New & Unique Innovations in the Beauty Market February 2010

| Copyright © 2010 Grail Research, a division of Integreon February 2010 2

In the past decade, the beauty market has experienced significant

changes, including the entry of prestige brands into mass markets,

the adoption of mineral cosmetics, the success of natural and organic

products, and the use of the Internet and social networking sites to

establish stronger brands

With new products and marketing techniques being introduced almost

daily across the beauty care industry, we wanted to explore some of

the more unique trends that we have seen taking place, with a

specific focus on the US market

In addition, we investigated possible drivers and market responses to

these trends to help understand how they might unfold in the future

and what impact they may have on the industry as a whole

Study Objective

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Source: Grail Analysis

Catering to “All Women”

Promoting “Beauty from

Within”

Professional Make-up for

Everyday Consumers

The “Beauty” of Innovative

Collaborations

Virtual Experience-

based Shopping

Large beauty brands are adding new product lines to their portfolios in order to better address the needs of consumers across and within different ethnic groups

The concept of improving beauty from the inside out, by consuming foods with cosmetic benefits, has long been accepted in Japan and Europe and is now taking off in the US market with the entry of new niche players

Specially formulated high-definition brands or product lines developed by professional make-up artists, previously only available to celebrities, are now hitting the shelves of mainstream merchandisers

Unusual and unique partnerships between beauty companies and other industries are being established to increase brand awareness and create unique brand perceptions among consumers

The traditional in-store cosmetic purchase experience is being replicated and enhanced through web-based and mobile applications that leverage the power of the Internet to establish a deeper relationship with consumers

1 2 3 4 5

Recent Trends in the Beauty Care Industry We identified and explored 5 trends that we believe are the most relevant and interesting in the rapidly evolving beauty industry

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1

Source: Press releases from Beautypackaging.com (March 2009), Essence Magazine (May 2009), High beam (October 2006), Cosmetic & Toiletries (April 2008); Drug Store News (September 1991, July 2003); CosmeticDesign.com News (February 2006); Wal-mart.com; “Ethnic Cosmetic /Skincare 2007” – Mintel (2007); Wal-mart.com; Company Websites

The Hispanic population currently only accounts for 15% of the total US population, however it is expected to reach 51 million by 2013 growing at a rate of 12.9%, compared to only 2.9% for non-Hispanics. This growth will continue to increase the diversity among Hispanics as well as other ethnicities, and create more specific sub-segments within the traditional ethnicity segmentations

As a result, the recent “blanket” approach in which companies have tried to create products for one particular race as if it were a homogeneous segment, will no longer be a solution. Companies will face an increased demand for products which address the growing, complex differences within these groups

Select brands have taken notice of this market shift and adopted an inclusive product strategy to address these consumer needs. First by developing products that are appropriate for all different skin tones and needs, and then by providing several product ranges or color shades that women can choose from

Clinique’s Even Better line of skin tone corrector (launched in March 2009) aims to address this growing trend as it boasts in its ads to cater to women of “all ethnicities”

Instead of attempting to create a line which targets one specific ethnicity as a whole, Clinique addresses the vast diversity between different ethnic groups and within each of them by providing a product formulation which works for every woman regardless of her ethnic background

Clinique's “All Inclusive” Approach

Bobbi Brown‘s foundation line was the first to leverage a unique yellow-based formula in order to “match and look natural on every skin tone”

The brand has effectively addressed the growing Hispanic market by not only making products which are suitable for a diverse group of individuals, but also by creating customizable palettes so consumers can choose what is “most perfect” for them

Bobbi Brown’s Custom Palettes

Catering to ‘All Women’…. Regardless of Ethnicity

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Pharma

Personal Care

Nutrition

Cosmeceuticals

Nutraceuticals

Key Facts

Nutraceuticals are foods or beverages that provide medical or health benefits

The Nutraceuticals term was first coined in the late 1980s and the market has significantly grown to become a USD 128 Bn industry

Cosmeceuticals are topical cosmetic products that also have medicinal benefits

This concept can be traced back to the 1960s, although the term cosmeceuticals didn’t become popular until the 1980s

As of 2007 the market was worth USD 55 Bn

While nutraceuticals and cosmeceuticals have been around since the 1980s, nutricosmetics is a market which has only recently gained traction in the US

