NEW YORK — The drugstore industry, a sprawling behemoth that has been threatening to devour the department store beauty world for years, seems to have lost its appetite.
Following the lead of big-box competitors, drugstores are drafting plans to scale back inventory and trim the number of beauty products they carry, according a number of industry experts.
The de-bulking effort is a move to boost stores' profitability, particularly in the wake of slowed consumer spending and two sizable acquisitions, namely CVS Corp.'s March merger with Caremark Rx and Rite Aid Corp.'s purchase of Brooks and Eckerd stores from The Jean Coutu Group, which was completed in June.
After all, the larger the retailer, the greater the power they wield. It's an ongoing shift of power that ironically mirrors what's happening in the department store channel.
But some beauty mavens said the inventory squeeze right now is merely to clean out for the barrage of new items.
A top beauty merchant for one of the leading drugstore chains pointed out the decline of Revlon's sales has created a feeding frenzy for space. "I have never seen so many new lines and requests for space in my life," said the seasoned source. Manufacturers added that buyers — hoping to keep their beauty footage intact — are driving the initiative for new items. Rick Goldberg, vice president of cosmetics for Coty Beauty, said the planogram reduction changes might not be seen until 2008. "In the meantime, buyers are coming back to vendors and giving us great ideas so we have hot stuff to leave the footprint."
Whether consumers truly desire the new items or not will be the question. "Something has happened to the consumer, especially the drug chain shopper," observed industry consultant Allan Mottus. "They are retrenching and for retailers there are so many stockkeeping units that it is hard to handle the turns. And, with other categories growing, it [beauty] is not as critical to them." Mottus cited other growth opportunities such as mini clinics and even apparel for drugstores.
With so many sku's, some merchants said they are getting pressure from top management to edit, a move supported by Procter & Gamble Co., which has studies on how avoiding duplication can net greater productivity.Harvey Alstodt, president of Del Cosmetics, said retailers are "crushing" inventories, which isn't necessarily a bad thing. "Tighter inventories don't mean a loss of sales as long as you don't go too low and have out of stocks."
Referring to retailers' efforts to pare down the assortment, Wendy Liebmann, president of WSL Strategic Retail, said, "It's a reflection of a new power struggle between retailers and the brands they carry about who controls the space."
She added that inventory continues to be a significant issue across all categories, as retailers work to improve the shopping experience.
"There's just too much stuff, and that makes it more difficult to shop," said Liebmann. She cited a recent shopping survey that WSL conducted in partnership with the Network of Executive Women, which revealed that when it comes to makeup, 52 percent of women surveyed described selecting a new foundation as "difficult," as opposed to "easy" or "so so."
Nearly the same percentage rated buying a computer or choosing a cell phone service as "difficult." The study also indicated that more women, or 44 percent, said choosing a new lipstick was difficult than women who rated selecting an over-the-counter medication, 38 percent, as difficult.
In the end, said Liebmann, it's the customer who will benefit from a more carefully edited assortment. "If it's easier to shop, people will buy more."
A tighter control of the space also allows retailers to make room for their exclusive lines and respond to brewing trends, like natural products. However, it makes it more difficult for beauty firms to secure space for new innovations. Last year, Wal-Mart Stores Inc. had a push to reduce inventory, a move that was followed by several other mass retailers, which negatively affected some beauty firms' sales in the second half of the year, such as Elizabeth Arden Inc., noted Gary Giblen, an analyst with Goldsmith & Harris. He added that during the company's earnings call Aug. 14, Wal-Mart said it would intensify de-stocking efforts across all categories. During the call, Wal-Mart president and chief executive officer H. Lee Scott told analysts that "strong inventory management" was one of the management team's top three priorities for the second half of the year. "De-stocking severely disrupted results in 2006, and I think we are going to see another round this year. When Wal-Mart does something, other retailers copy," said Giblen. Beauty products, particularly fragrance, offer retailers high margins, but slow turns. "Where the rubber is really going to meet the road is (product) returns," said Giblen, noting that drugstores generally have 100 percent return privileges. The return policies of drug chains have been blamed on the exit of many fledgling companies from the mass market.Last week, Physicians Formula Holdings Inc. revised its outlook for the second half, citing a slowdown in consumer spending and "unexpected changes to replenishment order patterns."
Physicians Formula chief executive officer Ingrid Jackel said the recent shift has not resulted in any changes to the beauty firm's in-store space, but that a certain — unnamed — retailer is using its existing inventory and not replenishing stock as frequently. "The drugstore chains historically have carried very heavy inventories, basically close to a year of inventory." She added that Physicians Formula continues to generate double-digit sales growth across its retail accounts.
Physicians Formula would not disclose the name of the retailer behind the abrupt change in inventory strategy, but several analysts said it was CVS, although Walgreens was also mentioned. CVS's smaller store format requires tight editing of the beauty assortment.
That said, several beauty vendors said CVS takes an aggressive, analytical approach to determining which items stay in the assortment, and which go. Nevertheless, the chain introduced some 3,000 new beauty products in the past year, and increased its cosmetics wall by 8 feet to 76 feet in 500 doors last year, said Cheryl Mahoney, vice president of merchandising for beauty care, adding that the change was based on the double-digit sales growth of cosmetics last year. This year, she also anticipates double-digit growth in cosmetics, hair care and skin care.
The drugstore chain will continue to install the 76-foot cosmetics wall in new and renovated stores. Mahoney said she was not aware of any changes in inventory replenishment.
CVS continues to emphasize beauty, and in May launched an aggressive marketing program called Reinventing Beauty, which includes in-store signage and circular direct-mail advertising. It's focus on beauty seems to be paying off.
Last year, CVS's beauty business grew two times faster than the industry average, and its cosmetics sales grew three times faster than the industry average, said Mahoney.
She hinted there are a flood of beauty launches slated for next year. "I think it's going to be an exciting year," said Mahoney.
One industry source said that in aggregate the upcoming cosmetics launches across all brands, which are said to include an organic cosmetics line from Physicians Formula, would require 30 feet of additional retail space next year.CVS's big-box competitor, Target Corp., is said to also tightly control its inventory and product assortment. One vendor said that every four to five years, Target reviews the space in each department. The practice, which is sometimes referred to as "space wars," requires each department head to justify their square footage. Vendors noted that Target constantly culls slower-moving items from its beauty assortment, requiring each brand to reduce its sku count by 5 percent a year. Industry sources also said that next year, Target plans to shift 12 feet of bath space to skin care.
Target had revamped its entire specialty department in spring 2006, clearing national brands and replacing them with exclusive foreign-born lines.
Industry sources also said Walgreens has talked of trimming space from its beauty department. One vendor said the drugstore chain was considering dedicating 6 feet of space to creating six 1-foot spacers to display visuals, rather than product. A Walgreens spokeswoman said the retailer currently has no plans to scale back its beauty department, but that it is considering a smaller prototype store for urban areas. Wal-Mart is also said to be mulling smaller formats that could include health care services. Wal-Mart, according to Mottus, has already tightened up its beauty footprint.
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