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Fashion Institute of Technology State University of New York Cosmetics and Fragrance Marketing and Management Master’s Degree Program This 2014 Capstone research paper is the work of graduate students, and any reproduction or use of this material requires written permission from the FIT CFMM Master's Program.

Capstone 2014 White Paper accessible beauty

Authors: Jessica Dudley (L’Oréal) group leader; 2030 Global Landscape and India as they experience catch up growth Heather Cunningham (Shiseido Group USA) Global Economy: Research published by (National Intelligence Council, 2012; Standard co-leader; Natalia Espejo (Unilever); Jennifer Standard Chartered Bank predicts the global Chartered Bank, 2013). A 2011 report issued by Lacenera (IT Cosmetics); Dudley Williams economy will double by 2030 with Real Gross Ernst & Young Global Limited (EY) supports (L’Oréal) Domestic Product (GDP) increasing from this claim, estimating new middle class con- $69 trillion (USD)1 in 2013 to an estimated sumer growth of 3 billion people by 2030, rep- “I certainly am interested in accessibility, $129 trillion; however, the role of today’s resenting a growth in demand from $21 trillion clarity, and immediacy.” developed economies, including the U.S., will in 2011 to $56 trillion (EY, 2011). Maria Pinelli, Paul Muldoon (Poet) have changed. World growth will primarily be Global Vice-Chair Strategic Growth Markets driven by the emerging markets, which are for EY explains: “There is a huge potential for “I believe in accessibility. I believe in honesty and estimated to contribute 70% of total increases. middle class consumerism in rapid-growth a culture that supports that. And you can’t have New regional and bilateral trade agreements, economies.” that if you’re not open to receiving feedback.” coupled with the effects of globalization and Meanwhile, today, the American middle Mindy Grossman (Chairman and CEO, HSN) the Internet will quadruple world trade to class has already lost its distinction as the most $75 trillion from $17.8 trillion in 2012. Trade affluent middle class segment in the world, Introduction between emerging markets will account for becoming victims of rising income inequal- On the last day of the 44th World Economic 40% of the total growth, up from just 18% ity. For the past decade, U.S. GDP growth Forum Annual Meeting, leading financial in 2012. By 2030 the National Intelligence has been driven by the top 10% of earners, experts offered a “cautiously optimistic” Council estimates that continental Asia will with median middle class income remaining outlook on the global economy. One expert, surpass North America and Europe combined flat (+0.3%) since 2000, compared with 20% Laurence Fink, Chairman and Chief Executive in terms of GDP, population size, military growth in Britain and Canada in the same Officer, Blackrock, USA said, “The U.S. econ- spending, and technological investment. With time period (Leonhardt & Quealy, 2014). This omy is going to be fine;” however he warned an estimated GDP of $38.5 trillion, the U.S. disparity has prompted President Obama to that the world will exist in a state of significant economy will fall behind China, where GDP proclaim, “Inequality is the defining challenge volatility, adding, “This doesn’t mean we will is expected to reach $58.8 trillion (Standard of our time.” If this pattern persists, living end up in a bad place. But there will be a lot of Chartered Bank, 2013; National Intelligence standards will continue to converge between disruptions” (World Economic Forum, 2014). Council, 2012). the U.S. and today’s emerging markets. These disruptions stem from a variety of global Despite the changing role of the developed Individual Empowerment and Global changes that will come together to create a new markets in 2030, the U.S. will continue to play Connectivity: In 2013, more than 70% of the global landscape in 2030. a vital part in the global economy. With private world’s population owned at least one mobile With experts from the National Intelligence sector balance sheets largely fixed—indicat- device and it is forecasted that by the end of Council, Standard Chartered Bank, and the ing economic stability—Standard Chartered 2014, in Sub-Saharan Africa, Southeast Asia, World Economic Forum predicting signifi- names the U.S. as the developed country with South Asia, and the Middle East, more people cant economic changes by 2030, how will the the strongest momentum going into the next will have mobile network access than electricity average U.S. consumer’s consumption habits decade. Furthermore, it is doubtful that any at home (National Intelligence Council, 2012). evolve? Furthermore, how can the beauty individual emerging market, even China, will Technological advancement and greater access industry prepare for these changes and remain attempt to usurp U.S. global leadership as to social media empowers individuals in ways relevant to the 2030 consumer? This paper emerging market perspectives are focused previously unavailable. For example, according will introduce a new consumer group and on reshaping regional structures (Standard to the 2030 Global Trends report issued by the- consumption equation created through the Chartered Bank, 2013; National Intelligence National Intelligence Council, Muslim women research and analysis of economic and demo- Council, 2012). have recently adopted social media as a way of graphic global trends. Analysis of consumer Global Middle Class: With the number of connecting with each other in “safe spaces” to preferences and consumption patterns rein- impoverished individuals worldwide2 expected discuss issues such as women’s rights, gender force tactical recommendations for the beauty to fall below 500 million by 2030, a decline of equality, and the role of women within Islamic industry to take in order to best prepare for the 50% from 2014, per capita income levels are Law. They predict that as technology advances 2030 marketplace. expected to rise by as much as 170% in China so will connectivity, giving individuals a