Nutricosmetics

Sources: Press releases from Cosmetics & Toiletries Mag. (April 2007); Comp. Websites;”Decoding the Convergence of Beauty & Healthcare” – Kline (April 2008); “Blurring Boundaries” – Kline (Fall 2010)

Future Growth

USD 1.5 Bn USD 2.5 Bn

2007 2012 CAGR 11.2%

Nutricosmetics are “ingestible products formulated and marketed specifically for beauty purposes”

While cosmeceuticals and nutraceuticals have been around for over 20 years, the concept of nutricosmetics is still in its infancy stage in the US. However, it is well developed in Japan and Europe due to the anti-aging concerns in these countries

Driven by the need for non-invasive alternatives and rising consumer awareness, it is increasingly becoming a niche market in the US with nutricosmetics products now available in specialty channels

Promoting “Beauty from Within” (1/2)

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Developed by Aveda’s founder, the intellimune, anti-oxidant seed oil blend and tablets are said to battle stress and premature aging

Launched in June 2008, it sells at Barneys for USD 42

Intelligent Nutrients1

Note: 1 These companies offer a range of other ingestible products in addition to the one highlighted on this slide

Sources: Press releases from Cosmetics & Toiletries Magazine (April 2007), GCI Magazine (October 2009); Company Websites; “Decoding the Convergence of Healthcare and Beauty” – Kline (April 2008); Barneys.com; Sephora.com

The nutricosmetics market in Europe and Japan is well developed and carries a wide range of products at various price points, from “hair energizing” tablets by Innéov (developed by a partnership between L’Oreal and Nestlé), to collagen coffee by Nescafe While products in these countries are successful in the mass market, attempts by US mass market brands have been unsuccessful (e.g.: Olay

and Avon launched nutricosmetics products in 2003 and then exited the business). However, recently we have seen the concept gaining new traction in the US as a niche market, with brands like Intelligent Nutrients sold in high-end department stores, and it is expected to grow quickly

Murad Pure Skin Clarifying Dietary Supplements help clean and protect skin against acne

Available in tablet form and sold at USD 43, it is one of the top sellers at Sephora

Murad1

Shiseido’s collagen tablets help ease stress and provide consumers with “youthful and resilient” skin

Available in Japan, the product is sold for USD 22

Shiseido1 Nescafe’s Collagen

coffee contains anti-ageing nutrients

Launched in October 2009, the product is available in Singapore for USD 15

Nescafe L'Oreal and Nestlé

jointly produced the beauty supplement Innéov, which offers products that increase hair volume, firm skin, or reduce cellulite

Launched in 2003, the product is available in Europe at a price of USD 42

L'Oreal + Nestlé1

Borba's products are designed to provide the body with nutrients for healthy, beautiful skin, in both topical & edible forms

The company first launched its skin care water in 2005

Borba

Promoting “Beauty from Within” (2/2)

Players Outside the US

Examples of Players in the US

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ColorOn’s EyeEnvy collection allows consumers to create “professional-looking eye makeup in minutes”

Designed by celebrity make-up artist, Irina Iosilevich, the peel-off cream eye shadows boast to provide women with “professionally ‘done’ make-up in the blink of an eye “

Sources: Press releases from USA Today (September 2008), canada.com News (January 2008), GCI Magazine (April 2009), The Daily Tribune (May 2008), cnet news (August 2008), Boots October 2008; Company Websites; BCC Research report (June 2009); Datamonitor report (January 2008); Sephora.com; Barneys.com; Macy’s.com

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Smashbox Cosmetics Cargo Cosmetics TEMPTU

Smashbox cosmetics (owned by great-grandsons of film make-up pioneer Max Factor) is said to be the first company to enter the high-definition cosmetic category

Launched for retail sale in March 2008, the brand is available at Sephora

Cargo Cosmetics’ blu_ray™ collection uses irregularly sized particles to diffuse and soften light, along with pigment that reflects light from different angles

Launched for retail sale in 2008, the brand is available at Sephora

TEMPTU is a make-up air-brushing company which traditionally served professional make-up artists

They launched a new consumer line in the Fall of 2009. Currently sold at Sephora, the brand boasts to offer consumers “the beauty of hi-def skin” that was once reserved for professionals

FACE Stockholm

Professional Make-up for Everyday Consumers

ColorOn Professional

FACE Stockholm started as a brand that catered to theater make-up artists Now the company markets

directly to consumers and all their stores employ professional make-up artists They have their own make-

up schools which give aspiring make-up artists hands-on experience in various professional techniques

