This article first appeared in The State of Fashion: Beauty report, co-published by BoF and McKinsey & Company.

History will not repeat itself — at least, as far as the global dynamics in beauty are concerned. Over the last decade, the growth strategies of many beauty brands consisted of targeting just a handful of countries, with particular emphasis on China. That playbook is no longer as effective as it once was — fast-changing structural economic challenges, geopolitical developments and competitive headwinds are just a few of the factors that will impact how brands develop their strategies, region by region.

China’s C-Beauty Play

Nowhere are shifting conditions more pronounced than in China, beauty’s biggest growth engine in the 2010s. Foreign brands once raced to capitalise on the country’s burgeoning beauty market and, for many, it became their main driver of growth. But in recent years, select brands, from South Korea’s The Face Shop to Dubai’s influencer-backed Huda Beauty, have ceased operations in the country entirely, or like L’Oréal, have been adapting their local strategies. Brands that have yet to enter the country are weighing whether they can be part of China’s beauty market, which is projected to reach approximately $96 billion by 2027 from around $65 billion currently.

Economic challenges in the country are part of the reason why brands in China are not expecting unconditional growth. Since 2020, Covid-19 policies that restricted shopping and travel, combined with a deepening property market crisis, decelerated China’s economic growth trajectory. In turn, businesses across a range of sectors have had to readjust their growth models. The beauty industry has not been insulated from these pressure points. For instance, The Estée Lauder Companies reported that its Asia Pacific net sales declined approximately 16 percent in the second half of 2022, with much of the decline attributed to China. Over the same period, total net sales fell by 16 percent and 1 percent at the Amorepacific Group and Coty respectively, with both corporations citing China’s performance as a contributor. While China’s economy is expected to weather the turbulence, economists say it will no longer deliver the double-digit growth that attracted foreign brands over the last decade.

Increasingly, foreign brands of all sizes can expect heightened competition from local companies, primarily in mass and masstige beauty, which represent around 60 percent of the market. Such “C-beauty” brands have targeted digital strategies and affordable price points and promotions; they also operate with tight margins, or even unprofitably. As such, they are putting pressure on the margins of foreign competitors while also gaining market share — approximately 50 percent of Chinese consumers said they regularly buy domestic brands.

While local players are growing in prominence in colour cosmetics, hair care, and mass to masstige skin care, foreign brands offering premium skin care continue to have significant appeal, owing to the allure of established foreign labels in the category and limited number of domestic brands. The category is expected to record a 10 percent CAGR over the next four years.

Meanwhile, the outlook for fragrance is particularly buoyant in China. As a $2 billion market, fragrance is underdeveloped compared to other parts of the world and could more than double by 2027. The category’s CAGR is expected to be approximately 18 percent. Consumers have already begun wearing perfume more often, and in some cases, are seeking out differentiating brands.

Premiumisation will also fuel fragrance growth. Niche foreign entrants, like Paris-based Diptyque and Stockholm-based Byredo, could be big beneficiaries of this growth. The key will be for brands to build on their expertise to develop scents tailored to local sensitivities while leveraging department stores for distribution.

Foreign brands in China will need to readjust their operating models within the country, creating a localised strategy that factors Chinese traditions and consumer behaviour into each aspect of operations, from how products are made to how they are marketed, taking into consideration the increasing importance of livestreaming and social selling.

Premiumisation will also fuel fragrance growth. The key will be for brands to build on their expertise to develop scents tailored to local sensitivities.

Foreign brands could also consider decentralising operations and providing local teams with greater authority to craft strategies. For some brands, M&A with local players may make sense, including taking minority stakes, as L’Oréal did with Chinese luxury fragrance start-up Documents in 2022.

The popularity of homegrown brands will continue to rise across makeup, hair care and skin care, spurring competition over the next few years. The country’s level of growth potential will vary for foreign brands, whose portfolios will need to be increasingly segmented and tailored to national preferences and reflect consumers’ shifting purchasing behaviour.

Doubling Down in the US

The US’s $77 billion market is expected to be the biggest growth driver for many multinational beauty brands over the next few years. Its sheer size has long made it a magnet for major brands, and this is unlikely to change.

US consumer sentiment did take a knocking in 2022 and the start of 2023 as pandemic-era stimulus payments wound down, and inflation and interest rates rose amid a looming threat of recession. Nonetheless, sales across all beauty categories and price points appeared to shrug off these pressures and continued growing. US beauty sales are now projected to grow 6 percent annually to over $100 billion by 2027.

The country is a fertile environment for beauty players in hyper-segmented markets like boutique fragrance, or with distinct value propositions, such as makeup brands accommodating particular skin conditions or complaints. But low barriers to entry and trend-obsessed consumers have fuelled intense competition over the last decade. Now, achieving meaningful and profitable scale is proving difficult for many in this increasingly fragmented market. In skin care alone, the number of small and mid-sized players has mushroomed, with at least 500 brands generating annual sales of less than $200 million. Of the 30 or so brands recording more than $200 million annually, the vast majority are owned by large conglomerates.

At the same time, big brands that have not had a significant presence in North America may start expanding their regional footprints. Wholesale distribution will likely play a significant role for these and other brands, requiring updated distribution strategies that reflect recent wholesale disruption.

Not so long ago, US wholesalers had clearly demarcated strategies to serve distinct consumer bases. For example, beauty retailer Sephora and department stores like Neiman Marcus focused on the premium market, while pharmacies and mega-store Ulta Beauty handled mass and masstige markets, respectively. But beauty shoppers have begun buying across price points since they no longer associate quality with price as they once did. As a result, mass and premium brands are increasingly sold at the same stores.

