties, this has forced companies in the sector to be more agile than ever.
The pandemic not only accelerated the move to digital, but it also caused rapid changes in product categories, disrupted supply chains and seriously impacted cashflows. It has become more important than ever to understand changing consumer needs, adapt and create future strategies to address them.
At this critical moment, the H&BA wants to ensure that the forward agenda addresses the challenges and priority opportunities of its member companies. As part of this, with the help of Integration Consulting, H&BA ran an extensive assessment by interviewing its members to better understand the current challenges and needs of the industry.
With this knowledge in hand, the association plans to build a targeted set of tools and initiatives to support its members. This report is the result of the assessment and includes the key topics that emerged from the interviews as well as specific areas that H&BA can focus on in the coming year.
Assessment Process
Over a period of 2 months, the H&BA and Integration teamed up to run an assessment by interviewing members and non-members of the association.
Our purpose was to understand the challenges, opportunities and needs of the industry so that the H&BA can better position its services and provide members with a structured and targeted plan for training, tools, and initiatives.
In total, we interviewed 30 companies that are extraordinarily diverse in terms of business type, size, and industry. We collected many insights and points of view regarding the challenges faced in 2020, as well as future plans for growth.
24/51 members interviewed – thank you all for your involvement!
REPORT STRUCTURE
Growing into New Spaces
Looking to the rest of 2021 and ahead, the industry is poised to seize opportunities for growth by leveraging changes in consumer habits from the last year, which have transformed the status quo.
Through our conversations, 3 major growth-related themes emerged:
New Channels: the unprecedented acceleration of e-commerce growth and direct-to-consumer
New Geographies: identifying geographic expansion opportunities
New Categories: product & category development
1. Managing E-Commerce and Direct to Consumer
The online channel undoubtedly grew the most over the last year, with estimates of around 46% for 2020 – the strongest result in more than a decade. Among e-commerce marketplaces, Amazon was the clear winner: Of the brand owners who participated in our survey, over 75% agreed that their presence on Amazon was key to sales performance and they see a lot of potential from this platform in the future.
How does the trend impact Health & Beauty Suppliers?
Who is
impacted
by this?
To differing degrees, all suppliers are affected by the trend. We are seeing disruption in the market even in more regulated spaces.
The shift to online presents new opportunities by expanding your potential consumer bases, but also exposes your brand to more competition.
The trend requires engagement from stakeholders across supplier organizations – requiring involvement of all functional areas, from commercial to logistics.
How can suppliers adjust to the trend?
The increasing importance of online poses an important question: Are the suppliers’ current structures, capabilities and trade terms suited to the different needs of the channel? These differ significantly from traditional channels.
Additionally, the trend may warrant adjustments to back-office processes and teams (e.g., logistics to meet expectations for delivery times) –either in house or from external stakeholders, e.g., third-party logistics providers.
What are the commercial impacts?
The growing relevance of online channels can present a good opportunity for top-line growth (particularly for suppliers lacking distribution).
However, adjustment does not come without costs and time for transition. Investing in new, useful capabilities for the channel (e.g., a dedicated e-commerce KAM team) can be expensive, and may present lower margins than traditional channels (DTC tends to be less profitable).
E-commerce has changed how to launch a new product –everything needs to be instagrammable.
Amazon has created the standard – now everyone needs to match it.
2. Identifying Geographic Expansion Opportunities
Although many companies were focused on survival during 2020, the new year has brought a shift in focus, with most looking to enter new geographies and exploit white space to create new opportunities. Understanding the challenges and risks of entering these markets is imperative for success. China is attracting lots of attention, with several members flagging it as their next focus area.
How does the trend impact Health & Beauty Suppliers?
Who is
impacted
by this?
A number of suppliers are looking to or have recently expand(ed) distribution, both to new regions in the UK or internationally, with ~30% of those interviewed listing this as a priority for 2021.
The trend requires engagement from multiple internal functions, and likely partnerships with external parties, as well (e.g., distribution or import partners).
Expansion also poses the challenge of ensuring that the brand meets the needs of a new (and different) target consumer base –something important to understand in new countries, in particular.
How can suppliers adjust to the trend?
The first (and most important) step is to use market studies to understand and prioritize expansion opportunities in order to set a clear direction for the organization to follow.
Geographic expansion typically requires two main adjustments. The first is to ensure that a commercial structure is in place (either internal or third-party) to deliver the results of the expansion. The second is making sure the organization is operationally ready for the new market (e.g., expand manufacturing capacity, regulatory compliance, etc.).
What are the commercial impacts?
