In 2022, the beauty market—defined 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 financiers 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.
This article is a collaborative effort by Imran Amed, representing views from the Business of Fashion, and Achim Berg, Sara Hudson, Kristi Klitsch Weaver, and Megan Lesko Pacchia, representing views from McKinsey’s Consumer Packaged Goods and Retail Practices.
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 definitions of beauty morph while their perceptions of everything—from the meaning of sustainability and the role of influencers 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 offline stores influence 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 significant 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 offerings 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 significance 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.
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 effective and require brands to reassess their global strategies and introduce greater nuance and tailoring.
Geographic diversification 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).
But in both markets, growth will be harder to come by for individual brands, not least due to fierce local and foreign competition. Meanwhile, other countries and regions, including the Middle East and India, are ready to step into the limelight, offering distinct potential for specific 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.
The next few years will be a dynamic time for the beauty industry, filled with opportunities and new challenges. Its high profitability, 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 differentiated value proposition amid a saturated market and increasingly sophisticated consumers. Key dynamics will include the following:
The years ahead will offer 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 flourish, if they develop and execute tailored strategies that reflect the changing world of beauty.
Download the full report on which this article is based, The State of Fashion: Beauty (PDF–10MB).
Achim Berg is a senior partner in McKinsey’s Frankfurt office, Sara Hudson is a partner in the London office, Kristi Klitsch Weaver is a senior partner in the Chicago office, Megan Lesko Pacchia is a partner in the New Jersey office, and Imran Amed is the founder, editor in chief, and CEO of the Business of Fashion and an alumnus of McKinsey’s London office.
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.
