What to Watch: How Will the Return of Student Loan Repayments Impact Gen Z and Millennial Beauty Spend?

Today, student loan interest resumes for 43 million U.S. borrowers, with payments set to return beginning in October.

It’s the first time American borrowers — who owe a collective $1.6 trillion in student loan debt — will be expected to repay their loans since March 2020, when the Department of Education’s COVID-19 student loan forbearance program took effect.

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And though the return of payments impacts Americans of all ages — 2023 data from Statista indicates that Gen X carries the largest average value of student loan debt, followed by Baby Boomers and Millennials — Gen Z is expected to soon overtake older generations in average debt as the cohort ages up.

“There is no doubt that the resumption of payments is going to weigh heavily on Gen Z and the Millennials,” said Patricia Buckley, director of economic policy and analysis at Deloitte, noting credit card delinquencies are up among the two groups, and so adding student loan payments to an “already precarious situation — it can’t not be a problem.”

A recent study by The Harris Poll on behalf of Intuit Credit Karma found that more than two in five federal student loan borrowers expect to go delinquent on their student loan payments once forbearance ends, and that 53 percent of borrowers are struggling to pay other bills, including auto loans and mortgage and credit card payments, even without adding student loan payments to the equation.

Even amid this economic uncertainty, though, the beauty industry has remained buoyant so far.

First-half data from Circana shows prestige beauty remains the only industry across general merchandise and consumer packaged goods to be growing in both units and dollar sales, with makeup being the fastest-growing category in the channel.

Mass beauty, meanwhile, has seen growth in dollar sales thanks to higher average price increases — prices have increased 10 percent in the channel versus last year, while prestige beauty price inflation has been under 5 percent since 2020 by comparison — but unit sales are on the decline.

“Mass prices are still much lower, but we’re paying significantly more for the beauty products on the mass side. That leap from mass to prestige becomes less of a difference; it becomes easier [for consumers] to make,” said Larissa Jensen, senior vice president, global beauty industry adviser at Circana.

Data from NIQ shows 63 percent of Millennial shoppers and 61 percent of Gen Z shoppers are buying luxury beauty, versus 59 percent and 48 percent of their Gen X and Baby Boomer counterparts.

“This might change, but we’re not seeing any indicators of cutback yet,” said Anna Mayo, vice president of beauty at NIQ, noting beauty spend among Millennial and Gen Z consumers is still “seeing strong growth among the major beauty categories.”

It’s worth noting, though, that the Biden administration is allowing borrowers a 12-month grace period through September 2024, during which missed monthly payments will not be considered delinquent or reported to credit bureaus.

“I think [student loan payments] will be an increasing risk factor starting next October,” said Oliver Chen, managing editor and senior equity research analyst at Cowen and Co. “That [grace period] could be a partial offset.”

Jensen anticipates that even as debt-ridden consumers make cuts to their spending, the prestige channel will likely continue to outpace mass in terms of growth: “I don’t think that [student loan repayments] are going to change anything in terms of the importance of mass or prestige in totality; even if mass improves a little and prestige softens a little, I think overall the trend will remain the same.”

Moving forward, cash-strapped consumers will likely prioritize brands and products that offer value on multiple levels.

“Brands and retailers need to convince Gen Z and Millennials that their company is a key — key’s not even a strong enough word — that company is a crucial part of their identity,” said Erik Gordon, clinical assistant professor at University of Michigan’s Ross School of Business.

Added Chen: “Value can come in many forms, but certainly price point, convenience, and efficacy relative to price.”

Data from Spate, for example, demonstrates the growing relevance of dupes in beauty, with consumers increasingly seeking out wallet-friendlier yet effective alternatives to prestige beauty favorites.

At an 83.3 percent increase since last year, U.S. Google searches for Dior Beauty dupes are the fastest-growing alongside any prestige brand. Searches for Le Labo dupes have seen a 43.6 percent increase during the period, and at 24,000 average monthly searches, Charlotte Tilbury reigns as the most-searched beauty brand alongside “dupe.”

