Profit from the fast growth of the haircare industry

Our society has become much more image-conscious, while new consumers worldwide want to look good too. From shampoos to new potential cures for baldness, here’s how to cash in, says Matthew Partridge.

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No one likes to be considered vain. But the past six months suggest that both men and women care more about how their hair looks than they might admit. When the lockdown restrictions were first imposed everyone predicted that one of the first consequences of our enforced isolation would be less time and money spent on hair; Unilever duly reported a drop in sales of shampoo and related products. However, since the restrictions were relaxed, the pent-up demand has seen some salons booked solid for weeks, despite running extended hours.

Haircare is a huge industry. The entire global beauty sector generates an estimated $500bn a year in sales, according to management consultancy McKinsey. An increasingly large proportion of this sum is spent on our hair. Grand View Research, another consultancy, estimates that the haircare sector’s annual growth rate of around 3% a year implies a value of $211bn by 2025. This includes contributions from the drug and biotechnology sectors, which are spending more time and money on finding treatments to slow down, stop, or even reverse age-related hair loss.

A more image-conscious era

Perhaps the main driver of the market’s rapid growth is that “people are much more interested in their hair than they used to be”, says Phil Smith, owner of Be Gorgeous, a company that produces a wide range of hairdressing products. When Smith started working as a hairdresser two decades ago, only a relatively small number of people were interested enough in the appearance of their hair to spend large sums of money on it, and few men considered it important. However, this has since changed dramatically, especially with respect to male grooming.

Some of this is down to the role of celebrities, notably the former footballer David Beckham who was a “big influence” on young men’s attitudes to their hair. In contrast to footballers of an earlier generation “who didn’t really care about their hairstyle”, Beckham adopted “constantly changing hairstyles” as a key part of his personal image. His success in gaining attention and, more importantly, endorsement deals, inspired other male celebrities, such as footballers and musicians, to emulate him, which in turn has changed men’s attitudes towards haircare products.

Celebrities’ influence on our concern about our hair has been intensified by the rise of social media, which means that we see a lot more of our favourite celebrities than we used to. They encourage people to copy all aspects of their lives, as Smith points out. However, social media’s role in making both men and women spend time taking care of their hair goes beyond the celebrity factor.

“Everyone wants to look good for Facebook and Instagram so that they can project the perfect lifestyle.” The perceived importance of good haircare on social media is highlighted by the fact that no less than 207 million posts on Instagram (as of July 2020) came with the hashtag #hair, while the hashtags #haircut and #hairstyle appeared in 47 million and 70 million posts respectively.

Emerging-market consumers seek out the salon

The image-conscious nature of modern society isn’t the only factor driving demand for haircare products. The rapid growth of the middle class in emerging markets, particularly in Asia, has led to a boom in personal grooming and beauty items.

As a result, sales of haircare products “are now growing significantly faster in emerging markets than they are in the rest of the world”, says Swetha Ramachandran of GAM Investments, an asset manager. What’s more, she expects this strong growth of haircare in emerging markets to continue, since people in emerging Asia still use fewer haircare products than those in other parts of the world.

At present the biggest challenge for haircare companies is getting many potential customers in emerging markets “to use their products for the first time”. However, Ramachandran is optimistic that companies will be able to substantially increase the uptake of premium haircare products in markets such as China. The haircare industry’s shift in emphasis toward natural products also sits well with the aspirations and values of younger consumers in emerging markets.

On that subject, a study by market research group Mintel in November 2018 suggests that large personal-care companies are generally becoming more adept at understanding how the attitudes of consumers in emerging markets differ from those in the rest of the world and adjusting their products to take account of this.

For example, many Chinese prefer to wash their hair less frequently than consumers elsewhere because they are worried about hair loss. As a result, several companies, such as Procter and Gamble, have achieved success by shifting their range of products towards “dry shampoos” and products designed to protect, as well as clean, hair.

The proliferation of premium products

The image-conscious nature of modern society and the global spread of Western attitudes to personal grooming have led to a large increase in the amount of money spent on haircare. These factors have also led to an increase in the number of different haircare products on offer. When Phil Smith first entered the hairdressing business, both professional stylists and ordinary consumers “had a very limited choice”. Today they can choose from a huge range of products, some catering to very specialised parts of the market.

