The biggest issue confronting the industry is one no one wants to talk about, even the principal player: namely, Amazon and its quest to become a power player in the beauty category.
This story first appeared in the March 8, 2013 issue of WWD. Subscribe Today.
Ask Chance Wales, Amazon’s director, category leader for health and beauty, for specifics about the exact plan and he’s cagey.
But he has no hesitation in making his intent crystal clear. “2013 is Amazon’s year of beauty,” declares Wales. “We are planning on ending the year with a much different customer experience and selection than the one we currently have.”
While Amazon may be bullish on beauty, for many of the brands the e-commerce giant hopes to do business with—particularly those in the prestige sector—the feeling isn’t necessarily mutual.
Although the company is an e-commerce powerhouse that has fundamentally changed how people shop online and off, when it comes to beauty, as one former head of a top-10 prestige brand who would speak only on the condition of anonymity says, “Amazon has become the best aggregator of the gray-market industry in the world.” Indeed, through its Amazon Marketplace program that enables third-party retailers to sell on the site, superluxe brands from Tom Ford to Chanel, Lancôme to La Mer and many, many more, are all available on Amazon.com—often at a discount and virtually never sourced directly from the brands themselves.
“The issue is price control and price protection,” says Neil Stern, a senior partner at the retail consulting firm McMillan Doolittle. “What most prestige brands don’t want to see is an item that is $50 at Macy’s and $39.99 at Amazon. It’s happening now, through Marketplace,” he continues. “Prestige brands don’t like it, but at least they can say, ‘It’s not us doing that.’ If you are going to establish direct relations, you want to make sure you are controlling the equity of the brand.”
That may be easier said than done, says one brand leader who does sell direct to Amazon—with reservations: “It’s not ideal, because we are not able to control the environment and the branding and the way products are sold. We are doing it to keep our foot in teh door and understand the dynamics of what’s going on.”
The numbers bear out the pressure to understand the dynamics of online commerce in all of its manifestations. The NPD Group reports that in 2012, prestige beauty sales grew 7 percent overall, while sales in the direct-to-consumer channel, which combines e-commerce and electronic selling, rose 17 percent. For the fourth quarter of last year, prestige sales overall grew 5 percent, versus 33 percent in the direct-to-consumer channel. “The online channel is outpac- ing all other channels, sometimes at twice the rate,” says Karen Grant, vice president and global beauty industry analyst at NPD. “Consumers are looking for convenience.”
Also of note is the predilection of the prestige shopper in particular to cross-shop channels and platforms. “She shops the online space even more than an average shopper and she will also shop mass as much as the average shopper,” says Grant. “She cross-shops more than any other shopper.”
WSL Strategic Retail’s report, “How America Shops 2012” paints a similar picture, with the Internet emerging as retail’s fastest-growing channel. One question in the report asked people if they had made purchases from a retailer’s physical store or Web site or both. The most, only 12 percent, shopped at both Wal-Mart and its Web site. Yet 49 percent of women purchased something from Amazon in the same period. Says Wendy Liebmann, WSL’s founder and ceo, “In general terms, you look at that and say, ‘Boy! I’ve got to get my Web site up to speed or I’m going to lose those people.’”
She continues, “You can understand why people might say, ‘I’ve got to have some kind of relationship with Amazon or I’m going to have this drain of shoppers who are going there for other things, and who, while there, might buy my stuff, too.”
Indeed, according to Wales, Amazon’s current customer is very beauty-involved. Citing Nielsen research, he says that Amazon’s current shopper base of 188 million active customers accounted for 74 percent of all offline cosmetics purchases in the last 90 days. “Just simply raising awareness is a massive opportunity,” says Wales. “Layer on top of that improved selection and an improved customer experience and we get very excited about the beauty business.”
Already, Amazon is considered the e-tailer with probably the best customer understanding in the business, and therein lies its power. Liebmann ticks off some of its strengths in rapid succession: “The power of their analytics to understand the shopper—it is CRM to the power of 10,” she says. “Their ability to not only craft a custom message, but to continue to deliver more and more categories that are relevant, from the commodity to the specialty. The efficiency of the operation— they’re in the distribution business, so I can get what I buy anywhere, anytime, either free or relatively inexpensively.