1 just $85,000. These are meager gains when taking into account an 8% increase in the cost of healthcare and the cost of college education doubling that of today (De La Cruz, 2012; JP, 2012). Many Americans will face decreases to disposable income over the next 15 years; wasteful spending will not be an option for these consumers. Those who do retain sig- Figure 2 nificant disposable income will become post- recession survivors, changing their habits to protect themselves against financial instability.

Figure 1. An increase in global migration due to Americans are already changing their behav- aging Western populations will strengthen global iors in order to survive in the post-recession connectivity. U.S. economy. The Federal Reserve Bank of New York reported a decline of $24 billion stronger voice through the power of informal in credit card balances in the first quarter of Figure 3 networks, creating a shift in power away from 2014. This contrasts greatly with the increase today’s hegemonic authorities. in student loan debt, which rose by $31 billion used brand recognition as their only purchase An increase in global migration due to in the same time period, quadrupling in value influencer. Retail venues such as Sephora, aging Western populations will also strengthen since 2003. Housing loans also increased by as well as the proliferation of social media, global connectivity. In 2013, only two countries, $116 billion, primarily due to lower rates of have significantly changed the way consum- Japan and Germany, had a median age over foreclosure (Kedmey, 2014). These are indica- ers shop for beauty. There is now a focus on 45. By 2030, this number will increase to over tions that U.S. consumers are changing their in-store trial and play as well as the availability 20 developed countries, triggering migration priorities. As the cost of education, healthcare, of instant recommendations from friends and from younger economies to fill entry and lower and other necessities continue to increase, con- beauty experts. In response to this shift, the level jobs. In America, the percentage of young sumers will adapt their spending patterns. beauty industry introduced hero products such people will continue to grow through 2030; The Progressive Rationalist: Global connec- as Benefit’s “They’re Real” Mascara and Urban however, their percentage of the total popula- tivity, migration, and new economic realities Decay’s Naked Palettes, building product tion will decline from 14.0% in 2012 to 12.8%, will cause the behaviors of previously separate loyalty as the first step towards brand loyalty. creating the same need for international migra- consumer groups to collide, forming one new This model has been successful, with skin tion (National Intelligence Council, 2012). group—the Progressive Rationalists. By 2030, care and color cosmetics brands focusing on As these global trends shape the economic purchase behavior will no longer be defined creating high quality, specialized products that and demographic realities of the United States, by traditional demographics such as income meet a specific functional need. These prod- they will force the U.S. consumer to adapt to a level, age, or race. For example, regardless of ucts are used to attract consumers to a brand new environment. the reason—be it necessity or the elimination with the hope that they will build a gateway to of wasteful spending—both low income and further sales opportunities. Today’s purchase The Evolution of America affluent consumers will expect high quality and equation—which focuses on building hero U.S. Economy: With average household design at a competitive price. Through the laws products—can be described as the following income rising just 2.1% in the U.S. between of supply and demand, the decline in dispos- equation: functional need (FN) plus product 2000 and 2009, the U.S. middle class is able income for all consumers will elevate the efficacy (PE) equals purchase (Pu) (FN+PE = struggling to maintain its standard of living value of each dollar spent and each purchase Pu) (see Figure 2). (De La Cruz, 2012). According to a report will be subject to higher scrutiny than ever In order to speak to the Progressive issued by the U.S. Census Bureau, the median before. Rationalist of 2030, brands will need to build household income in the U.S. remained flat at The Progressive Consumption Equation: upon today’s equation. Functional need and $51,017 in 2012 with 15% of the population liv- The Progressive Consumption Equation identi- efficacy will be mandatory requirements on ing in poverty3, an increase from 11.3% in 2000 fies the path to purchase that the Progressive the path to purchase, but The Progressive (Hargreaves, 2013). Meanwhile, the Bureau of Rationalist will follow. This equation is based Consumption Equation takes into account the Labor & Statistics has reported an average U.S. on the historical habits of the U.S. consumer. new value of disposable income by adding in inflation rate of 2.4% over the past 10 years. In the Nineties many companies relied on higher order needs (HON). As a result, the This economic stagnation has left consum- brand cache to succeed, particularly in fashion equation will evolve to: higher order need ers wary of the future. Researchers from LIS and beauty, where logos and advertisements (HON) plus functional need (FN) plus product (a group that maintains the Luxembourg were almost more important than the products efficacy (PE) equals purchase (Pu) (HON Income Study Database) and The Upshot (a themselves. Brands such as Tommy Hilfiger, +FN+PE = Pu) (see Figure 3). New York Times website that covers policy and Calvin Klein, and Nike gained popularity for Higher order needs are outside influencers politics) reported that polls show just 30% of their underground culture and shocking adver- that create enough additional value to allow the Americans believe the country is heading in tisements. However, as technology advanced consumer to justify spending their disposable the right direction (Leonhardt & Quealy, 2014). and consumers gained more access to product income on one product over another. These If current trends continue, the projected information through bloggers, product needs include convenience, clarity around average household income in 2030 will be reviews, and online editorial, they no longer sustainability, price point, or even brand

