The beauty industry is an ever growing and highly competitive sector, where innovation and brand image play a crucial role in capturing the attention and loyalty of consumers. Amidst the pursuit of growth and profitability, it is essential for brands to remain vigilant of the complex competition regulations that govern their practices.
The Competition and Markets Authority's (CMA) recent open letter to Nail Technicians serves as a reminder of the legal limitations on engagement amongst competitors and underscores the importance of understanding and complying with national and European Union competition law.
This article aims to shed light on four key competition law issues that beauty brands should be aware of to ensure compliance and avoid regulatory scrutiny. With a focus on the ever-changing industry, it considers the use of AI for online pricing practices; sustainability initiatives and the benefits and risks of cooperation for the purpose of greener innovation; the relevance of the new Digital Markets, Competition and Consumer Act to increasingly popular beauty-subscription services; and key considerations in the mergers and acquisitions space particularly in the context of businesses operating in the digital markets domain in the UK and EU.
Key competition issues for businesses in the beauty space
AI & Pricing
In the highly saturated beauty industry, pricing plays a critical role in influencing brand perception, consumer decision making and, in turn, profitability and market share. Many retailers therefore employ dynamic pricing strategies, constantly monitoring competitor offerings and leveraging data analytics to respond to changes in demand, supply and market conditions. The most efficient way to do this? AI. Take, for example, Amazon's dynamic pricing strategy, which employs sophisticated algorithms to update prices throughout the day in response to demand, stock availability and consumer behaviour.
With nearly two-thirds of consumers in the UK purchasing beauty online, we will inevitably see more reliance on pricing algorithms in this sector to guide or automate the decision-making process behind the promotional offers, discounts and tiered pricing advertised by online beauty platforms.
Whilst pricing algorithms are not inherently anti-competitive, they have caught the attention of the CMA, which has expressed concerns regarding their ability to reduce competitive uncertainty and enable or strengthen collusion on the market. In August 2023, the CMA published its updated guidance on horizontal agreements. In the context of pricing algorithms, the guidance notes the associated risks of:
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Collusion: the ease with which algorithms enable competitors to monitor and adjust to one another's prices may lead to tacit or explicit collusion between competitors and, in turn, increased prices. Businesses may deliberately use common behavioural coordination algorithms as a way to agree on parameters of competition. Similarly, the CMA is concerned that algorithms may be used to monitor pre-existing anti-competitive agreements and punish those businesses which deviate from agreed prices.
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Information exchange: where brands rely on third party tools and algorithms to assist in setting and managing prices, or autonomously set prices on their behalf, this could establish "hub-and-spoke" structures whereby commercially sensitive information is exchanged between competitors (via the third party) and market uncertainty is reduced.
The CMA reminds businesses that if a pricing practice is illegal offline, it is likely to be so when implemented online. Further, businesses cannot avoid liability for breach of competition law on the ground that their prices have been set by algorithms; a business will be liable for its algorithms just as it is for its own employees. A business that receives commercially sensitive information via an algorithm will be presumed to have taken such information into consideration and adapted its conducted accordingly, unless it has publicly distanced itself.
For more information, see the CMA's earlier paper Algorithms: How they can reduce competition and harm consumers .
Sustainability
By 2025, the UK's green beauty market is expected to reach a value of £339 million. This shows the increasing consumer demand for sustainable beauty and many brands, both big and small, are responding with the introduction of "green" practices and eco-friendly products. The CMA is keen to ensure these efforts are genuine and that customers are not misled. By way of example, at the end of last year, it announced an investigation into potentially misleading ‘green’ claims made by Unilever about certain household essential items, including toiletries.
One such way for cosmetics and personal care brands to accelerate their sustainable development is through collaboration. Most notably, we have seen brands working together on sustainability initiatives such as the British Beauty Council’s Sustainable Beauty Coalition, the EcoBeautyScore consortium (co-founded by key industry players Unilever, L’Oréal, Henkel, LVMH and Body Shop owner Natura & Co.) and Cosmetic Europe’s Commit for Our Planet project. These initiatives aim to drive innovation, create stronger frameworks and policies with a focus on sustainability, develop and implement clear climate-positive strategies, and secure government support for green initiatives.
When collaborating in this way, it is important to be aware of the extent to which competitors may collaborate and the type of information they can and cannot share with one another. Fortunately, the CMA's 2023 guidance on environmental sustainability agreements provides some clarity on agreements aimed at preventing, reducing or mitigating the adverse impact that economic activities have on the environment or assist with the transition towards environmental sustainability (so-called "green agreements").
