Tariffs are a new beast for beauty to grapple with.
While the global financial crisis in 2008 was primarily a shock to demand, and the pandemic in 2020 was a shock to supply, tariffs are a shock to both supply and demand, according to research from Boston Consulting Group presented at the Beauty CEO Summit.
“We’re increasingly concerned about their impact on consumer confidence, consumer spend, consumer wealth, the competitiveness of U.S. businesses who are now facing increased input costs and perhaps, most importantly, we’re concerned about the U.S. as potentially a slow growth economy going forward,” said Jeff Lindquist, a partner at BCG.
Drilling down to tariffs’ impact on the beauty category, he noted that the U.S. imports far more beauty products than it exports. Since tariffs are a tax on imports, they’ll make the cost of everything from raw materials to ingredients to packaging and finished goods more expensive.
While the U.S. and China just agreed to reduce sky high tariffs for 90 days as they continue negotiations, before this on average beauty businesses in the U.S. faced a 30 percent tariff on their imports, nearly half of which was driven by the elevated China tariffs. This was 27 percentage points higher than the 3 percent baseline tariff at the beginning of this year.
“This 30 percent rate is below other sectors like fashion and luxury and consumer durables, which have been especially hard hit, but it’s well above many other consumer categories including cars and electronics and packaged foods,” Lindquist said. “If there is a deescalation in the tariff rate with China that could materially bring down the overall tariff rates for our industry.”
If the 30 percent rate holds, that could also weigh on beauty companies’ P&L, he added.
“Sixty-five percent of the cost of goods sold at the average U.S. beauty business is comprised of imported materials. Those costs are now 27 percent more expensive. If you flow that through to the COG for the average beauty company that’s an 18 percent higher COG than just a few months ago. That’s a material drag on profitability,” Lindquist said.
As for how beauty brands can measure the level of disruption they may face, he pointed to scale, margins and supply chain profile as firms with greater scale and greater margins have greater strategic optionality in this context.
The other factor is consumers’ willingness to pay and the price range of the portfolio.
Raphaël Blanchin, managing director and partner at BCG, studied credit card data for the past 18 months and found that while beauty is the most resilient category after pet care, it has been impacted.
“Since the second half of 2024, you’re seeing slow growth, then flat then decline in beauty specialty,” he said.
As for what can be done in the short term, Lindquist suggested setting up a cross functional command center for a centralized team that tracks tariff exposure; running targeted scenario planning; shifting supplier mix, and protecting cash at all cost.
Blanchin added: “There are ways to continue attracting consumers and capture their higher willingness to pay, so pricing dynamically in some categories is still an option. Secondly, there are some pockets of demand where companies can proactively focus their marketing efforts, be faster than competition and continue to address those customers.”