2 name. Each individual will have their own set that the venture was profitable. In light of this Water Management Institute backs up this of higher order needs and use them to guide success, Fertman reconsidered his original claim, citing that by 2025, two-thirds of the their path to purchase. A consumer who values opinion and the first non-traditional Subway world’s population, or six billion people will sustainability will purchase more expensive location was opened. Today, non-traditional live under water-stressed conditions (Evans, products if they are recycled or organic while locations include over 10,000 gas station 2011; U.S. Census, 2014). Advancements in a consumer who places a premium on brand convenience stores, a Detroit high school, technology and the accessibility of information name will buy Kraft Macaroni and Cheese and a riverboat in Germany (Hollier, 2011). through global connectivity will continue to instead of the local market private label. During the first quarter of 2012, the Subway highlight the impact of everyday purchases on Successful brands of the future will identify chain hit two important milestones—25,000 the environment, creating highly scrutinized the needs of their consumers in order to bring restaurants across the U.S., and operations in consumption behavior. A recent GoodPurpose value through these needs. 100 countries. The current restaurant count global study revealed that 44% of global Through comprehensive research, three key is more than 41,000 locations (Subway.com, consumers feel they have more power and needs were identified as the most common and 2014). In 2013, Subway was ranked the #2 fast influence today versus five years ago (Edelman, valuable needs of the Progressive Rationalist: food chain in the U.S. and Fertman attributes 2012). The informal networks of 2030 will convenience, clarity, and cash. To successfully much of Subway’s success to their focus on provide individuals with even more power and execute the Progressive Consumption Equation local markets. They handle each market sepa- influence and the Progressive Rationalists will in beauty, products should meet a specific rately through a system of local developers who use their collective power to make a difference functional need, such as a wrinkle reducing work with franchisees to understand their local in the world. eye cream, be a top rated performer in the market far better than the corporate office. This voice will not be limited to the con- category and be ethically sourced, available for With each location specifically created to meet sumer. Social entrepreneurship is currently on same day delivery, and competitively priced. the demand of the local consumer, they achieve the rise, and not expected to slow down. New By focusing on these three key needs, beauty convenience without saturation. Subway has business models such as Benefit Corporations brands can position themselves to succeed in found that franchisee operated stores are bet- (commonly referred to as B-Corps) unite busi- 2030. ter maintained and provide superior service nesses around the world to use their collective because there is someone in each store who power to solve social and environmental chal- Convenience truly cares about that specific location (Hollier, lenges. Method, a cleaning supply brand, is a The 2013 Capstone group that presented 2011). B-Corp that illustrates how a brand can deliver Digital Marketing predicted that in the near It is recommended that the beauty industry beyond functional needs and performance. future, mobile and on-the-go purchase would build upon Subway’s unique franchisee model They have created an entire line of non-toxic be ubiquitous, and purchase points would