The beauty battleground: The sprint to win on services (2024)

The beauty industry, especially beauty services, was significantly affected by the COVID-19 pandemic—but it is bouncing back. The postpandemic industry is characterized by five important trends: growth in beauty players offering both products and services, a shift in customer preferences to specialized over generic, growth in advanced procedures, the increased centrality of customer experiences, and shifts in the labor market for beauty service professionals (for example, hairstylists and aestheticians).

Companies looking to consolidate or expand their positions in this highly dynamic and innovative industry will need to understand these trends and respond to them.

The benefits and considerations for companies looking to capitalize on these opportunities differ. Beauty service providers such as salon owners have the opportunity to diversify their revenue streams but will need to expand product sales, develop partnerships with brands and retailers to help expand their footprints, and upskill their employees. Retailers, on the other hand, have the opportunity to deepen relationships with customers and drive foot traffic to stores, but they will need to develop a clear strategic objective, build a unique customer experience, and carefully consider their capital expenditure requirements.

Recent upheavals and ongoing technological innovations are leading to innovative offerings in both products and services across the industry. Companies that are slow to develop a robust services strategy that adapts to and capitalizes on this new battleground are at risk of falling behind.

The US beauty services market

The beauty services market encompasses three key service segments—hair, skin (including injectables, makeup, tanning, and waxing), and nails—as well as beauty merchandise sold in salons. Market growth was strong in the years immediately before the global pandemic, with a CAGR of 4 percent between 2017 and 2019.1“Hair & nail salons in the US,” IBISWorld, August 16, 2021.

The beauty industry was among the hardest hit during the COVID-19 pandemic, which forced temporary closures and caused an estimated 20 percent of salons to shut down permanently. In 2021, sales bounced back to about 70 percent of prepandemic levels, corresponding to an estimated market value of $57 billion (Exhibit 1).

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We predict it will take another six years for sales to return to prepandemic levels, despite an estimated CAGR of 7 percent (Exhibit 2). Shifting market dynamics, which we will explore in the next section of this article, will cause growth rates to vary substantially by segment. We expect strong growth in more specialized offerings, such as luxury spas and salons, nonsurgical skin services, and specialized hair services. Salon chains and traditional nail care experiences will likely recover more slowly due to an increase in both labor costs and the availability of at-home substitutes with near-professional results.

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The beauty services industry has long been fragmented, driven in part by historically low barriers to entry. In 2021, enterprises with more than 250 employees nationwide made up only 11 percent of the market (Exhibit 3).

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We expect this fragmentation to increase, enabled by the availability of low-cost social media marketing and the attractive terms offered by rent-a-space salons. Anyone looking to enter, maintain share in, or grow in the beauty services industry will need to understand the drivers of this fragmentation to compete with the ever-expanding network of small and midsize businesses.

Understanding the future of the beauty services industry

Five macro trends will affect the growth of the various beauty services segments over the coming years (Exhibit 4).

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1. Growth in beauty players offering both products and services

Merchandise sold at spas and salons will continue to grow faster than the overall services market. We estimate that product sales from inside salons will grow from roughly $4 billion today to $6 billion by 2027. This growth is fueled by both service providers and beauty retailers. A number of brands that have traditionally focused solely on services have created complementary product offerings. Similarly, retailers continue to experiment with service offerings that help them establish deeper, trust-based relationships with customers while also providing opportunities for education and cross-selling.

2. Specialized over generic

Service providers are developing and marketing increasingly specialized services with the goal that customers will feel that the menu of offerings is designed “for me.”This has led to the continued growth of specialty salons, such as salons targeting men or designed for patrons with textured hair.

3. Growth in advanced procedures

The types of services performed by beauty professionals are also becoming more advanced, particularly in skin-related services such as injectablesand treatments with either machines (for example, lasers) or chemicals (for example, peels and lash lifts). This is driven both by a rising bar for efficacy, leading to more advanced offerings, and by a pandemic-related increase in customers’ confidence in their ability to perform simple services for themselves. As a result, service providers must offer treatments with results beyond what customers can achieve at home.

4. Centrality of customer experience

Enhancing the customer experience is becoming paramount to winning in the beauty services space—as it is across the retail sector. Unique and premium service environments are capturing customer loyalty and share of wallet, while no-frills express services will struggle to win back the hearts and minds of customers who are newly aware that they can perform simple hair coloring, facials, and nail services at home.

5. Shifts in the service-provider labor market

The COVID-19 pandemic has caused long-lasting disruption to the service provider market. The pipeline of new talent has been particularly affected, with professionals with less than three years of experience making up 75 percent of those who left the industry.2“Barbers, hairstylists, and cosmetologists,” Occupational Outlook Handbook, Bureau of Labor Statistics, updated April 18, 2022; “Skincare specialists,” Occupational Outlook Handbook, Bureau of Labor Statistics, updated April 18, 2022; interviews with former employee and marketing director of a beauty services provider. Two years later, this has led to labor shortages, especially in the growing field of aestheticians. This shortage has led to rising labor costs across beauty services and increased competition for talent.

