How Amazon is disrupting skincare, and what the beauty sector can do to fight back
The news that Amazon has launched its own range of natural, sustainable skincare products is sending shockwaves through the beauty sector.
Amazon’s new skincare brand is called Belei and it is aimed squarely at influential millennial consumers with a competitive price that is designed to test their loyalty to existing brands.
Belei products contain popular active ingredients like retinol while avoiding chemical preservatives like sulphates, parabens and phthalates. The products haven’t been tested on animals and they come in packaging made from recycled materials.
Of course the products themselves are not the whole story. Similar brands have been launched before to challenge the cosmetics giants, but in the past they have only made a small dent in terms of market share.
Amazon’s strength lies in its unprecedented financial heft, its endless streams of customer data, and its globally dominant sales platform. If Amazon’s strategy works out, Belei is set to capture significant market share in a very short space of time.
Barriers to entry
So what are established cosmetics companies like L’Oreal, Unilever and Shiseido going to do about this enormous e-commerce interloper?
Before Amazon stepped in, the likes of Coty and P&G saw off would-be disrupters with expensive celebrity endorsements, big media campaigns and continuing dominance at point of sale in the fancy retail stores. In instances where those ploys failed, they simply acquired the challenger.
But classic defensive strategies won’t work with Amazon. The internet behemoth can’t be locked out of the market or bought up because it is hugely well-resourced and sells online.
In terms of strategy, Amazon is deploying targeted online marketing and then selling to its customers directly. This is the same approach that other disrupters have taken, but Amazon is doing it on a far larger scale.
It is a radical departure from the old way of doing things, where venerable brands kept generations of high-spending customers under their spell with a combination of mystique, pedigree and exclusivity.
But smoke and mirrors won’t work on their own any more – and the cosmetics giants know it.
Amazon’s main weapon is its data. Its advanced algorithms sift through huge streams of customer information and draw out insights that describe in intricate detail how we shop and spend, and how we are likely to shop in the future.
This allows Amazon to design products that meet a clearly defined and often unsatisfied demand in the marketplace. It also has a very accurate idea of the price point that will tempt customers to part with their money.
Another factor working in Amazon’s favour is the fact that branding no longer commands the same degree of loyalty among millennials as it did with previous generations. Even the most established and prestigious brands need to work hard to align with their customers’ evolving values, or risk losing them to new businesses that were designed from the ground up to target millennials.
Millennials are pretty sceptical. They are not dazzled by wealth and celebrity in isolation. They want to see the scientific evidence when a product makes an eye-catching claim. And if the price isn’t right, they will shop around for the active ingredients that they desire.
Thanks to its data-led approach, Amazon has understood which brands deliver value in a particular market segment, and those that don’t. The fact that it has decided to leave its own name off Belei skincare products is not a sign of weakness, but of confidence in its own approach. Few prestige beauty brands would have swallowed their pride in the same way.
A longer term change in the cosmetics marketplace has also paved the way for disrupters like Amazon. Upscale cosmetics companies used to be able to muscle out challengers by dominating the point of sale at retail stores. Now the migration of customers from bricks-and-mortar retail to online is throwing the marketplace wide open.
Spurred on by anxious shareholders, some cosmetics companies are playing catch-up by investing in technology that will improve customer experience and engagement with the brand. But this does not address what is arguably the most insidious challenge to their market dominance: the looming expiry of patents.
Patented formulations have long been a precious USP of luxury cosmetics brands. These ‘secret serums’ provide compelling claims for marketing purposes that justify premium prices. But in 2020 several important cosmetics patents are due to expire, and this is likely to have a big impact on the owners’ profit margins. Copycat products will be free to flood the market, and e-retailers like Amazon are in an excellent position to compete on price.
So is there anything that the cosmetics companies can do to avoid being marginalised by this ruthless new breed of disrupter? Perhaps the easiest option is to await rescue by friendly European regulators.
In September 2018, the European Commission announced that it was launching a preliminary information-gathering exercise that may lead to a formal probe into how Amazon uses data about merchants. Unusually, it was not prompted by a complaint from a competitor.
Amazon president and CEO Jeff Bezos has brushed off antitrust concerns, pointing out that it operates in large sectors with multiple competitors, and that online sales are only a (rapidly growing) fraction of the whole market.
Bezos may have a point. Even if antitrust legislation is pushed through in the next 5 or 10 years, its progress is likely to be slow and limited. Besides, politicians and regulators rarely succeed in protecting market incumbents over the longer term; at best they delay decline.
There is one fairly obvious way for cosmetics companies to protect their futures, and that is to create innovative products. But this is one area where the industry has been dragging its feet.
That’s because conventional wisdom dictates that product innovation is slow, costly and vulnerable to copycats. Also, if a new product alters the structure or function of skin it risks being classified as a therapeutic, which then requires years of costly and risky pharmaceutical-style testing before it can be taken to market.
The net result is that most cosmetics businesses keep R&D to a minimum.
Amazon doesn’t want to spend time and money on R&D either because its core proposition is internet retail. Currently, it just re-packages existing active ingredients and focuses on marketing them well.
This would suggest that cosmetics companies have a clear edge on Amazon in the field of product innovation. But the question is, how can it be done in a way that is faster, cheaper and more effective than traditional R&D, and can it result in a product that is non-therapeutic?
New technology, new approach
New technology and a fresh approach hold the answer to that billion-dollar question.
Skin is an extremely complex organ, which is why even huge cosmetics companies struggle to develop active ingredients that actually deliver skin benefits in a scientifically verifiable way. But AI techniques and complex systems science is uniquely equipped to handle the complexities of skin. Just as importantly, it is able to address the underlying health of skin, not just the surface appearance, and do so without altering the skin’s structure or function.
By deploying a cloud computing approach powered by proprietary deep learning algorithms, scientists are now able to screen and test natural compounds much faster than traditional methods. Machine learning can identify promising ingredients hidden away in huge databases, and combine them in a way that optimises their effectiveness. Innovative development techniques of this kind are able, therefore, to deliver new product benefits for skincare brands in a way that is patent protected and based on natural ingredients. In fact, if there is one way for a cosmetics company to take on Amazon and win, it is by embracing the skincare revolution.