Half-trillion-dollar cosmetics industry upended by digital, cyber risks are growing and investors should be asking the right questions

Summary

Technology and the COVID‑19 pandemic are combining to rapidly transform the beauty industry. Artificial Intelligence (AI) and Augmented Reality (AR) allow a degree of personalization that is helping offset the loss of in-person product sampling that has long been a cornerstone of the cosmetics industry. Imaging and analysis technologies can detect issues such as skin oiliness, wrinkles and dark spots in a way that previously could only be done face to face.

In addition to technology-based imaging and diagnosis, cosmetics companies are using digital transformation strategies that allow personalized products to be mixed, potentially increasing sales and margins compared to traditional products. Cosmetics companies are also using blockchain technology to track their supply chains to better meet with sustainability and eco-friendly targets.

Report

Analysis

Instead of walking into a booth for samples, customers are now sitting in front of a screen for an augmented reality session.

As with nearly every other industry, effective Digital Transformation strategies have rapidly become the most important differentiator between corporate winners and losers. While COVID‑19 upended traditional business and commerce methods overnight, the companies that have successfully adapted to the lockdowns and other disruptions were well along in their digital transformation strategies before the pandemic struck. This has been most visibly on display in the retail sector.

L’Oreal sales were down—11.7% YoY as of 1H2020 despite a 64.6% increase in digital sales. Digital is helping cushion the blow to business models that were built on in-person interaction. With this increased reliance on digital operations to drive—or even sustain—sales comes increased risk exposure to ensuring the security of IT networks and the need to increase investments in the ‘people and process’ area of cyber governance, especially at companies where staff are using technology far more than they have in the past. Most companies are not handling this well so far, and indications are that cyber security budgets will at best remain flat in 2021, if not experience cuts.

As a result of this transformation, investors and financial analysts should ask cosmetic companies’ management questions about the management of associated downside financial risks:

  • What additional risks are they assuming with almost their entire business now shifted online?
  • What resources are being invested to protect this exposure, and how are they determining if this is sufficient?
  • How are they prepared if digital operations were somehow disrupted, and what contingency plans are in place to react to a cyber breach?

These are questions and issues that were relative sideshows in the past, but in the age of Digital Transformation should be given as high priority as questions around sales, market growth, competition and other traditionally key financial metrics.

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Denis Bolshakov

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