What should players do?

The five trends laid out in the previous section will fundamentally reshape the beauty services industry. Companies will need to both understand these trends and evolve in response.

Fortunately, the continued blurring of the line between beauty products and services unlocks a number of different opportunities.

Recommendations for service providers

Beauty service providers looking to thrive in this evolving market should expand product sales, develop partnerships with brands and retailers, and upskill their employees.

Invest in expanding product sales to protect against increasing labor costs and the rise of DIY. Service providers enjoy an authoritative position when it comes to selling beauty products because of their firsthand insights on customer needs and because of their trust-based relationships with their clients. Cross-selling beauty products can also be more financially rewarding. Beauty products tend to have higher margins than services, with average product margins of 55 to 80 percent for products, compared with 5 to 20 percent for services (Exhibit 5).

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In our experience, the companies that succeed in growing their product sales into a meaningful revenue stream are those that invest in three enablers: increasing the amount of retail square footage, paying special care to the visual merchandising of products, and offering an appropriate breadth within their product range.

Partner with beauty brands and retailers. Partnerships with brands can offer service providers access to marketing and operational support—such as training on new products and techniques, on-site marketing, and volume discounts—in return for carrying or exclusively using the brand’s products.

Service providers should consider which brands and retailers align best with their strategic objectives. For example, Benefit Cosmetics partnered with Ulta Beauty and Macy’s to provide brow services in more than 1,500 locations,3“Services,” Benefit Cosmetics, accessed May 13, 2022. dramatically expanding its geographic footprint.

Train employees on how to sell products. Training service providers on how to effectively cross-sell products—and providing incentives for them to do so—is critical. Service professionals may be uncomfortable engaging in “selling,” but formal training using roleplaying scenarios can help to overcome this barrier. A well-structured incentive program that offers financial or nonfinancial recognition to employees who reach sales targets can also boost profit and increase employee satisfaction.

Recommendations for beauty brandsand retailers

Beauty brands and retailers looking to capitalize on complementary service offerings will need to develop a clear strategic objective, focus on customer experience, and carefully consider their capital expenditure requirements.

Set a strategic objective. A clear strategic objective will influence the scale and offerings of beauty services. Beauty brands and retailers typically use services as a marketing tool to generate buzz and brand awareness. In these cases, the profitability of the services is less important than propelling lift on product sales. Companies that have used services as a marketing technique include Amazon, which opened a hair salon in London to showcase its technology innovations, and Old Spice, which opened a barbershop that employed celebrity barbers and doubled as a content studio for digital and social media.4Joseph DeAcetis, “Old Spice barbershop launches with celebrity barbers and content studio,” Forbes, April 20, 2021.

For some, offering services enables access to first-party data for product testing. Since Google announced that it will begin blocking third-party cookies in 2023, more beauty brands and retailers have been turning to first-party data sources to learn more about their customers. For example, Madison Reed opened 12 Color Bar locations prior to the pandemic, which provided primary data critical to developing new products and driving improvements in customer experience. The company has since announced plans to expand to 80 locations by the end of 2022.5Faye Brookman, “Madison Reed is well poised as hair color becomes beauty’s next battleground,” BeautyMatter, March 17, 2022.

Finally, retailers looking to use services to drive incremental profit at scale should take into account the time needed to build up the service-professional talent pipeline and establish the consistent service levels needed to be both competitive and profitable. Given the current service-professional labor shortage and the competition for talent following the disruptions of the pandemic, this is a long-term objective that should be approached strategically.

Drive foot traffic to physical stores with experiential offerings. While cosmetic counters at department stores have offered makeup services in exchange for product purchases for decades, recent next-generation beauty havens have fueled customer expectations for a new test-and-try playground.

At Sephora’s 700-plus locations in the United States, for example, experiential studios offer services ranging from touch-ups and makeovers to quick-fix facials.6“Happening at Sephora,” Sephora, accessed May 13, 2022. Ulta has also doubled down on customer experience. Dedicating a meaningful portion of each store to The Salon at Ulta Beauty7Annual report pursuant to section 13 and 15(d), US Securities and Exchange Commission filing, Ulta Beauty, March 25, 2022. is enabling the company to live up to its mission of “all things beauty, all in one place.”

Find the right service to minimize footprint. Enabling services within retail stores requires significant capital investment and dedicated floor space. Companies should consider which low-capital-expenditure services can drive foot traffic while simultaneously minimizing floor space requirements. Examples of services with minimal store infrastructure investments include makeup services, waterless hair services such as blowouts and styling, and 15-minute injectables.

While the beauty services industry was one of the hardest-hit industries during the pandemic, it is firmly on the path to recovery. Changing dynamics present an opportunity for new players to emerge as winners in the fragmented market. Those that can capitalize on the increasing convergence in products and services will be well positioned to thrive in the newly emerging beauty services landscape.