through Hyper-Accessibility. With Hyper- homecare products that claim to be more exist everywhere the consumer was (Videira, Accessibility, companies will utilize micro-fran- powerful than a bottle of sodium hypochlorite A., Boyce, A., & Cifrese, A., 2013). By 2020, chisees who buy into brands and set up highly while using 100% post-consumer recycled there will be 2.5 billion smart phones in the localized points of distribution. This model will plastic for their packaging. world, representing nearly half of the global provide brands with a low risk strategy that will Progressive Rationalists will under- adult population (Van Belleghem, 2013), each expand their sales team beyond beauty advisors stand their individual impact on the world. providing a unique point of purchase. In this and account specialists. These micro-franchi- Consumers will not want to stop using beauty new world, where every desire is in the palm of sees can identify optimal and unique distribu- products, but they will want to do so with less the consumer’s hand, convenience will take on tion opportunities for their market, such as environmental and social impact. In order to a new meaning. local boutiques or hosted parties that would address this need, the beauty industry should One example of a brand model that has otherwise be too small for the corporate office provide clarity around three key operational identified a way to bring true convenience to to manage. In addition, micro-franchisees business aspects: sustainability, profit, and the consumer is Subway. Subway has pro- will be empowered to execute localized sales social responsibility. gressed beyond that of a typical fast food chain. techniques and offer a customized product Everlane, an online clothing retailer, has It is an established brand that has continu- assortment. Through Hyper-Accessibility, made clarity a priority, providing radical trans- ously redefined itself through innovation. The brands will be able to collect local consumer parency to the consumer. In 2012, the brand Subway brand was established in 1974 and insights across the country, identifying key shocked the fashion industry by providing a expanded to 2,000 locations by 1988 using a trends before they emerge nationally. For simplified cost breakdown of a designer tee traditional franchise model. In 1993, a local minimal capital, brands will gain a footprint in shirt. They then compared this cost with a typi- businessman from small town Iowa brought communities that were previously only acces- cal designer’s suggested retail price, revealing forth an idea that changed the Subway model, sible via the Internet. that the average designer markup was more introducing non-traditional franchise loca- than seven times the manufacturing cost (see tions with his proposal of a shop in his local Clarity Figure 4). gas station convenience store. Don Fertman, According to the Charting Our Water Everlane typically doubles the cost of creat- Subway’s chief development officer initially Future report, published by McKinsey & ing a garment and takes pride in providing dismissed the idea as he felt the combina- Company in partnership with the 2030 Water complete transparency on every product it tion of fresh food and gasoline would not be Resources Group, by 2030, there will be a creates. Everlane CEO Michael Preysman has successful. Despite the dismissal, the local 40% gap between the global supply of water shown the industry that “sometimes making entrepreneur opened his own sandwich shop and the world’s collective demand (Charting 100% profit is enough” (Soller, 2013). and returned to Subway one year later proving Our Water Future, 2009). The International According to Jessica Blotter of Fast