Smith admits that this increased choice has been negative for some companies, especially since some consumers “are much more willing to look for bargains”. Competition between supermarkets and the rise of online retailers has also put pressure on them to cut prices, which has reduced margins for producers.

Nevertheless, some manufacturers have prospered by finding ways to “persuade people to trade up to more expensive premium products”. Even the most cost-conscious consumers are “increasingly willing to pay more money if they feel that this is justified by the quality of the product”.

Swetha Ramachandran notes that the level of competition in the haircare market is also tempered by a high degree of brand loyalty, with people sticking with particular products or buying from just one company. This makes the industry more stable than other subsectors of the beauty industry. Another advantage for haircare is that – unlike in the cosmetics subsector – there is no need for companies to spend additional money on sales staff or counters in physical stores in order to sell haircare products.

Combatting hair loss

The haircare-products industry may be the largest part of the sector, but there is also mounting interest in treatments for those who suffer from age-related hair loss. In the past such hair loss used to be accepted as “inevitable”, says Smith. As a result, people did nothing or “tried things like combovers to disguise it”.

However, now that we are all paying more attention to our appearance, people (especially men) are “under increasing pressure to try to take measures either to slow it down, or even reverse it”. While some of this involves cosmetic solutions, such as spray-on fibres, drug and biotechnology companies are working hard on medical solutions.

At present the main treatments for hair loss are the drugs Minoxidil (also known as rogaine) and Finasteride (propecia). These drugs can “significantly slow down the rate of hair loss”, says Dr David Fenton of the British Association of Dermatologists. However, both come with some significant drawbacks. For example, if people stop taking them, the hair loss “will immediately resume”. Another problem is that they work by altering the production of certain levels of hormones in the body, with a small number of patients experiencing a reduced libido. Finally, they only have “limited effectiveness” when it comes to regrowing hair that has already disappeared.

All these downsides can be major deterrents for those considering such treatment, especially if they are uncertain about the process to begin with. Indeed, Fenton notes that a large number of his patients, especially those whose partners have urged them to see him, “immediately tell me that they don’t want a product that they have to take every day for the rest of their lives, or something that will alter their hormone levels”. As a result, after consulting with him, many people decide not to begin treatment.

However, Fenton believes that if these problems were eliminated people would be much more comfortable undergoing treatment. They would be “particularly open to a one-off treatment, as well as one that doesn’t involve hormones”. If this is true, then better treatments could boost spending on hair regrowth far beyond the current global annual level of $3.9bn. With male-pattern baldness affecting 30% of men under 30 and 80% of men over 80, the potential market seems huge.

Drugs for your rug

The two drugs that Fenton is most enthusiastic about are Dutasteride, originally developed by GlaxoSmithKline, and Clascoterone, developed by Cassiopea and Intrepid Therapeutics. Of the two, Dutasteride is probably the less interesting, as it functions in a similar way to existing treatments, with similar drawbacks. The only difference is that it appears to be more effective in halting hair loss in men. Like Minoxidil and Finasteride, it has been around for so long that its patent has expired, sharply reducing the profit potential.

By contrast, Clascoterone shows much greater promise. Originally designed as a treatment for acne, it has now been repurposed as a potential cure for hair loss after studies showed that it increased the density of hairs on patients’ scalps. While it still needs to be applied regularly, it doesn’t affect hormone levels in men, with no observed changes in patients’ behaviour. The drug entered late-stage trials at the end of last year and preliminary results suggest that any side effects are relatively minor.

However, other companies are also pursuing research in this area. The Swedish company Follicum is developing a cream that can be applied to the scalp with the aim of stimulating hair growth by helping individual hair follicles that have been damaged by the ageing process (or other conditions such as diabetes) repair themselves. Early studies show that this produces effects comparable to that of Minoxidil, but with far fewer side effects. Another key feature is that Follicum’s formula will only need to be applied once every day, rather than twice a day like Minoxidil.

