Some say crows feet and laugh lines give a person 'character.' Don't even try to sell that theory to the billions of women and increasingly, more and more men, who swear by the skin care products that they believe help them maintain a youthful appearance. For many, price is not the deciding factor in their purchases. If they think one product is of higher quality than a cheaper one offered by a rival company, they're willing to pay more for what they perceive to be a better product. The beauty industry has remained strong in good economic times and bad, and shows no signs of slowing down anytime soon.
The big names in the beauty industry achieve high gross margins between 60 and 80 percent.
Makeup of the Beauty Industry
Just what is the makeup of the beauty industry (pun intended)? Though 'beauty' and 'cosmetics' are often used interchangeably, the beauty industry includes much more than makeup. In fact, although most people think of cosmetics as makeup, cosmetics are defined as anything people regularly use to look or feel beautiful. That includes makeup, of course, but also facial products to try to improve the look and feel of the skin, such as anti-wrinkle creams, toners, firmers, anti-redness preparations, concealers, primers and more – think shampoos, conditioners, hair color, sprays, mousse, deodorant, body lotions, toothpaste and mouthwash, shaving products, sun care and perfumes. The industry is also sometimes referred to as "personal care" or "cosmetics and personal care."
Understanding the Gross Margin
The gross margin of a product, a category of products or a company as a whole is calculated by the formula:
Gross Margin = revenue from sales of product - cost of goods sold (COGS)
The gross margin is what you have left after subtracting what it cost to produce the product before you subtract overhead costs. This is useful to know because overhead costs can change, depending on office space, location, number of employees and their salaries, as well as other factors. It's easier to compare the profitability of several products using gross margin.
Most of the time, when people discuss gross margin, they're really interested in the company's gross profit margin, which is expressed as a percentage. The formula for calculating gross profit margin is:
(Revenue - COGS) / revenue
A company can improve a product's gross profit margin simply by raising its purchase price. That's why, when the cost to produce the product increases, companies typically raise its purchase price. If they don't, the product's gross margin will decrease.
Sample Gross Margins
Estee Lauder is one of the largest cosmetics companies in the world. The company has acquired numerous top-name brands through the years, and the group now includes Clinique, Bobbi Brown, Smashbox, Too Faced, Origins, Prescriptives, DKNY, Tom Ford, Tory Burch, Tommy Hilfiger and Michael Kors and many more as well as the original Estee Lauder brand. For the fiscal year ending June 30, 2017, Estee Lauder Companies Inc. had a gross margin of 79.39 percent and a five-year gross margin average of 80.19 percent.
To see how their gross margin stacks up against competitors in the industry, the gross margins of a sampling for the same fiscal year ending June 30, 2017, include:
Tracking Industry Trends
The beauty industry typically has high gross margins compared with other industries. It's also relatively impervious to economic downturns. During recessions, people still continue to buy cosmetics. Consumers are also brand loyal, so once they've found a brand they like, they stick with it in spite of the economy.
Skin care products continue to be in high demand as the population ages and are concerned with maintaining a youthful appearance. Discussions in the news regarding the effects of the sun on skin and the threat of skin cancer has propelled sales of sun care products. The men's market is growing, too, as more men want to protect their skin and maintain a youthful appearance.