Any geographic expansion should inevitably result in top-line growth for suppliers. The real issue for suppliers is how to best pick and choose which opportunity to chase.
This top-line opportunity must be balanced against the supplier’s other priorities and consider the investment required (balanced vs. expected revenues), the supplier’s capacity for risk and time horizon for returns (expanding into a new geography rarely happens overnight, whether organic or inorganic).
There has been lots of growth globally and in particular in China. We need to understand where the biggest opportunities are.
3. Product & Category Development
In 2020, consumer buying habits shifted, with an increased focus on well-being, mental health and self-care. However, categories such as some over-the-counter medicine and beauty products like makeup, body sprays and perfumes, saw a decline in sales as more people stayed at home. Looking to the future, companies want to understand which categories will continue performing well and are here “to stay”, which will boom again when people return to normality, and which will continue to decrease.
How does the trend impact Health & Beauty Suppliers?
Who is
impacted
by this?
All suppliers will be impacted by the trend to an extent – whilst 2020 was an exceptional year for rapid changes in category popularity, some overarching trends (e.g., increasing demand for products connected to self-care) will likely continue.
The theme sees consumer needs changing, and therefore potentially impacting each supplier’s ability to keep serving their consumers with their current portfolio, whilst also offering up new opportunities and segments for suppliers to target.
How can suppliers adjust to the trend?
You can’t always predict but you can prepare –develop insight capabilities, explore funding options for acquisitions, develop partnership models for product innovation, or seek co-creation opportunities with innovative brands.
This also necessitates adjustments to manufacturing, packaging, distribution into new outlets and a coherence check as to how the new portfolio could impact the brand’s overall positioning.
What are the commercial impacts?
Similar to geographic expansion opportunities, category expansion should, by nature, represent a top-line growth opportunity. To find the ‘optimal’ opportunity, the key trade-offs to consider are if this pays off (in terms of bottom line), if this happens in a sufficient time frame and if this meets the supplier’s risk tolerance.
Business model innovation, such as the one operated by Ugly Drinks (see below), allows suppliers to trial and test new categories with consumers before committing to investment in large-scale launches.
Ugly Drinks: UK & US-based flavored sparkling water company with big Online & DTC presence (including subscription model).
Operates with 6 core flavors and trials new flavors with subscription customers – ‘democratizing’ new product development.
4. Questions to Answer to Unlock Growth
When assessing the challenges that the H&BA members have faced in growing into new spaces, we identified several key issues for Healthy & Beauty suppliers
- What are best practices from successful e-commerce businesses in the health & beauty industry?
- How do you best balance investments in DTC and e-commerce versus traditional channels?
- How do you build a successful digital marketing area (e.g., strategy, capabilities, tools)?
- Amazon simplified learnings – How do you succeed within the marketplace?
- How to win in China? What can a Western brand learn through entering the market?
- What sort of tariffs and trade regulations exist in the markets you want to enter?
- How do you understand and prioritise new market opportunities with minimal data visibility, or on-the-ground experience?
- How do I design a commercial entry plan that allows me to connect to new customers from a different cultural background?
- How can I identify the right distribution partners to help support me in a new market entry?
- Practically speaking, how do I prepare my organisation for new market entry?
- What are the main upcoming market trends in health and beauty?
- What are the best practices in choosing the right category to invest in?
- How can you prepare your organisation for continuous innovation and portfolio expansion?
- What people, processes, and tools do you need to help your organisation understand and react to upcoming trends?
Managing Change in Traditional Spaces:
From the start of the pandemic, consumers and companies had to quickly adapt to the new reality in order to make it through. With retail stores closed, consumers turned to e-commerce to cover their needs as well as to other traditional spaces such as local convenience stores, grocers or pharmacies.
What initially seemed like a short-term solution, feels more like a new norm a year later and leaders being called on to manage this change are still unsure how permanent this transformation is going to be.
Through our conversations, 3 themes emerged:
The changing role of local pharmacies
Managing portfolios in discounters and convenience stores
Renewed pressure from the major multiples
1. Future of Pharmacies
The aggressive entrance of grocers and e-commerce platforms in categories historically served by independent pharmacies has brought skepticism and conflicting views around the future of the channel for health & beauty. During the last year, with consumers shopping local and big retail pharmacies closed, categories such as vitamins, supplements, probiotics, and well-being products performed well, while sales of some regular medicines and over-the-counter categories (e.g., cough & cold) lagged.
How does the trend impact Health & Beauty Suppliers?
Who is
impacted
by this?
Whilst the channel may not have the same scale as grocery or the major pharmacy chains, it is an important driver of revenue for many suppliers.
