The trend, which became apparent during the course of 2005, is likely to spell a significant turn-about for the industry's fortunes and looks set to be a defining characteristic of the market this year, according to a new report from the Kline Group, entitled Cosmetics & Toiletries USA 2005.
"Innovation has captured increased interest in categories that had been flat or declining for almost a decade," said Carrie Mellage, industry manager for the Consumer Products practice of Kline's Research division.
"Products with a new twist, like Jergens Natural Glow, show how innovation can turn a category around," she said. "It appears the industry has reached the tipping point and is back to business as usual."
Another strategy that all the big players have employed during the tougher times the industry has experienced in recent years is a focus on mega brands. All the big global players have chosen to pursue this path, which has proved extremely successful.
German player Beiersdorf has chosen the expand its Nivea brand, particularly in the men's skin care area, while Unilever has chosen to build further on its Dove brand and Axe brands and P&G has developed its Pantene hair care and Olay skin care brand.
Likewise, Mellage also points to the fact that the line between mass market and prestige brands is continuing to be blurred as manufacturers race to meet consumers' increasing demands for quality products that are both functional and effective.
The main reason for this has been increasing demand from the baby boom generation, many of whom are now reaching their sixties.
Increasing pressure for this generation to hold on to their youthful looks has led to a big surge in sales of anti-aging products, and with many consumers in this category enjoying more spending power than ever, this is leading to a distinct move towards more expensive premium products.
Kline Group's study shows that the fastest growing categories were lip balms, deodorants, anti-perspirants and men's skin care products.
But what is really driving growth in these categories is innovation.
This means that products are being formulated with increasing amounts of highly developed active ingredients, such as anti-wrinkle and firming agents for skin care products, and anti-frizz agents and added vitamins for hair care products.
In fact Mellage highlights that two of the biggest growth categories over the next five years will be hair care and skin care - areas where even more innovation will lead to increasing segmentation.
Likewise, at the other end of the market, the consumer quest to find simple products formulated with ingredients they can relate to will also mean that the growth of products based on natural and organic ingredients will continue to be developed.
To capitalize on all of these trends the big players are employing various strategies to. Mellage points out L'Oreal's intention to grow through strategic attention, while Unilever is concentrating on its core brand and divesting smaller brands.
But Japanese player Kao will also be one to look out for in the future. It experienced market growth of 15 per cent in the US last year, due mostly to innovation.
And this appears to be the pattern for future success. Consumers want increasingly meaningful and functional cosmetic and toiletry products, which means that the over-riding key to market success should continue to be innovation.
Susan Babinsky, Kline Group's head of Consumer products, believes that this will help to shape the future of the US market. "It's innovation that's really going to determine the industry leaders over the next five years."