To help address this shift, Ulta Beauty has partnered with Target, while Sephora has sought out big box player Kohl’s to expand its reach. Instead of segmenting retail by price point, brands are moving even more tactically when deciding both where to scale and where to build engagement. Sun care-focused skin care brand Supergoop!, for example, brought its most popular — and lowest priced — items to Ulta Beauty in 2022, while selling top-tier products at Sephora, without diluting its proposition.

Expanding through direct-to-consumer plays will be key to building or defending market share. One path forward for brands with sufficient capital is to develop physical experiential spaces. Glossier, for instance, has nine experiential stores in the country including its New York flagship, which serve as effective storytelling vehicles.

Adding More Markets to the Mix

While China and the US remain key markets, global brands should consider widening their global aperture. Two markets capturing the attention of many beauty players, albeit for very different reasons, are India and the Middle East.

India’s $14 billion beauty market is compelling for a number of reasons, not least its robust longer-term economic prospects. By 2027, the beauty market is expected to be worth $21 billion. This is leading many brands to assess the country differently than they once might have. The country, which is expected to have one of the fastest-growing economies in the world, has both an expanding middle class and disproportionately large younger generation, with approximately half of its population of 1.4 billion under the age of 30. Per capita annual spend on beauty, at around $10 today, is set to rise to around $15 by 2027, though may still lag more mature beauty markets like China, where per capita annual spend is approximately $40, and fully mature markets like the US with per capita spend of more than $200. Spending growth may well be driven by younger shoppers, who are already willing to pay higher prices for quality, and consumers generally continuing to embrace e-commerce.

While China and the US remain key markets, global brands should consider widening their global aperture. Two markets capturing the attention of many beauty players, albeit for very different reasons, are India and the Middle East.

Local retailers like Nykaa and Purplle operate almost completely online, as do many direct-to-consumer brands such as Sugar Cosmetics and Bare Anatomy. Much like in China, these agile, homegrown brands and platforms are carving out market share thanks to rising e-commerce penetration as well as innovative product development and locally tailored influencer campaigns.

To date, mass beauty represents the largest segment. Local and global names share the market, including Hindustan Unilever-owned Glow & Lovely and Lakmé, Beiersdorf’s Nivea, and Piramal Healthcare’s Lacto Calamine. While prestige brands such as Estée Lauder and Estée Lauder-owned Clinique represent less than 15 percent of the market in colour cosmetics, and even less in skin care, the prestige segment is growing twice as fast as mass and masstige. In recent years, challenger brands like Too Faced have entered India to compete alongside legacy players such as L’Oréal Paris, Estée Lauder and Clinique. While these players have little competition from local brands thus far, this could change, requiring greater agility, including localising strategies to reflect India’s vast heritage of using natural ingredients in a modern way.

Meanwhile, brands can tap new opportunities in various parts of the Middle East. While the beauty market in the Middle East and Africa combined is worth $27 billion, it is yet to reflect the growing wealth of consumers in the Middle East. Per capita annual beauty spend in the Middle East is around $50, compared to more than $200 in the US.

But by 2027, sales are forecast to reach over $47 billion as the market directly and indirectly benefits from a combination of factors already having an impact, including government programmes such as Saudi Arabia’s Vision 2030, aiming to modernise the economy, and a growing population — both local and expat — of high-net-worth consumers.

Alongside Saudi Arabia, which is projected to be the fastest-growing global economy in 2023, the other country driving beauty’s growth in the Middle East is the United Arab Emirates, where household incomes are the highest in the region. In both countries, beauty ranked as the second most-popular shopping category for 30 percent to 40 percent of female shoppers, according to BoF Insights. Recent regulatory changes, including a loosening of the requirements for local partners and franchises, have also made it easier for foreign brands to do business in the region.

Categories such as skin care (at $6 billion) and fragrance (at $8 billion) are expected to double in size, as both local and foreign brands expand region-specific product ranges. Homegrown brands such as Dubai skin care label Shiffa are leaning into their Arab roots and using ingredients like Iranian roses and Egyptian jasmine. Foreign brands have been looking to do the same. Christian Dior, for example, launched a fragrance and beauty boutique in the UAE in 2020 where its smoky oud perfumes are popular with local shoppers. In 2021, the brand collaborated with Dubai fashion designer Yasmin Al Mulla to create an incense burner only available in the region.

As in India, beauty players in the Middle East need to appeal to a digitally savvy consumer base, even though e-commerce adoption is relatively low in the region — representing, for example, only about 10 percent of sales in colour cosmetics — but is rising steadily.

Against this backdrop, the beauty growth map is evolving. A single playbook will no longer be effective for internationally focused beauty brands. The US is becoming more critical than ever, while growth prospects in China will be viewed through a different lens. Brands must now build strategies that place these markets within a broader context, re-assessing resource allocations as other markets provide greater growth opportunities. Arguably more so than ever, honing a brand’s unique value proposition in each of these countries will be critical, and potentially require dedicating more resources to bulk up that proposition. Nuanced understandings of each market will be needed, as will speed. Ultimately, successful growth strategies will be significantly more tailored and unique than in the past.

For a deeper look into the report, join us for the global livestream of The Business of Beauty Global Forum on May 30 and 31, 2023. Click here for all the details on how to sign up.