First, the CMA has confirmed that businesses may rule out any concerns about competition law compliance if the green agreement in question does not affect or engage with the way those businesses compete. Secondly, the CMA has provided helpful examples of green agreements that are unlikely to affect the main parameters of competition, including:
- agreements that concern the internal corporate conduct of the businesses, for example, to eliminate the use of single-use plastic in their business premises, or to moderate the use of heating and air-conditioning in offices;
- agreements to pool funds to engage in activities to mitigate, adapt or compensate for the effects of greenhouse gas emissions generated in production;
- agreements to run a joint campaign to raise awareness about environmental sustainability issues within an industry or among customers, provided that the campaign does not amount to joint selling or advertising of specific products; and
- joint lobbying for policy or legislative changes, such as on carbon pricing, where businesses come together to influence policy or legislative change in order to protect and promote their interests. It is important to note that any such arrangement must not involve the sharing of competitively sensitive information between competitors, nor must it be an attempt to use lobbying as a means for seeking the exclusion of a competitor.
Subscription boxes and the Digital Markets, Competition and Consumers Act 2024
Consumers today can subscribe to a wide-ranging variety of services and products in the beauty industry. With the offer of convenience, regularity, personalisation and even the potential for savings, an estimated 67% of households sign up to subscriptions.
Whilst providing a raft of changes to the digital markets space and competition law (as discussed in further detail here), the new Digital Markets, Competition and Consumer Act ("DMCC Act") will also bring an overhaul to consumer legislation. Of particular note is the impact the DMCC Act will have on businesses offering a subscription-based service to consumers.
Businesses offering the likes of 'Beauty Box' subscriptions, whereby customers pay a subscription fee (often monthly) in return for a box of cosmetics and skincare products selected based on a customer's preferences, need to be aware of the following key changes to subscription contracts:
- Provision of pre-contract information – traders must make pre-contract information available to a consumer when entering into a subscription contract, which includes:
- notification that the contract (and the consumer's liabilities) will continue (indefinitely or for a fixed term) until the consumer takes steps to terminate;
- any minimum period before the consumer can terminate the contract;
- whether future payments may be at a higher rate than the original price (and when these will be payable);
- the minimum total amount the consumer will be liable for; and
- the steps that the consumer must take to terminate the contract.
- Cooling-off periods – consumers will have a right to cancel subscription contracts within 14 days of being entered into. They will also have an additional 14-day cooling-off period after the expiry of an introductory fee or discounted period which includes any renewal committing the consumer to a further 12 months or more.
- Cooling-off notice – Consumers must be given a 'cooling-off notice' for each cooling-off period.
- Reminder notices – businesses will need to provide reminder notices before renewal payments are taken which must be compliant with the minimum content of any reminder notice specified by the DMCC Act.
- Cancellations – businesses will need to ensure that subscription services can be cancelled by the customer in a "straightforward" way and without needing to take "any steps that not reasonably necessary". Where contracts are entered into online, this must include the option to cancel the contract online with instructions on how to do so clearly displayed.
For more information on what steps businesses offering subscription-based services should be taking to prepare for these changes take a look at a recent article on our website.
M&A in the EU and UK Digital Markets
The EU's equivalent to the DMCC Act, the Digital Markets Act ("DMA") brought in a series of ground-breaking rules for platforms designated as "gatekeepers" in the digital space. The likes of Amazon, Apple, Meta (formerly Facebook) and Microsoft have all received "gatekeeper" status from the European Commission. A number of obligations and prohibitions have been imposed on these "gatekeepers" with the aim of improving the fairness of digital markets.
As a result of its "gatekeeper" status, Amazon recently informed the European Commission of its acquisition of Pellicano Italy, a retail store which sells beauty products and over-the-counter medicines (so-called 'para-pharmacy').
Whilst the EU regulator's powers under the DMA do not extend to reviewing deals, the DMA does require all designated "gatekeepers" to inform the European Commission about "digital concentrations".
The UK's equivalent to "gatekeeper" status under the DMCC Act is the designation of "strategic market status" ("SMS"). Firms may be designated as having SMS where they are found to have entrenched market power, a position of strategic significance in respect of a digital activity linked to the UK and where they meet the turnover condition (UK turnover exceeding £1 billion or global turnover exceeding £25 billion).
Whilst the standard merger control regime in the UK is voluntary, and will remain so under the DMCC Act, SMS-designated firms will be required to report to the CMA all merger activity with a transaction value of at least £25 million and involving the acquisition of at least a 15% interest in a company connected with the UK.
The DMA's "gatekeeper" designations offers some insight into which firms may receive SMS status in the UK. Whilst only a handful of tech companies will likely be designated with SMS and subject to a set of applicable new rules and conduct requirements, any business that deals with these firms should be aware of the changes and potential implications for their commercial relationships. Amazon's interest in the beauty and pharmaceutical industry has been piqued in recent years with a number of acquisitions. It remains to be seen how these changes in UK competition law will impact this sphere, and no doubt the CMA will take a keen interest in the EU's approach.