To dig in on the trends and market forces that will be top of mind for US beauty investors and dealmakers in 2023, we cited opinions out of experts to bring you their predictions for the year.

During the fourth quarter of 2022, cosmetics related deal index tracked a 28.8% decline from Q4 2021 and a 12.2% and 9.2% decline from Q4 2020 and 2019, respectively. In fact, the entire back half of 2022 was a bit slow. 2022 deal activity for July through December was down 28.1% versus the same period last year and down 9.3% and 15.6% versus 2020 and 2019. This was a far cry from the beginning of the year when deal activity was down just 2.9% versus 2021 and up a staggering 85.0% and 94.1% versus 2020 and 2019.

Design with Ease

With more and more people getting back out―returning to the office, attending social gatherings, etc.― a growing demand is anticipated for beauty products in 2023.

Despite a relative decline in deal activity in the back half of 2022 and some consensus that the US economy will move into a mild recession in the early part of 2023, industry executives and dealmakers, alike, remain surprisingly optimistic about the prospects for beauty in 2023.

1. Beauty M&A Will Start Slow with Potential for a Strong Year

It is expected that beauty deal making in 2023 to get off to a slower start as sellers assess the macro and market environment, as well as their own holiday performance and momentum before launching any capital raising or sale plans. Demand and supply factors could drive significant activity as the year progresses―continued strategic intent towards M&A, the pipeline of deals waiting to come (or return) to market, and the meaningful number of maturing private equity investments needing exits to lock in returns. Investors will watch holiday sales, supply chain, and retail reorders for brands, and greater stability in the economy and credit markets will drive more M&A with confidence.

2. An Evolved View of Skin and Hair Health Will Dominate M&A Activity

Two of the top three health and beauty priorities for consumers in the coming year are skin and hair health. We believe this will translate to M&A activity in those areas, but in an evolved way. At a high level, buyers will prioritize brands with proven technology driving efficacy and those that advance their ESG agendas, while we see specific areas such as clean SPF, microbiome-focused products, biotech ingredients, beauty supplements, and hair loss solutions gaining increased attention. The convergence of beauty, wellness, and clean science will continue to bring categories like women's health to the forefront.

3. Landscape Shifts Will Affect Strategic and Financial Buyer Channel Preferences

M&A playbooks in beauty will continue to adapt to the shifting landscape. Buyers looking for brands with focused omnichannel distribution vs. dependence on one major account, and the macro backdrop and improved quality at mass will continue to fuel greater interest in mass and masstige brands. Heading into 2023, major retail tie-ups enter their second or third year, which is ample time to assess whether these partnerships have achieved their goal to reach more consumers wherever they shop and are on track. Noted that Amazon's role in the prestige and professional beauty ecosystem gaining share with some notable brand wins in 2022 as a potential tipping point in their beauty journey.

4.Ingredient Transparency

Using words such as "clean," "organic," "safe," "natural," and other similar descriptors has been common practice in the beauty industry for years. However, many of these words do not have official, regulated definitions, leaving consumers confused on which products might be the safest options. It has been years Sephora launched "Clean at Sephora" program and the EU's Corporate Sustainability Reporting Directive started to require cosmetic companies to publish detailed information on ESG related topics as customers begins to demand more transparency in regards of ingredients they buy. This demand will further propel brands with a heritage of ingredient transparency, expanding awareness to a broader audience and cementing long-term customer loyalty. Customers will demand transparency from brands as they become even more educated on the nuances of natural ingredients and synthetic materials. Brands with a heritage of ingredient transparency and customer trust will benefit the most from this dynamic, cementing long-term customer loyalty. As such, brands seeking investment will likely experience more diligence on these topics, as investors will want to ensure products meet certain safety requirements and that the promises made to consumers are both comprehensive and accurate.

5. Proven and Proprietary Technology

The beauty industry is filled with wonderful brands featuring newly discovered natural ingredients and innovative technologies. Although many brands and products are differentiated and have something unique to offer, the true disruptors will be the brands with proven or proprietary formulations and technologies. Highly effective formulations, backed by scientific studies and credible data will earn customers' trust faster, facilitating both rapid new customer adoption and long-term loyalty. Consequently, investors will likely spend more time investigating product claims and will also want to ensure a brand's proprietary technologies will complement the ones already in their portfolios.

6.Innovative and Disruptive Business Models

As the cost to acquire customers becomes increasingly expensive, launching brands through traditional DTC(Direct To Consumer) channels requires substantial investment, rendering it difficult for new brands to expand brand awareness and scale their customer base. To alleviate some of these pressures, new brands will likely seek ways to market their brands and products to customers more efficiently. Successful new brands will likely have more of a dual pronged, content-commerce driven model, in which they will utilize their own entertaining and educational content to build community, optimizing consumer engagement and building brand loyalty. The savviest brands will lean on consumer behavior analytics to make data-driven decisions to accelerate growth and profit.

7.Mass is the new frontier for prestige beauty in the US

A clear premiumization of mass beauty in play will drive M&A transactions targeting next-gen beauty brands selling in prestige but can cross over and succeed in the mass channel. This premiumization of mass beauty comes from 2 sides. The first is driven by Sephora and Ulta's slowing growth which fueled partnerships with mass retailers (Kohl's and Target) while other mass retailers, notably Walmart, are also trading up in the category. The second comes from a new generation of brands and entrepreneurs who are no longer dreaming of being at Sephora but rather disrupting the status quo in mass by bringing some of the successful recipes in prestige (clean formulation, minimalist packaging, active social media presence) to the channel with lower price points. Think The Ordinary, Versed or Bubble, just to name a few.

8. Asian buyers, including the Koreans and Chinese, are finally a real force in the M&A landscape

Without even mentioning Japan-based Shiseido, because it is perhaps the most Western of Asian groups, a number of conglomerates have emerged as credible buyers for future sale processes. In 2022, Korean AmorePacific acquired Tata Harper, and LG acquired The Crème Shop, while multiple buyers are emerging in China, including S'Young group who acquired Evidens de Beauté, Proya, Pechoin, and several others. Sale processes in 2023 will need to include these players.

9.New beauty categories will continue to emerge, creating M&A traction

Innovation in beauty also manifests itself by disrupting new categories. An easy recent example is the anti-acne category, which was not an active M&A space up to recently: the success of a few key players is driving both fundraising (Peace Out) and M&A (Hero and ZitSticka). So, on the innovation front, founders in less visible categories are competing to make their category hot. A number of categories come to mind: feminine care, DIY alternatives to salon (across verticals: lashes, nails, hair, etc), body sculpting, etc.

10.Investors Will Remain Skittish

Investors (and strategic buyers) will continue to remain skittish in 2023 given the uncertain macro environment. This will result in fewer M&A deals, lower valuation, and a flight to quality. The high-quality brands will still receive strong interest at attractive valuations. True Beauty Ventures still remains very active as we believe in the long-term characteristics of this segment.

11.Increased Scrutiny of "Clean" and More Transparency

The term "clean" will continue to get scrutiny. Clinical and efficacy are driving the conversation, and as long as there are no standards for "clean" and different retailers have different standards, consumers will continue to be confused. Brands will move more towards "transparency" in their communications.

12. Omnichannel Will Drive Growth and Capital Needs

Brick-and-mortar will continue to gain penetration. DTC will remain expensive to acquire new customers, and brands seeking profitable growth will need to consider omnichannel strategies. Investors are seeing younger brands prioritize retail as a growth driver more than ever before. This will create additional capital requirements for brands to grow.