Suppliers with a focus on health & wellness will be impacted to an even higher degree given the importance of this channel.
Store owners have been impacted by the trend. Seeing new ways of working through the course of the pandemic, and distinct categories performing better and/or worse than before.
How can suppliers adjust to the trend?
Given the changing role of the channel, there are two key actions suppliers can take.
Firstly, this is an opportunity to revisit product offerings, formats, and pricing specific to the channel.
Secondly, there is potential to revisit ways of working and commercial routines with store owners.
Commercial teams should work to create experiences grounded in advising and educating store owners and building long-term trust collaboratively.
What are the commercial impacts?
Revisiting product, format and pricing presents an opportunity for optimizing current revenue streams.
Any move in this sense poses some risk (e.g., launching a new format in a channel), but can be mitigated to an extent through trial periods.
In the short term, there may be an investment required in cost and time to build the knowledge and design the right experience associated with your product or brand.
There’s a change in mindset of the pharmacies – they’re now more open to remote contact with our sales teams.
2. Managing Portfolio in the Discounters
Whilst 2020 was not the most successful year for discounters such as Lidl and Aldi (in part down to low e-commerce capabilities), the overarching trend of growing their share in retail is continuing and extends to other non-grocery discount brands (such as B&M, Home Bargains, and Savers). A number of suppliers saw the channel as a new opportunity, and many relied on the channel heavily in 2020.
How does the trend impact Health & Beauty Suppliers?
Who is
impacted
by this?
Whilst the trend clearly has a greater impact on those suppliers selling to the channel, there are greater impacts to those selling outside of the discounters also.
The overarching trend, and shift towards discount options in the market, has also driven a number of the major grocers and pharmacy chains to conduct range reviews – reducing their offering in an attempt to squeeze prices to match Lidl and Aldi.
How can suppliers adjust to the trend?
The main adjustment is primarily one of price, product offering and format.
Suppliers need to tackle the question of how to best serve the discounters, whilst maintaining relationships in other channels. Buying teams at the major grocers are unlikely to be happy if suppliers offer the exact same products at Lidl and Aldi for 80% of the price.
To avoid this, a number of suppliers have reacted by creating specialized formats and/or products for discounters.
What are the commercial impacts?
First and foremost, revisiting price, format and product presents a chance to optimize revenue streams.
Given the downward pressure on price associated with the trend, a number of risks arise. Suppliers risk falling into a ‘race to the bottom’, in which margin is compromised in order to maintain revenue and share.
Where margin is compromised, you may need to look again at your cost structure (channel-service model, cost to serve and sales force excellence).
Independent retailers will do well if they can keep pace with the needs of the customer and modernize and focus portfolio on health and well-being.
3. Renewed Pressure from the Major Multiples
Major pharmacy chains experienced big hits in 2020. With footfall dropping, retailers such as Boots closed stores. Whilst the economy reopens, the industry is expecting pharmacy chains to regain their position and reclaim the consumers that switched to online or local stores. Grocers on the other hand performed well, filling the gap that non-essential retail stores left in the market, refining their product portfolio, adding new categories to their offering and leveraging e-commerce more.
How does the trend impact Health & Beauty Suppliers?
Who is
impacted
by this?
All suppliers selling into the major grocers and large pharmacy chains have been impacted. The past year has seen increasing pressure with regards to product listings from pharmacy chains (e.g., Boots) and improved performance from major grocers (e.g., Tesco).
Whilst not impacting the consumer per se, the trend has seen stark changes in the way in which suppliers’ commercial teams interact with buyer teams at the retailers.
How can suppliers adjust to the trend?
Firstly, to manage increasing pressure on listings, suppliers should engage in proactive revenue growth management. With mounting pressure to ‘prove’ that a brand’s listing is worthwhile, working together with buying teams to identify promotion and pricing opportunities is key.
Secondly, suppliers could adjust their ways of working and commercial routines to manage the major retailers. A mixed in-person/ remote interaction model is being adopted by many suppliers (e.g., sending samples to buyer teams’ homes).
What are the commercial impacts?
Whilst not necessarily opening new revenue streams, the trend represents an opportunity to optimize the current model.
As the two channels represent a significant share of the market for many suppliers, proactive management and optimization is key to maintaining revenue and profitability.
Continuous efforts and engagement of retailer partner teams will be key to mitigating any risks (e.g., those associated with a change in pricing) and enable growth in the channels in the long run.
Some of the big retailers did not handle the pandemic well and do not seem in a good position to bounce back.
We need to protect the Bricks and Mortar as they represent a big part of our business.