“There are categories where they are best-in-class—everyday products, anything you need with some regularity, they are building a great model around. People swear by their subscription services.” Liebmann pauses before summing up. “And they are now viewed as the go-to place for checking everyday low price, which is what Wal-Mart was and Amazon has become.”
Of course, there are the all-powerful customer reviews, too. “What Amazon does so well is make you feel like part of a community,” says Grant. “They give you product information, tell you what other people think about it, tell you what other people who bought it also bought,” she says. “Because there are so many people shopping with them, you feel a trust. You know they are going to offer you the best deal and unbiased information and convenience.”
Already, Amazon is leveraging those strengths in beauty. Wales describes a recent test with Olay Pro-X Advanced Cleansing System using Amazon Vine, a program in which the site’s most-trusted reviewers are invited to test and post their opinions about new items prelaunch. “We were able to seed the product in the marketplace, get feedback from the customer base and then use the ability of Amazon to be a retail and advertising platform by working with the ad team to put display ads on the site to drive awareness of the brand and to drive people to the detail pages, where there were already reviews,” he says. “We were also able to put marketing programs in place, so that if a customer bought Pro-X, we could show her the rest of the products and e-mail her when it’s time to replenish.”
When asked how successful the program was, Wales declined to provide figures, saying only, “Sales were strong. We were happy.”
Of course, for mass-market brands, selling on Amazon makes perfect sense. One marketer who insisted on anonymity estimates that online sales for mass brands constitute 6 to 7 percent of overall sales, versus double that for the prestige category, with the primary difference being the cost of shipping versus the cost of the product. Programs like Amazon Prime and multi-item orders lower the price of shipping considerably and make such purchases economically viable for shoppers.
Conversely, for the top prestige brands, selling direct on Amazon seems to make very little sense at this point. “The stronger your brand is, the more control you have of your destiny,” says Stern. “If you can keep your brand strong and demand strong, you can keep your existing distribution strategy. Prestige brands spend a lot of time making that happen.”
The efforts of such brands hasn’t been for naught. When asked if prestige brands need Amazon, Liebmann says, “If you had asked me three or four years ago, I would have said yes. But today they need them less now than they did,” she says. “Then, some of the brands were so weak in terms of their strategy and execution around digital that you thought, ‘My gosh, shoppers are looking for a digital store to buy this stuff and brands are doing nothing to avail them of that.’ A lot has changed since then.”
Selling directly to Amazon might also raise issues in Europe, where the distribution of selective luxury brands is highly legislated and regulated.
But for smaller and midsize prestige brands, Amazon could be an attractive distribution option—not unlike Sephora in its early days in the U.S., as it worked to establish a toehold, and Ulta, as it carved out a place for itself in higher-end beauty.
“For a lot of brands it could be opportunistic,” says Grant. “We saw that with brands that went on television—it wasn’t a case of trading down. If they play the Amazon card similarly, it will allow them to have a broader reach with consumers, rather than people thinking they’ve lost their prestige status.”
Skyn Iceland is one such brand that has been testing the waters. As cofounder of the beauty e-tail pioneer Gloss.com, Skyn Iceland’s founder Sarah Kugelman is more experienced than most with the online beauty channel. “It is going to be very competitive with the beauty dot-com sites,” she says. “Amazon doesn’t have the same image or content, but it has an incredible audience and incredible search capabilities.”
Elaborating on the impact of the audience size, Kugelman notes that selling to some existing large beauty specialty stores with a brick-and-mortar and corresponding online presence can be an arduous and expensive proposition, whereas on Amazon, the entire process is basically automated. “I don’t have to have a sales force and I can have a huge audience just by setting up online,” she says. “It is the flexibility and the autonomy that are extremely attractive.”
The downsides are the environment and the clutter, hurdles which require a certain amount of savvy to overcome. “You have to be digitally aware and educated to build this business,” says Kugelman. “It’s a different skill set.”
