Like most segments of retail, beauty has taken a hit from the pandemic. Net sales at Ulta fell by nearly 8% in the third quarter and the beauty retailer remains one of the top players in the space. Unlike apparel, though, which has suffered a deeper decline and will face a longer recovery, beauty could be back to 2019 levels in the U.S. by the first half of 2021, according to McKinsey & Company's State of Beauty 2021 report.

China's beauty market recovered in 2020, while some other geographies won't rebound until 2022, but a more developed e-commerce channel is expected to help the U.S. bounce back next, Sophie Marchessou, a partner in McKinsey's global beauty practice, said during a roundtable discussion of the report Wednesday. 

In the near term, categories that have suffered will continue to do so, most notably color cosmetics, which has been on the decline for some time now. The global makeup category will lose share from 2019, falling to 14% of total retail beauty sales in 2021 from 15%. Fragrances will also be down (from 11% to 9%), due mostly to travel retail being "basically shut down," Marchessou said. The category is also seen as more of an investment purchase and, if anything is true of 2020, it's that most people aren't going out enough to justify those purchases. 

As to color cosmetics, the pandemic has simply worsened an existing trend. 

"I think it's pretty intuitive reasons why color cosmetics would be down because of the pandemic, but all the mask wearing, fewer social occasions, not being able to try products in person at department stores or specialty retail in the U.S., for example, have made it harder for color cosmetics to stand out," Marchessou said. "Also we've looked recently at innovation within color cosmetics and you do see less innovation happening in the past three years than you had in the decade prior."

Denise DiCanio, director of consumer perception research at Estée Lauder, has seen similar trends in makeup during the pandemic. The consumer perception research team at the beauty retailer has had to pivot during the global health crisis and collect insights from consumers virtually, through video Q&As and eye-tracking technology, among other methods. 

Even with the shifts, DiCanio has been able to collect information from consumers on how their makeup and skincare routines have changed, how they're feeling about the pandemic, and what they expect their spending patterns to be in the future. 

"Makeup is struggling because of mask wearing, you see that overall. You see that skincare is doing really well, sometimes better than expected. It's being able to understand why those things are happening, how people are being impacted and why, but also looking at the whole process and saying, 'Where's our opportunity?'" DiCanio said, pointing to Zoom calls and other virtual ways people are going about school or work. "There are still opportunities for makeup, it's just in a different format. It's really a way of appreciating the opportunities that you have, understanding the pitfalls and trying to be responsive to those the best you can."

A shifting channel outlook

As expected, e-commerce has been a boon for beauty retailers during the pandemic, and McKinsey expects the shift to digital spending to only increase. 

Emily Gerstell, an associate partner in McKinsey's global beauty practice, said the share of retail sales that come from e-commerce is expected to surge from 10% pre-COVID to 19% post-COVID. Almost every other channel for buying beauty products, including drugstores, department stores and mass retailers, will decrease.

Fortunately for beauty players like Sephora and Ulta, their share of the market is expected to simply shift partially from in-store to online. Beauty specialists and direct were the only channels not predicted to decrease post-COVID.

As consumers have pivoted more of their purchases online while stuck at home, it's no surprise that the same would be true for beauty. More consumers are expected to buy skincare and makeup products online going forward, and more will also buy via social media, though 91% of U.S. consumers still don't use social media shopping.

The lack of in-store shopping hurts some categories more than others. When consumers can go back into stores and play with products, cosmetics will likely fare better, according to Gerstell. Foundation matching, for example, is easier in a store than online.

DiCanio has been focused on this dynamic at Estée Lauder as well, using her research to get an idea of how customers prefer to shop and even how they're feeling about the pandemic to get a sense for where the company should be focusing its energy.

"Some people are very much techy and online," DiCanio said. "Other people that were used to shopping in stores, how do we make that shopping experience feel as personal as an in-store shopping experience?"

Retailers also can't just blindly target consumers based on demographic information anymore, McKinsey researchers said, and more retailers will push to use personalized ads in the future. Those personal methods require understanding the consumer, but in a pandemic, one-on-one interviews with customers are not as much of an option.

DiCanio said the pandemic has pushed her team to consider methods of data collection and partnerships with firms that they hadn't previously been involved in, like one measuring consumer personality types to help the beauty giant better understand things like why consumers buy products from one channel over another. 

The result has been a "smorgasbord" of datasets that has broadened what they're able to glean from consumers, even though they've had to largely abandon the in-person testing they usually do. It's also led to higher volumes of data, since some remote methods are faster than bringing people into a building to physically run tests.

"I don't want to lose sight of my in-person testing, but the remote options have definitely opened up some new choices and opened new potential to reach consumers from all around the world in a very quick timeframe," DiCanio said.

The makeup problem may not be a problem for long

Makeup doing poorly in the U.S. matters more than elsewhere. According to Gerstell, the share of wallet between cosmetics and skincare is about 50-50 in the U.S., whereas in an area like China the split is 80-20 in favor of skincare.

"We really are kind of a color crazy country, and we're actually the only country in the globe that has such a high ratio of color cosmetic spend to skincare," Gerstell said.

Other categories have fared better. McKinsey sees haircare, skincare and personal care growing in the near term because they're viewed more as self-care categories. The rise of skincare more generally will continue, thanks to multi-step routines and young demographics that care more about skincare as they age.

But it's not all bad news for cosmetics, either. By 2023, McKinsey predicts makeup will reach 17% of total beauty retail sales in the U.S. That's still down from 21% in 2019, but it's an upward trend from a predicted low of 15% in 2020.

Like Estée Lauder, McKinsey also collected data on how consumers have been affected by the pandemic and how that impacted their spend on makeup. Emma Spagnuolo, a partner in McKinsey's global beauty practice, said consumers were intentionally pulling back on makeup spend during the pandemic but that many expected to increase their spend in the category once things returned to normal — a good sign for major beauty retailers.

In Ulta's most recent annual report, the retailer said cosmetics made up 50% of its total sales, dwarfing the next closest category, skincare, bath and fragrance (22%), as well as haircare products and styling tools (19%), and services (5%). A return to spending on makeup in the U.S., therefore, would be meaningful.

Spagnuolo added that from 2015 to 2017 there was a lot of innovation in makeup, leading to consumers stocking up on products. Now, they're going through all those products during the pandemic, and could be positioned to start "cabinet stuffing" again once the health crisis is largely over.

Many of the consumers looking to increase their spending on makeup are Gen Zs or millennials, meaning brands need to target those demographics in order to capture growth, Spagnuolo said.

Next year will be a year of shifts, according to McKinsey. Fragrances will trend upward as travel reopens, and importantly for the U.S., makeup will start its comeback.

"We're still bullish on skincare, but I think some of the growth will slow down and we are much more positive on color cosmetics coming back for a number of factors," Marchessou said, including that the category is a "significant part" of the U.S. beauty spend. "This is a critical category for a lot of the brands and players and retailers to push."