3 Figure 4

Figure 5

Company, “If your brand story does not authentically and meaningfully contribute to the well-being of society or the environment, your brand will not be viewed as important.” To meet the needs of the Progressive Rationalist, the beauty industry must not only continually improve upon sustainability efforts and social responsibility, but also do so in an authentic manner and effectively communicate this to consumers. Effective communication will be extremely important as brands will need to own their story, otherwise they will leave themselves open to brands such as Everlane, who will highlight any lack of clarity.

Cash Brands that fulfill the higher order needs of convenience and clarity must not ignore the importance of price point. Progressive Figure 6 Rationalists may be willing to pay a premium when certain needs are addressed, but the mine which pair they would like. Once they partnered with Andy Katz-Mayfield to create amount of disposable income will remain decide, they order directly online with their Harry’s, applying a similar online, direct- finite. If consumers trade up by paying a pre- prescription and return the samples at no cost. to-consumer model within the razor indus- mium for one product, they will want to bal- By shipping samples to individuals in their try. Harry’s has taken the notion of cheap ance that by trading down on another product homes, Warby Parker eliminates the need of a razors and elevated it to include high quality, or service. Looking beyond the beauty indus- physical retail showroom. Without costly brick design, and style. Their tagline of “respect- try, brands such as Warby Parker and Harry’s and mortar locations across the country, they ing the face and wallet, since like…right now” have proactively addressed this issue, and, as are able to offer high quality frames for just is executed through accessibly priced offer- a result have drastically disrupted their respec- $95 and donate a pair of glasses to someone in ings that are half the price of their compe- tive industries. need (see Figure 5). tition. These brands were introduced by Warby Parker entered the eyeglass indus- Warby Parker is a brand that is offering the outsiders who exploited the weaknesses of each try with the introduction of their innova- price point of a private label but the quality and industry’s stagnated distribution model. They tive online direct to consumer distribution design of a high-end brand. Competitors such created affordable products in creative ways by model. To purchase glasses, consumers as Lens Crafters have been forced to retaliate disregarding industry conventions. This is the choose up to five frames online. Samples are by creating their own $99 offerings in order to same way innovative giant Apple changed the then shipped to the consumer’s home free of compete. face of both the technology and music industry charge. The consumer has five days to deter- Warby Parker Co-Founder Jeff Raider with its own accessible-distribution model.

4 In the beauty industry, private label is fol- level of convenience. Providing radical trans- Creative Task 2014. (n.d.). Retrieved from lowing a similar model and making significant parency will give consumers clarity around http://pdl.vimeocdn.com/76649/443/ inroads, recently becoming one of the fastest brand sustainability, price points, and social 243829175.mp4?download=1&tok growing segments of the mass market. In commitments, minimizing the risk of competi- en2=1399256071_eb3d285d46348a1059f4feea1 2013, private label skin care represented 10% tive spin. Finally, brands that enter private label 46d85ff&filename=Creative+Task+2014+- of the overall mass skin care market, growing will position themselves to be available when +Edvina+Koda+Sander-SD.mp4. 4.4% from the prior year versus market growth the consumer trades up and trades down. Crowdfunding as the next marketing darling of just 1.8%. Furthermore, private label color Progressive Rationalists will no longer – Crowdfunding Entrepreneurship. (n.d.). cosmetics, while small in absolute value, saw invest in brands or products alone. The path to Medium. Retrieved April 13, 2014, from https:// an astounding 71% growth (IRI, 2013). Within purchase has changed and brands must incor- medium.com/crowdfunding-inspiration/ prestige beauty, private labels such as Sephora porate higher order needs into their business b45abf987c52. are creating changes to the way prestige con- strategy in order to create the value that the De La Cruz, N. (2012, March 15). Health sumers shop in luxury with their upcoming consumer demands. n Care Costs Will Exceed Average Household offerings of innovative single-use products, Income By 2030. Business Insider. Retrieved including sheet masks, nail polish, and eye- Endnotes May 27, 2014, from http://www.businessinsid- liner. These small, affordable products provide 1. All dollar amounts ($) are given in US dol- er.com/health-care-costs-will-exceed-average- an easy way for the consumer to test products lars, unless otherwise indicated. household-income-by-2030-2012-3. without making a large monetary invest- 2. Impoverished individuals are defined as De La Merced, M. J. (2014, January 24). A ment. Traditional wholesalers have historically those earning less than $1.25 per day. Start-Up Run by Friends Takes On Shaving been unable to offer profitable products in 3. Living in poverty is defined as a family Giants – NYTimes.com. New York Times. small sizes due to prohibitively high produc- of four earning below $23,493 per year, or an Retrieved April 11, 2014, from http://dealbook. tion costs. 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