News & Press

As Featured in Fashion Mannuscript

By Megan Klingbeil, CPA, Partner & Co-Leader –
Beauty, Health & Wellness

In recent years, there has been a notable surge in the pre-teen demographic’s fascination with skincare products. As a parent with a pre-teen, I have watched this trend permeate my own household when a winter break lull turned into a trip to Ulta, which was packed with tween shoppers. This inspired me to dig a little deeper. Largely fueled by social media influencers and celebrity endorsements, this movement has led to a significant expansion of the skincare market. However, beneath the surface of this booming industry lies a complex web of financial challenges, particularly for companies seeking to penetrate this unexpected consumer segment.

At first, we started to see products initially targeted at adults gain unanticipated popularity among pre-teens due to influencer marketing, resulting in the tween skincare market rapidly evolving into a full-fledged industry. Certain brands began successfully targeting this demographic with programs that are thematically youthful, such as Bubble’s “skin school” campaign.

This new audience presents both opportunities and challenges for companies in the skincare sector. On one hand, tapping into a new and potentially lucrative market segment can drive revenue growth. On the other hand, companies risk overextending themselves by hastily pivoting their marketing and product development strategies to cater to this new target market. As brands are spending marketing dollars, a key metric to track is the incremental sales generated from this new marketing, as this can help companies assess whether their efforts are fruitful for the business.

Additionally, because many products are originally intended for adult skin, they must be modified in order to make them suitable for use on pre-teens. This opens up opportunities for investment in research and development (R&D) to either create new products or adapt current skincare offerings to be friendlier to younger skin. In such instances, there are R&D tax credits for which the company may qualify, allowing them to save money. However, there are risks that should be discussed with your attorney related to marketing to children. Further, even with the tax incentives, the rapid pace of innovation and product development in the skincare industry could exacerbate the financial pressure on companies. To remain competitive and capture the attention of pre-teen consumers, companies may feel compelled to continuously introduce new products or variants. This constant churn in product offerings requires significant investment not only in R&D, but also in manufacturing, warehousing, distribution and marketing, all of which impact a company’s financial health. Companies should leverage data as much as possible and use that data to update projections and cash flows to strategize for profitable growth.

In my work with clients, I emphasize the importance of strategic decision-making in navigating this evolving landscape. We discuss the necessity of carefully evaluating each opportunity that arises, particularly when it comes to partnerships with retailers. Opportunity can be exciting and it can be tempting to say yes to every retailer or collaboration without fully understanding the associated costs and potential risks.
One of the critical financial aspects that companies must consider is the concept of slotting fees and other trade promotions imposed by retailers. These fees, which are often mandatory for securing shelf space or online placement, can eat into profit margins significantly. Moreover, retailers may demand discounts or unique promotional offers, further impacting the bottom line. One potential offset to such costs is to offer an exclusive time period whereby a new product will be available only at that retailer.

However, the financial challenges extend beyond just the upfront costs of partnering with retailers. Cash flow management becomes a paramount concern, as companies may underestimate the time it takes to receive payment for goods sold through these channels. Delayed payments can strain liquidity and hinder the company’s ability to meet its financial obligations, such as paying suppliers or covering operating expenses.

While the pre-teen skincare obsession presents lucrative opportunities for companies in the industry, it also poses significant financial challenges. Navigating this landscape requires a delicate balance between capitalizing on emerging trends and managing the associated risks. By carefully evaluating each opportunity, understanding the true costs involved, and maintaining prudent financial management practices, companies can position themselves for sustainable growth in this dynamic market.

For further information about how this new market can affect you and how you can respond to the challenges, consider connecting with your trusted advisors or Megan Klingbeil, a Partner at Anchin and Co-Leader of its Beauty, Health & Wellness Group.