The Next Frontier of Circular Economy Innovation

The retail sector, valued globally at $28 trillion in 2023, is undergoing strong growth in total market size as well as the number of brands that make up the market. As a consumer, I love the optionality and brand diversity that exists - I could spend hours scrolling on marketplaces like SSENSE or Credo Beauty discovering new apparel or cosmetics brands. However, as an investor, I’ve spent a lot of time thinking about the negative repercussions stemming from the retail sector's growth, including the rise of excess inventory and waste. In the past, it’s been estimated that apparel brands overproduce more than $500 billion of goods annually, much of which end up in landfills or destroyed through incineration. In addition to the devastating environmental impact, overstock is a heavy financial burden for brands, resulting in millions of dollars lost from unsold goods and other indirect costs like the cost to hold inventory in warehouses.

One way to relieve the environmental and financial burden of excess inventory is to build an effective circular economy where goods that initially go unsold can be repurposed or resold while maintaining at least partial value, which is critical for incentivizing brands and retailers. At Interplay, our interest in building and supporting a circular economy led us to invest in Max Retail, a platform that enables SMB retailers to effectively sell their unsold inventory directly to end-consumers across various retail e-commerce sites and retail marketplaces. We’re very excited about what the team at Max Retail is building and the impact they are having on relieving the burden of excess inventory for SMB retailers. 

As I look across consumer categories, most startups innovating in the inventory management or circular economy space are focusing on electronics or apparel. This is not surprising, as these industries represent the largest online shopping categories in the world with a 2024 total e-commerce spend of $922.5 billion and $760.0 billion, respectively. 

However, as I continue to dive deeper into the world of overstock and consumer waste, it’s clear that there’s a major gap in overstock innovation for beauty and personal care, a category that includes cosmetics, skin care, hair care, and fragrances. Although the total global spend in this category is small relative to fashion and electronics, it’s still a muti-billion dollar industry that is growing rapidly. In 2023, the global beauty and personal care market retail sales grew to $446 billion, up 10% from 2022 (total retail sales, not just online as shown in the image above). Growth in this category is expected to be maintained at 6% annually through 2028. 

With such a large market opportunity, why hasn’t the beauty and personal care industry undergone the same innovation around inventory management and overstock as industries like apparel and electronics? It’s not that the pain point doesn’t exist in this space. In fact, the cosmetics industry suffers more than other consumer categories, with an average of only 47.8% of inventory sold after 1 year in the market. 

Unfortunately, the problem is much harder to solve. Unlike apparel and electronics, products in the beauty and personal care space have an expiration date, typically between 2-3 years. The seasonality of many products and the rapidly evolving consumer trends further restrict the purchase window, making it difficult to sell inventory after its prime. Companies in this sector also feel pressure to offer a wide range of products to satisfy various consumer preferences. For example, in cosmetics, if a brand wants to sell lipstick to their customers, it can’t just be one lipstick. Customers want 5-10 shades to choose from and a lip liner and lip gloss to match. The brand’s set of SKUs quickly diversifies, making it very difficult to estimate demand and produce the accurate amount of inventory. 

So, what’s the solution? 

To alleviate the environmental burden of beauty and personal care products, there’s been a wave of brands manufacturing more sustainable products with less packaging, waterless formulations, refill systems, or made to order products like Elate Beauty and Prose. This helps limit waste, but these strategies are only being adopted by a small portion of brands in the market. It’s unlikely that this commitment to sustainability will become more widely adopted without a financial incentive to brands. 

Inventory management tools like Syrup or warehouse management systems like Logiwa allow brands to make production decisions with greater intelligence and insight into their customer demand. These tools are meant to effectively prevent overproduction and reduce the financial losses associated with unsold inventory such as warehousing costs. Preventative inventory management can help decrease the burden of unsold inventory, but it is very unlikely that it will alleviate the issue all together. The nature of the beauty and personal care industry - with excessive SKU counts, perishable products, and trend-driven sales cycles - makes it difficult for brands in this category to remain relevant without overproducing. 

A potential resale solution could come in the form of a B2B marketplace like Ghost, a company that has had a significant impact on powering the resale economy for the apparel industry. According to their website, Ghost has begun to break into beauty and personal care, and it would be interesting to know more about the viability of resale in a space where products expire within 2-3 years. We’ve seen marketplaces leverage global seasonality, which could be a potential solution here; for example, when it’s winter in the U.S. and summer in South America, beauty products with SPF might be more favorable there. Sotira and Highstock, two start-ups in the early innings of building, could present compelling marketplace solutions specifically for the beauty and personal care industry. 

There is clearly an opportunity for more innovation and the rise of a venture-scale company solving overstock in the beauty and personal care space. The majority of existing solutions for inventory management or resale are industry agnostic; however, with so many unique challenges associated with beauty and personal care, I believe the most effective solution will be industry-specific. The solution must also financially incentivize brands in addition to alleviating the environmental impact of unsold product waste. If you’re building in this sector, please reach out to our team-we’d love to learn more!