The recent increase in the number of brands developed or endorsed by professional make-up artists have led companies playing in this space to find innovative ways to maintain the specialized, elite industry product status in the consumers’ minds. Recently, we have seen three interesting strategies to accomplish this objective:

The development of industry-specialized product lines like “high definition” or “blu_ray™” cosmetics that cater to the professional market, but are sold in mainstream outlets like Sephora and are available to the everyday consumer The launch of consumer-friendly tools for professional product application, whether that be in-home make-up airbrushing or one-step

professional eye shadow kits The introduction of consumer access to professional personnel and make-up instruction when buying products in order to give

consumers confidence in the brand, its quality, and the way they will look when wearing the products

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Sources: Press releases from WWD Beauty (January 2010, August 2009); Tweetmeeme.com (January 2010); Bellasugar.com (August 2009)

Effectively targeting the elusive teen market has always been important but challenging for beauty companies Recently we have seen beauty companies capitalize on the popularity of hit television series and Hollywood movies among teens by

partnering with production companies to create make-up lines inspired by these video productions As part of these partnerships, beauty companies are creating theme-based make-up lines in order to provide consumers with a different way

to relate to their favorite movie characters, stars or fantasies

Beauty Companies Collaborate with Movie Production Companies

Make-up in Wonderland “Twilight” Beauty

The “Beauty” of Innovative Collaborations

In January 2010, Urban Decay and OPI collaborated with Disney to launch beauty products in tandem with the release of Alice in Wonderland, in March 2010

Urban Decay designed packaging for their cosmetic palette with a pop-up drawing of the mushroom forest, featuring 16 themed eye shadow colors with names such as ‘Alice’ and ‘White Rabbit’

OPI has launched a palette of four nail colors with Alice in Wonderland themes such as, Absolutely Alice, Mad as a Hatter, and Off With Her Red

In November 2009, ImaStar Corp. (a company under Lambus Partners, which owns the license to produce make-up affiliated with the Twilight series of movies) launched two lines of Twilight themed beauty products – Volturi and Luna – in tandem with the release of the second movie in the Twilight series, New Moon.

DuWop, another company under Lambus Partners, also launched the lip stain Twilight Venom, to tie in with the Twilight initiative

| Copyright © 2010 Grail Research, a division of Integreon February 2010 9

5 Virtual Experience-based Shopping

Beauty companies are enriching customers’ online shopping experience with applications that imitate the benefits of in-store shopping by allowing the customer to try on the product virtually as well as provide online make-up education, tips and tricks. This enables them to capture the growing online audience and establish a better, closer relationship with their customers Many of these virtual applications leverage popular media sites such as Twitter, Facebook, and Myspace (~50% of users on these sites were

women in 2008) or mobile applications (almost 50% of the total US mobile internet users were women in 2009)

Recent Examples from Virtual World

Sources: Pew Internet & American Life Project Survey, April 2009; Press releases from VatorNews (August 2009), Nielsen Wire (September 2009), Techcrunchies(October 2009), Cossma (December 2009), WWD Beauty (October 2009, January 2010), The Economic Times (November 2009), Wal-Mart (October 2009), Mary Kay (November 2009), Estee Lauder, comScore (September 2008)

Try-before-you-buy ‘Real Women’ Experiences Makeover on the Go Product Usage Education

Mary Kay and Estee Lauder launched virtual makeover applications in 2009

Users can upload pictures, try company products on their own photos, get a professional makeover virtually, and share their completed looks with their friends

iPhone applications such as Makeup & aBeautyPro, were launched in 2009 Their functionality enables potential

consumers to upload their own pictures and virtually see how different make-up products will look on them Different brands can launch their

own version of these applications

Bobbi Brown launched the ‘Pretty Powerful’ online campaign in January 2010 The campaign features 50 “real”

women who were given makeovers Their experiences and the products

used are then highlighted, allowing consumers to find the person they share similar features with, as well as the style or transformation they like the best and want to try

Lush, Iman, MAC and several other brands have posted online videos on ‘You Tube’ to educate consumers on effective product usage In the video they demonstrate

different looks and product techniques providing consumers with the “one-on-one” instruction they might have received from a sales clerk in the store

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