Stem-cell therapy: the new frontier

Perhaps the most exciting area of research is the use of stem-cell therapy to treat baldness. Stem cells are special types of cells found in the human body; they can be repurposed to become other types of cell, enabling our systems to repair everyday wear and tear. The hope is that combining these cells with hair follicles extracted from our scalp will enable doctors to grow additional hair follicles in the laboratory. These could then be re-implanted and used to grow hair on bald or thinning parts of the scalp.

As a result, hair transplants, which are increasingly popular, could be used to increase the amount of hair on our head, rather than just move it around from less visible parts of our body to cover bald patches. And a much smaller number of hair follicles would have to be extracted during surgery, which could drastically reduce the post-surgery discomfort. In late 2018 scientists at Yokohama National University announced that they had found a way to multiply extracted hair follicles using stem cells.

In the longer run stem cells could be applied directly to the patient’s scalp, removing the need for any follicles to be extracted. While such treatments are still in a relatively early stage of development there have been some important breakthroughs. Researchers at California’s UCLA have also found ways to stimulate existing stem cells in hair follicles to make them start growing hairs again; South Korean scientists have found that stem cells derived from fat could be used to increase the thickness and density of hair. We look at several potential investments in the growth potential of haircarebelow.

The stocks to buy now

Cosmetics and personal care firm L’Oréal S.A (Paris: OR) is the world’s leading producer of luxury haircare products. Elvive is the most well-known of its brands. It derives around a fifth of its revenue from haircare products.

While it trades at 35 times estimated 2021 earnings, it has grown profits and sales by around 8% a year between 2014 and 2019 and boasts an impressive return on capital expenditure, a key gauge of profitability, of 16%.

A smaller company worth researching is Aim-listed Brand Architekts (Aim: BAR). It is developing a portfolio of skincare and haircare brands and attempting to bolster their value by launching them overseas.

Its haircare brands include Kind Natured and MR. which has been developed by celebrity hairdresser Jamie Stevens. Even though earnings per share have more than doubled since 2014, it trades at a reasonable 16.3 times 2021 earnings. It also offers a dividend yield of 2.4%.

Shiseido (Tokyo: 4911) is a Japanese cosmetics conglomerate that makes a significant portion of its income from haircare. It also owns the rights to a treatment for baldness based around stem-cell technology developed by Canadian biotechnology firm RepliCel Life Sciences.

Although Covid-19 has led to a temporary drop in sales, sales have been increasing by around 8% a year over the past five years and the company has made a return on invested capital of 11%. It currently trades at 25 times 2021 earnings.

Consider also global salon conglomerate Regis (NYSE: RGS). Regis controls 7,868 hairdressing salons around the world, primarily in the US. Its brands include SmartStyle, Supercuts, MasterCuts, Regis Salons and Sassoon Salons, Cost Cutters, Roosters and First Choice Haircutters.

The company has embarked on a restructuring programme aimed at boosting profitability by moving to a fully franchised model. While revenue has been hit by the closure of salons owing to social-distancing rules, the relaxation of such restrictions means that it should return to profitability this year. It trades on a 2021 price/earnings ratio of 15.

Follicum (Stockholm: FOLLI) is a Swedish biotechnology company spun out of Lund University. It is working on a treatment for baldness as well as a diabetes drug. It has also patented a process for developing peptides (short chains of amino acids) that could be used by other biotechnology companies to help them manufacture drugs. Like any small biotechnology company it is a highly risky investment, especially since it is not yet making any money. However, if the results of early stage trials of its hair loss drug are sustained, then it could be on track to make a large sum of money through licensing it to a larger drug company.

Another small drug company worth looking at is Cassiopea (Zurich: SKIN). Like Follicum, Cassiopea is burning cash while its drugs go through clinical testing, so this is not a company for risk-averse investors. However, Cassiopea’s acne drug Clascoterone is close to being approved by regulators, while there is also strong clinical evidence that it could be used to treat hair loss.

The company also has other drugs, including a new antibiotic, in the pipeline. Several brokerages, including Barclays, provide access to both the Swedish and Swiss markets.

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