4. Questions to Answer to Manage Traditional Channels
When assessing the challenges that the H&BA members have faced in growing into new spaces, we identified several key issues for Healthy & Beauty suppliers
- What do independent pharmacy and retail outlets look for in a supply partner? What are best practices in relationship management at this scale?
- How do you right size your commercial structure post-COVID to manage pharmacies and local independents?
- What are the current best practices in terms of ways of workings, routines, and tools for managing pharmacies and independent stores?
- What expectations do discounter buying teams have from Health & Beauty companies?
- How can you best manage pricing, promotions, and format in the discounters given your model in Pharmacy & Grocery?
- How can you best balance and prioritize the discount channels versus the service level and investment required in Pharmacy & Grocery?
- How can you optimize your cost to serve and channel service model whilst broad distribution, and profitability?
- What expectations do buying teams have from Health & Beauty companies?
- What are the best practices in key account management and negotiation for smaller suppliers?
- What are the current best practices in net revenue management (price, product format, promotions)?
- How can you optimize your cost to serve and channel service model whilst maintaining scale and broad distribution?
Meeting Changing Consumer Demands:
In an increasingly fast-paced world, with rapidly changing market trends and consumer demands, it is more important than ever for brands to place the consumer at the centre of their strategy. The high prevalence of digital media means that consumers have access to an unlimited amount of information, allowing them to make informed decisions about their purchases.
Through our interviews, we saw 3 recent trends impacting health & beauty companies:
The growing importance of sustainability
How to provide convenience without full distribution
Consumer centricity, and the importance of personalized experience-driven consumption
1. The Growing Importance of Sustainability
Sustainability is core to many brands – as reflected in their ethics, campaigns and investments. Most suppliers expect that demands for this will mature further as younger consumers spend more, concerned about the entire value chain of a product, adding pressure for slower brands to adjust and re-think partnerships, manufacturing methods and traditional ways of working.
How does the trend impact Health & Beauty Suppliers?
Who is
impacted
by this?
The majority of suppliers have or are being impacted by this trend. Brands that aspire to have a younger consumer base are likely to see a greater impact on sales and customer loyalty if they are seen to be unsustainable.
Whilst driven mostly by changing consumer sentiment, and mostly impacting suppliers, there is inevitably a knock-on impact on stakeholders across the value chain (e.g., raw material suppliers, retailers, etc.).
How can suppliers adjust to the trend?
Firstly, it is important for suppliers to understand the differing wants and needs of consumers, retailers and government with regards to sustainability and design a plan of action on the topic (e.g., understanding retailer expectations with regards to product packaging or carbon emissions).
Following this, a consistent effort of tracking (through internal KPIs or understanding external trends) and re-planning is key to remain on the front foot in understanding the trend.
What are the commercial impacts?
Adopting more sustainable practices can often require high investments from brands – in particular when first making the switch.
Alternatively, given consumer pressures, the risk of not moving to sustainable practices is high for brands. A longer-term competitive advantage can be built through increased consumer loyalty today, even if it comes at the cost of short-term decreases in margin.
75% of interviewees said that they are investing in sustainability,
55% of interviewees mentioned packaging and plastic as one of their focus areas
2. Convenience without Full Distribution
Convenience comes in various forms, from where you can purchase a product to the time it takes to arrive, where the product can be delivered, how many units you can order and the ease of returns. Consumer expectations are more complex than ever, and as competition increases across all categories, convenience is key for a brand to remain competitive. It is important to be in the right place at the right time and offer consumers a seamless and enjoyable experience across channels when purchasing.
How does the trend impact Health & Beauty Suppliers?
Who is
impacted
by this?
All suppliers are impacted by the trend, to an extent. A growing desire for convenience comes from consumers across various segments of society, connected to making a brand easy to access – both to purchase (many points of distribution), to learn about (online to offline consumer experiences) and to receive/ return (through quick and affordable delivery).
Failing to adopt more convenient practices risks putting a brand at a disadvantage when compared to the competition.
How can suppliers adjust to the trend?
Firstly, it is important to adopt a proactive approach to understanding consumer insights to track changes in consumer expectations. This can be done through leveraging data or industry news to better shape how to serve a supplier’s customer.
Suppliers need to leverage these insights and to be present where and when the customer needs them. Convenience means servicing consumers across all points of the journey through technology, process, policy and partnerships.
What are the commercial impacts?
Taking action to make a brand more convenient for consumers will inevitably require up-front and continued investment (e.g., through purchasing new data or using margin to invest in next-day deliveries, etc.). Some of this cost (e.g., next-day delivery fees) can be passed on to consumers.
