Thought Capital

Beyond Fundamentals: Beauty Care & Cosmetics

Jeff Mueller shares his view of the global beauty industry and what sets the leaders apart

As long-term investors, why do we see global beauty care leaders as attractive opportunities for growth? Jeff Mueller, portfolio manager & analyst for Polen’s Global Growth strategy, explains.


What stands out to you about the beauty care and cosmetics industry?

First, it’s an extremely durable industry that has demonstrated resistance to recessions in the past. Years ago, our team went on a world tour to study this industry and meet different management teams. We traveled to Japan, Korea, Europe, and across the United States. We saw many companies that sold beauty as just one of many product lines. To us, L’Oréal and Estée Lauder stood out as the two dominant companies with the deepest focus on this space.1


What makes these two companies so unique?

They are the leaders with the largest market share. L’Oréal has a significant portion of its business in “mass market” products and also has a luxury category. Estée Lauder focuses exclusively on luxury. They both meet our Polen investment guardrails, and their sole focus is beauty care and cosmetics.

Many consumer packaged goods companies have seen decelerating revenue growth, and I think it’s primarily because of a shift in the basis of competition. In contrast, L’Oréal and Estée Lauder have seen their oldest and largest brands re-accelerate growth and gain market share. It’s not an accident that this has happened. They were early adopters of e-commerce, and they leaned into high-margin areas like skincare and active cosmetics. Additionally, they were pioneers in using social media to build their brands effectively and leverage influencers to sell their products. These factors have helped them to leap out ahead and carve out a globally dominant position.


Polen’s research on consumer product companies suggests that the barriers for new entrants to use social media to successfully launch a new cosmetics brand are lower than ever. And yet L’Oréal and Estée Lauder have seemed to insulate themselves from that challenge. Why is that?

There are a couple of reasons. It’s true that the barriers to entry have come down. But what we see is that the barriers to scale globally have gone way up. L’Oréal and Estée Lauder have a long history of acquiring small start-ups they believe have the potential to be global brands. They can buy small, local brands that might be gaining popularity through social media in a particular geography and effectively plug them into the company’s distribution network and market them globally.

Marketing is a major competitive advantage for both L’Oréal and Estée Lauder, a trait they share with Nike. They take a substantial portion of their profits and cash flow and re-invest it back into the business in the form of marketing. To put some numbers around it, L’Oréal earns almost €40 billion in revenue a year. They spend about 30% of it on sales and marketing, often promoting these smaller brands globally.

Another dynamic we see is that more consumers are “trialing” new beauty products—again because those barriers to entry are low—but we’re not seeing that always equate to high re-purchase rates. It’s one thing to enter an industry, but it’s quite another to scale a product up and sustain it successfully. One could argue that a decade ago, it was more guesswork for L’Oréal and Estée Lauder to parse which of these new entrants would become the next big brand. But now, with the ability to measure likes on social media, they have a very good idea of what the future winners might be.


Given the ubiquity of mobile phones and social media today, can you quantify the impact on the beauty care industry?

It’s hard to pin this down with precision, but we absolutely know it has an impact. Humans are taking more pictures of themselves today than they have at any other time in the history of humanity. We see that as a strong secular shift, which is helping other businesses like Align Technology, which makes the Invisalign teeth straightening technology. The bottom line is that as people take more pictures of themselves and each other, they want to look great and feel confident. Whether it’s skincare or cosmetics, the industry leaders are there to support that desire.

Important Disclosures
1’L'Oréal and Estée Lauder are holdings in the Global Growth portfolio as of March 31, 2023.

This information is provided for illustrative purposes only. Opinions and views expressed constitute the judgment of Polen Capital as of May 2023 and may involve a number of assumptions and estimates which are not guaranteed and are subject to change without notice or update. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness or accuracy. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients. This document does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction.

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