TO: John Smith.

CEO
FROM: Christopher Stone
SUBJECT: Business Model Disruption and its Impact on the Beauty Industry
DATE: August 4, 2018

In an industry, disruption occurs when one of the four core elements of a business model are
threatened. These elements are the customer value proposition (CVP), the profit model, the key
resources, and the key processes of the industry. This memo will focus on defining the current
state of these four elements in the beauty industry, how the model is being disrupted, and what
incumbents can do to compete against the disruption.

To begin, it is important to understand the business model of the beauty industry. The CVP
focuses on two main product aspects: benefit magnitude and benefit timing. Benefit magnitude
(Covergirl) refers to the extent which the product can provide the desired benefit over the
competitors’ verse benefit timing (Aveeno) which focuses on providing the products key benefit
in a shorter time than competitors. Examples of both CVP’s can be found in Appendix I.

The profit model in the beauty industry focusses on high volume and low costs. Of the 9
consumer packaged goods brands on the Forbes top 100 brands (appendix II) list, 5 are in
Beauty. The brands that have the highest sales are typically mass-market products like Gillette
and L’Oréal with most products having a price below $10. Due to the volume that beauty
products are sold, many companies currently in this industry benefit from economies of scale.
These benefits arise from the ability to manufacture high volumes of products in a single facility
as well as selling products in multiple categories, i.e. P&G can make and ship shampoo,
bodywash and conditioner from the same facility and ship them on the same truck.

The key resources for the beauty industry are commodity chemical and sales channels. Many
chemical suppliers work to tailor their product to the beauty industry; for example, Dow
Chemicals has a site devoted to its beauty and personal care division and markets their ability
to monitor trends in this industry to provide the most value to consumers. Other companies,
such as Procter and Gamble, have vertically integrated and developed their own chemical
branch to service their company and others in the industry (Appendix III). To support a mass
market brand, beauty companies distribute through many sales channels (Appendix IV). No
single channel has a lion share of sales with the largest channel being grocery retailers at just
over 20%. It is also important to note that most of sales are from brick and mortar retailers; only
15% of sales are online of direct to consumer.

Finally, the business model for the beauty industry has 2 key process, manufacturing, and
marketing. A typical company in this industry will rely on industrial scale, internal production of
their products: L’Oréal manufactures 85.9% of its products internally10. This provides the
company with an economy of scale since a single facility can manufacture a wide range of
products. From a marketing standpoint, beauty companies are some of the top spenders. Of the
brands on the Forbes top 100 list, 3 of the top 4 brands for company advertising are beauty
brands (Appendix II). The combination of large scale manufacturing and heavy advertising helps
support the volume-based revenue model used by the beauty industry.

The business model described above is being disrupted on multiple fronts. To begin I will
analyze how the CVP is changing in this industry. The disruption to the model is occurring as
consumers care less about benefit magnitude and more about the products effect on long term
health. Databases like Skin Deep® provide consumers with information on the health effects
associated with the use of beauty product. Their website (Appendix V) provides a safety rating
for products based on the adverse health affects associated with the ingredients. As a result,
disruptors have formulated products free of potentially harmful ingredients and built their CVP
around this benefit (Appendix VI). Consumers that desire this CVP are a growing, with over 50%
of adults believe natural or organic ingredients are important in their cosmetic products11; this is
not a benefit provided by most incumbent beauty products.

The beauty industry is also facing disruption along their key processes. The ability to easily
share content over the internet allows consumers to share their experience with products
directly with each other. This has switched how consumers find information on beauty products
from advertising produced by beauty companies to influencers on social media. In 2017, the top
10 influencers in the beauty industry had a total reach of 135 million12. These influencers create
content related to their experience with a variety of products across the beauty industry. As
influencers gain notoriety, many will start their own brands or partner with existing companies.
This disruption changes how consumers make a purchase decision on a product and disrupts
the traditional marketing function in beauty.

Another point of disruption in the beauty industry is focused on the key resource of sales
channels. There are high barriers of entry for a disruptor to enter the existing sales channels of
brick and mortar retailers which has forced disruptors to enter to market through e-commerce.
Companies like Dollar Shave Club and Birchbox disrupted by providing direct to consumer
subscription services. This allowed them to lower prices by removing the costs associated with
maintaining brick and mortar retail channels and increase convenience by automatically sending
the consumer product. Birchbox provides additional disruption by changing the products
featured each month; this allows new products to be distributed at a very low cost. Finally,
companies like Wix and Weebly make it very easy to create an ecommerce site. Appendix VI
shows how products following the new CVP can be purchased through the company’s website;
those shown in appendix I much be purchased through a traditional retailer still.