Not adopting to these practices may place long-term revenue streams at risk, as brands get ‘left behind’ versus the competition. Convenience is a bit like digital: its importance is only going one direction.
Everything must stop and start with the consumer and really understand how they are changing their shopping habits, regimes, priorities, and the impact of the last 12 months.
3. Personalization and Trust
As competition keeps increasing and consumers have many choices available to them, brand identity and personalisation are becoming essential to cultivate consumer trust and develop a competitive advantage. Putting the consumer at the heart of the strategy means really getting to know your consumer and offering them an enjoyable experience when buying your product. With the vast amounts of data and new technologies available today, brands can tailor their services to different consumer needs and wants.
How does the trend impact Health & Beauty Suppliers?
Who is
impacted
by this?
An increasing desire from consumers for personalized experiences (e.g., through connection with a brand) or products is driving a key change for suppliers: they (especially those in the beauty sector) must be increasingly connected to what their different consumers want and expect.
This may warrant needing to leverage new channels (e.g., DTC E-Commerce) in order to capture more consumer data, and it may warrant a need to blur the lines between channels (e.g., with digital interactions in physical stores).
How can suppliers adjust to the trend?
Internally, new capabilities may be required to better capture and understand consumer data (e.g., through a dedicated consumer insights team), or through leveraging third-party support.
These insights can then be used to position/ re-position the supplier’s brand, product offering and digital presence – be it through more product personalization (e.g., DIY beauty enabling consumers to customize products) or through a personalized connection with the brand (e.g., through a digital consultation to personalize offerings based on each consumer’s needs).
What are the commercial impacts?
Adopting tailored services, creating new digital platforms, and purchasing extra consumer data inevitably requires up-front investment and costs.
Increased investment in these areas can open new opportunities, both as a new source of revenue (e.g., through launching personalized products through DTC) and through increasing loyalty (and therefore recurring revenue) with consumers.
Personalized services may also pay back further if accompanied by increased prices to consumers.
Consumers are not interested in ‘discounting for volume’ but they want a higher degree of personalization.
The advantage of digital is consumers are now super savvy. They can measure the real value and cost of everything they buy.
4. Key Issues to Solve to Best Meet Changing Demands
When assessing the challenges the H&BA members have faced in understanding changing consumer demands, we identified several key issues for Healthy & Beauty suppliers:
- What are best practices when it comes to sustainability? What is the most effective way to present a sustainable image to consumers and customers?
- What is the current view on sustainability held by major retailers? Do they have specific expectations or requirements for suppliers?
- What is the current regulatory environment with regards to sustainability? Is there any government legislation coming up that may impact your offering?
- What are the case studies for similar health & beauty suppliers transitioning their organizations to be more sustainable?
- What do consumers expect from brands today? Are these expectations changing and in any direction? What is the current data and/or trends showing?
- What is the end-to-end journey for my consumer? Where along that journey do I hinder convenience? How do I compare to my peers? Where do I need to invest to differentiate?
- How can you best leverage consumer data to tweak how and where you engage with your consumer or make your brand visible?
- Using this data, how can you best segment and profile your consumers to develop more tailored approaches to the market?
- How can you set your team up to be more data savvy? What skills and training can be given to help commercial teams read data on contemporary trends best?
Summary of Proposed Structure
Industry associations can play across several different spaces and offer support in a number of ways. Given the H&BA’s current strengths in acting as a networking space for health & beauty companies, and providing industry insights and professional development in sales & marketing-related topics, this is likely to remain the focus in coming years:
Other areas that may affect individual or a few members will be considered on a case-by-case basis. H&BA will support or connect members with other third parties, when appropriate e.g., Government lobbying.
1. Growing into New Spaces
TOPICS FOR H&BA:
2. Managing Change in Traditional Spaces
TOPICS FOR H&BA:
3. Meeting Changing Consumer Demands
TOPICS FOR H&BA:
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Freya Tomley
Freya Tomley is an senior manager at Integration and has been working at the London Office since 2015. Freya has a wide range of experience in implementation and project and program management across new business/product launches, M&As (post-merger integration), and efficiency-driving initiatives (e.g. internal restructuring, systems implementation, commercial planning). In the last few years, she [...]
Jamie Gale
Jamie Gale is a partner at our London Office. He has spent more than 25 years in the consulting industry and private sector. Jamie is recognized for his extensive experience in digital, developing and executing strategies that enable business transformation. He has supported clients across manufacturing, retail, telecommunications, financial services, food & beverage and transportation [...]
- On 29 May 2021