“The benefit for the beauty industry in the immediate term is, it may lose dollars but it’s not necessarily going to lose consumers,” said Wendy Liebmann, founder and chief executive officer of shopper insights firm WSL Strategic. “There are a lot of ways to still be part of the beauty world in a way that’s affordable, whether it’s trading down from Lancôme to E.l.f., just using up what I have, or using smaller sizes.”

Added Mayo: “We’re seeing some dynamics with stretching out purchase cycles — on average, people are waiting a week longer to replenish.”

The growing connection between wellness and beauty, too, poses a potential benefit to the industry’s performance. “There is more rationale around why I would still spend on beauty, because it’s also a part of my emotional, physical well-being,” Gordon said.

When it comes to makeup, one of beauty’s hottest categories of late — Circana reports prestige makeup grew 18 percent in dollar sales and 13 percent in units during the first half — Spate cofounder Yarden Horwitz noted consumers are seemingly going back to the basics.

“We’re seeing a lot of interest in things like foundation, face makeup, base makeup products, whereas more of the accent colors — things like colored eyeliners and so on — aren’t seeing as much traction as they were last year or the year before,” Horwitz said.

The beauty aesthetics dominating TikTok of late demonstrate as much: “latte makeup,” which consists of neutral, brown-toned lip, eye and face makeup, counts more than 318 million hashtag views on the platform. Its predecessor, “clean girl makeup,” which is essentially another term for no-makeup makeup, has racked up more than 891 million TikTok hashtag views.

“I think, in general, the more gimmicky and more experimental products that don’t actually show immediate value could be on the chopping block,” said Horwitz, adding that the buy-first-think-later mentality that dominated TikTok’s beauty sphere during the early days of the pandemic appears to be on the outs. “For the most part [consumers] are going to invest in high-quality products that they can use in a more subtle way on a day-to-day basis.”

When it comes to scaling back beauty spend, Mayo said income is just as much — if not more — of a factor as a consumer’s generation.

“It’s the consumers who have less money who are making harder choices, whereas the ones who are making, you know, over $100,000 are not really having to cut back on much,” said Mayo, adding that because fragrance and cosmetics are more impulse-driven categories, those could be areas in which consumers could look to cut back.

A July survey conducted by Circana indicated 70 percent of consumers plan to reduce spending in the face of student loan payments returning, a majority of whom were female and Hispanic.

“Hispanic consumers are very engaged in the beauty category, especially in fragrance,” Jensen said, adding that “young, lower-income and ethnically diverse” consumers have been significantly driving interest in higher fragrance concentrations, one of the key drivers of the fragrance category’s growth.

“We do expect fragrance to be positive on the prestige side — it’s just that the growth will slow,” said Jensen.

The Harris Poll’s study on behalf of Intuit Credit Karma indicates 19 percent of Hispanic Americans have outstanding student loan debt, behind 30 percent of Black Americans and more than 15 percent of white Americans.

According to Credit Karma’s State of Debt and Credit Report, all generations saw a decrease in overall debt during the first half with the exception of Gen Z, whose debt remained flat.

“Regardless of inflation, regardless of the cost-of-living crisis, people do have recession fatigue, particularly Gen Z — there are still a huge cohort of people who are not taking any steps to get their finances in order, and they still want to treat themselves,” said WGSN’s senior retail strategist Laura Saunter.

Even so, said Saunter, many consumers are thinking differently about not just the value of their products, but the perceived values of the retailers and brands peddling them.

“Retailers and brands are going to have to think a lot more about altruism toward consumers if they want to attract long-term loyalty. Price freezes, generous discounting, philanthropy — things like that are going to be important,” she said.

Liebmann echoed the sentiment.

“I wouldn’t take Gen Z and Millennial consumers for granted — don’t assume they will just keep coming. Understand that if they’re coming for the ‘small indulgences’, you better make it special —  whether it’s in-store or online, you better make that experience and the product innovation, quality and value evident, because these are tough shoppers.”

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