In addition, many smaller niche brands run into concrete roadblocks of resistance from their brick- and-mortar retail partners. Says another brand founder who sells to Amazon directly as well as to luxe specialty stores like Barneys, “I don’t care about saying if we’re sold on it, but I can’t publicize it because now retailers are threatening the brands that do it.” This person says that the realities of today’s business landscape present few other options, however, noting, “Even though everyone says beauty does well, working with retailers is expensive and sales are down. We have to think in creative ways. If you’re a brand that is very prestigious, but not very known or easy to find in stores, Amazon gives you the missing link that makes it easy. You could argue that anyone could go on our Web site and buy the product, but with Amazon, there is a sense of trust. It gives people a sense of ease.”
Another niche brand quantifies the opportunity as significant for a brand with $10 million in sales, noting Amazon could comprise 3 to 5 percent of that.
Kugelman wouldn’t comment on any figures, but overall is bullish about the prospects. “It is getting very competitive online,” she says. “If you’re a customer, how many sites are you really going to shop on? You want to go where it’s easy to navigate, where they’re not going to charge you shipping and where you can get the brands you want. As a brand, you want to go where you can get the best margin and highest revenue. All of these point to Amazon being successful.”
Still, as Kugelman points out, image and experience, two key drivers of prestige beauty sales, aren’t Amazon’s forté. Wales insists that will soon change. “It is fair to say we are a little bit behind,” he concedes. “The beauty experience on Amazon looks a lot like the kitchen or housewares experience. We have some catch-up to do and that is what we’re working on.” (When asked, however, if beauty will be getting its own tab on the site—currently it resides on Grocery, Health & Beauty—Wales laughs before saying, “We have a lot of things on our wish list. That would certainly be one of them.”)
Wales also declined to go into specifics about what a new beauty section might look like, noting only that “when we find functionality to enable a customer to make a better purchase decision, we are going to provide that information. There is a lot of innovation we can add, particularly in prestige, but also in the mass space.” When pressed for details, he elaborates on the upcoming relaunch of the beauty space, declining to provide a time frame. “The things we are thinking about are cleaner detail pages, additional functionality to help customers choose products, like taking your own image or skin type and matching it to a particular color,” he says. “Think about the ability to create a virtual counter experience online. Once we have solved that challenge, that is what the brands are looking for.”
Maybe—but there are those who would argue that others have cracked the code. “Think of sephora.com and Beauty.com,” points out Grant. “They know everything about their shopper and are constantly finding ways to not just trade on price, but to trade on the innovation and fashion and excitement of the moment. Those things are not what Amazon is traditionally known for.”
Wales says internally he and his team are well aware of the criticism. “For me, I didn’t fully appreciate the emotion that exists at the brand level within beauty. We are very data driven, and hopefully what you’ve heard over the last six months from us is that we are acknowledging there are better and more-enhanced customer experiences out there and beauty is a space that requires more of that. It took me a while to get adjusted to the fact that [online] comments are emotional rather than data driven. Having said that, what’s great about beauty is the passion.”
Be that as it may, the brands that Wales ticks off when asked which brands he would most like to secure direct distribution for—Clinique, MAC, Chanel, Estée Lauder and Lancôme—show no signs of being swayed in their decision not to sell to Amazon. “At this stage, I don’t know,” says a chief executive of one top-20 company. “Consumers will help us decide. But the basic principle remains that we are very happy in the way we deal with our partners today, offline and online.
“It depends on if Amazon comes with the right proposal as well,” this person continues. “We’re not stupid. But if they think they own the place and we can’t live without them, maybe we don’t need them.”
Liebmann is silenced when asked if Amazon needs the brands. It’s a query that seems to raise more questions than answers. “Well,” she says. “The thing for me about Amazon is, what business are they really in? I think about Amazon as being in the business of selling things, not one particular category, but knowing who I am so they can figure out what I want,” she continues.
“How important is beauty as a category? What role does it play? Will they get tired of the battle for prestige brands? Will they do what Sephora and Ulta did and find a way around it?”
Ultimately, says Stern, size may trump intent. “Look at the macro picture—this is not Amazon’s assault on the beauty industry. This is Amazon’s assault on retail,” he posits. “They are very good and very determined. They have capital and they have a long-term perspective that they bring to the business. They’re going to be a factor and they need to be taken very seriously.”