Although the beauty industry is facing disruption, there some distinct advantages that
incumbents have against disruptors. First, the profit model used by disruptors requires a
premium price point since many disruptors do not have the high sales volume and low costs of
the incumbent. This profit model makes it challenging to appeal mass market consumers. In
fact, 16% of consumers using mainstream brands are concerned about the ingredients11. These
consumers agree with the benefits provided from the disrupting CVP however are deterred by
factors like price. Incumbents can reinforce their hold on this market segment by modifying
product formulations to remove ingredients causing safety concerns.

Second, the online sales strategies used by disruptors are an advantage but not a unique one.
Incumbent companies can also create subscription services for their own products. In fact, by
offering a range of beauty products across categories, incumbents can provide a more products
on a single subscription. This is an advantage over most subscription services, like Dollar Shave
Club that focus on one to two categories.

Finally, incumbents can acquire disrupting companies. Incumbents have access to a large
manufacturing and distribution network that can provide disruptors with the economies of scale
necessary to reduce costs. This allows for price reduction enabling the product to reach
segments of the market that are not currently served by their products. Furthermore, the
incumbent can set price so that the new products provide higher margins than the existing ones.
Although disruption is high in the beauty industry, incumbents have several ways they can
compete to preserve their large share of the business.
APPENDIX I: Current Customer Value Propositions

Benefit Magnitude: Covergirl Lashblast Fusion Mascara1

1
"LashBlast Fusion Mascara." COVERGIRL. Accessed August 01, 2018.
https://www.covergirl.com/en_us/beauty-products/eye-makeup/mascara/lashblast-fusion-mascara.
Benefit Timing: Aveeno® Daily Moisturizing Lotion2

2
"AVEENO® DAILY MOISTURIZING LOTION." AVEENO®. Accessed August 01, 2018.
https://www.aveeno.com/products/daily-moisturizing-lotion.
APPENDIX II: Consumer Packaged Goods Brands in Forbes top 100 List3

3
“The World's Most Valuable Brands." Forbes. Accessed July 28, 2018.
https://www.forbes.com/powerful-brands/list/#tab:rank_industry:Consumer Packaged Goods
APPENDIX III: Examples of Chemical Providers in the Beauty Industry

Dow Chemical Company Beauty and Personal Care Site4

Procter and Gamble Chemical Homepage5

4
"Beauty and Personal Care." Dow Consumer Solutions. Accessed July 29, 2018.
https://consumer.dow.com/en-us/industry/ind-beauty-personal-care.html.
5
"Oleochemicals Industry Applications." P&G Chemicals. Accessed July 29, 2018.
https://www.pgchemicals.com/industry-applications?q=personal-care.
APPENDIX IV: Distribution of Beauty and Personal Care Sales by Channel6

6
Fung Global Retail & Technology. Distribution of beauty and personal care sales in the United States in
2011 and 2016, by distribution channel. https://www.statista.com/statistics/754012/distribution-channels-
beauty-personal-care/ (accessed 8/4/18, 12:53 PM).
APPENDIX V: EWG’s Skin Deep® Database7

Product Scores for Mascara made for Covergirl

7
"Search Results." EWG Skin Deep Cosmetics Database. Accessed August 04, 2018.
https://www.ewg.org/skindeep/search.php?query=burts bees lipstick#.W2IpPdJKiUk.
Product Rating for Mineral Fusion Mascara Showing that It Meet all EWG Requirements
APPENDIX VI: Benefits Provided by Disruptor Customer Value Propositions

Mineral Fusion Volumizing Mascara: Claims based on Product Formulation and EWG Certified8

8
"Volumizing Mascara." Mineral Fusion. Accessed August 04, 2018.
https://www.mineralfusion.com/collections/cosmetics/products/volumizing-mineral-
mascara?variant=1234459027.
Vermont Lotion: Demonstrating claims of non-synthetic ingredients and made by hand9

9
"3.4 Oz Natural Unscented Hand Lotion." Vermont Lotion Company | Natural Skin Care. Accessed
August 04, 2018. https://www.vermontlotioncompany.com/product-page/3-4-oz-natural-unscented-hand-
lotion?ref=StoreYa&utm_campaign=storeya2&utm_medium=trafb&utm_source=stry&utm_term=kwd-
118237638.
 Additional Sources
10
L’Oréal Group. "Manufacturing - L'Oréal Group." L'Oréal, World Leader in Beauty: Makeup,
Cosmetics, Haircare, Perfume - L'Oréal Group. Accessed July 29, 2018. https://www.loreal.hk/en-
hk/careers/whoyoucanbe/operations/op-fabrication.
11
Vyleta, Jana. "Natural and Organic Personal Care Consumer - US - December 2017." Mintel |
Academic. Accessed August 4, 2018.
12
"Top Influencers of 2017: Beauty." Forbes. Accessed August 04, 2018. https://www.forbes.com/top-
influencers/beauty/#2e4f96843378.