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Beauty Retail Thrives Against E-commerce

As beauty brands seek to forge a deeper connection with young consumers, they’re discovering there’s never been a better time to set up shop.

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The Ultimate Brand Experience

Steve Belkowitz

Jurlique

Jurlique

Courtesy Photo

MAC

MAC

Courtesy Photo

Appeared In
Special Issue
Beauty Inc issue 03/21/2014

In the past few years, New York City’s Grand Central Terminal has transformed into beauty central. L’Occitane, Origins, MAC Cosmetics, Aveda, Jo Malone, Art of Shaving and Bobbi Brown have all set up shop in the transportation hub, where up to a million people a day—with billions in spending power—pass through.

On the other side of the country, in Las Vegas, Dior Beauty, Inglot, Fresh, MAC, Kiehl’s Since 1851 and soon, Nars, are all paying pricey rents at The Forum Shops at Caesars and creating enough of a critical mass for the shopping center that attracts 28 million people annually to host its inaugural festival of beauty on March 21-22.

Not so long ago, brick-and-mortar stores were proclaimed dead as Amazon.com and digital commerce ascended. Yet, beauty retail is thriving against the e-commerce odds. Big and small brands alike are investing heavily in an on-the-ground presence to catch the eyes and dollars of local shoppers and tourists. Maureen Case, global president of Bobbi Brown and Jo Malone, declares retail is a “fantastic distribution opportunity for the future” at the Estée Lauder Cos., which has roughly 925 freestanding stores worldwide, half in North America, with MAC boasting the largest network on track to reach some 250 stores this year.

In its last fiscal year, L’Occitane increased the number of its owned stores globally by almost 14 percent to 1,053. Kiehl’s has 300 freestanding stores worldwide. Procter & Gamble, not known for its strength as a retailer, has pressed ahead with bricks-and-mortar for Art of Shaving, boosting its store count from 25 to 128 in the four years since acquiring the brand. Jurlique has 70 concept locations in nine countries, and Benefit has around 55 stores worldwide.

“Kiehl’s is still moving forward. Fresh is still moving forward. L’Occitane continues to move forward. Those are brands, like ours, that have something to say and they want to make sure they can say it in the clearest way possible and in a way that they are able to control,” says Mary Beth Peterson, managing director of the Americas for Jurlique. “Clearly, stores have paid off or they wouldn’t be continuing.”

For Karen Buglisi Weiler, global brand president of MAC Cosmetics, freestanding stores are key to a well-rounded distribution strategy. “We have a commitment to serve all of our consumers no matter where they shop. Department stores are still the biggest part of our business. It is the foundation of our business,” she says. “Our stores are complementary. They help to raise awareness and, if you raise awareness, it benefits all the businesses.”

Kilian Hennessy, founder of By Kilian, a niche fragrance brand that opened a New York boutique last year, agrees. At a department store, he says, “you are never 100 percent at home. Your own boutique is freedom. It is the space where you can say exactly who you are, the way you want that to be said.”

Aggressive retail pushes are also a response to the influx of Millennial shoppers into the spending pool. Paco Underhill, founding president of Envirosell, says brands “have to find a new, younger customer in another kind of venue. There are people who wouldn’t think of walking into a major department store that they think is old and stuffy, but they would be very happy to walk into a cool-looking store.”

It is not only big, established brands that are taking the retail plunge. Small brands are seeding streets and malls with their locations. Caudalie, L’Atelier Cologne, Hourglass, Bite Beauty, Intelligent Nutrients, Murad, E.l.f. and TheBalm are a few that have or will soon make their retail debuts. “I see a lot more niche brands having opportunities that they didn’t have five or 10 years ago because consumers are out seeking those experiences,” says Susanne Langmuir, founder of Bite Beauty “We have seen things change from just stocking shelves to creating stores that are more memorable, and that is going to be even more the case. We have been through a stage of trying to compete on price for commodities and that is going to be really dangerous in the future.”

Such a strategy doesn’t ignore e-commerce; rather it’s conceived in the context of the digital onslaught. This year, the National Retail Federation expects online sales will grow 9 to 12 percent, overshadowing retail sales growth of 4.1 percent. Narrowing it down to beauty, the NPD Group estimates that direct-to-consumer sources accounted for nearly 20 percent of prestige beauty sales in 2012. Across prestige and mass, A.T. Kearney estimated that beauty e-commerce generated $3 billion in sales in the U.S. in 2012. Even if that is a lowball figure, it shows that online beauty shopping hasn’t overtaken in-store purchasing habits.

Beauty might be a category in which retail plays a special role that can’t be entirely emulated online, particularly when shoppers are seeking out new products rather than replenishing familiar ones. “It’s not electronics. It’s not small appliances. It’s not shoes,” says Candace Corlett, president of WSL Strategic Retail. “The volume that goes online is a fraction of total sales. There is still a majority of shoppers tied to their bricks to buy beauty.”

Todd Brisky, managing director of Art of Shaving, isn’t surprised the Web hasn’t conquered personal care. “If you look at the growth in e-commerce, you see nice growth in beauty, but it is about half the rate of other categories,” he says. “In general, the sensorial nature of the products lends itself to retail. All of our products are based upon essential oils. For recruiting consumers, the aroma and the experience of them in a physical store remain critical. We are in department stores and in Sephora, and we have a robust e-shop presence, but the retail stores themselves are an immersive consumer experience that is important, especially for introducing the brand to consumers.”

“An immersive experience” neatly sums up what most brands are after today when creating their own environments. A successful beauty store can’t be, as Case describes stores in the past, four walls plunked down to enclose a department-store counter. Shoppers simply won’t get off the couch for that. “Today, the customer has so many more choices and so many more opportunities to shop, so how do you continue to create a compelling retail experience? That is the challenge for all of us,” says Buglisi Weiler.

What makes a compelling retail experience? Elements like play, customization, interaction and unique product offerings are key. Any barriers that existed between product and user are being broken down. “People want to play, and not in such a structured way as a lot of makeup counters have today,” says James Gager, MAC’s senior vice president and creative director. To that end, Gager details the evolution of MAC’s store design and formats. “We are creating play tables that are very modular,” he says. “It is different than having a tester at an angle. It is more about playing with products that are in front of you on a table. It is akin to what you might experience at your own house where you have makeup on your table.”
In Caudalie’s stores, about 20 percent of the space is devoted to product sales on average and 80 percent to experience. The experience portion is encapsulated in what the brand calls BBB, for “Beauty Barrel Bar,” an oak-clad table that has stools, mirrors and a sink. Licensed aestheticians conduct complimentary 10-minute facials that incorporate cleansing, a mask, serum, tinted moisturizer and bronzing powder application. “We have an exceptionally high conversion rate with this,” says Caudalie cofounder Bertrand Thomas. “People who come in and go to the BBB will buy the products.”

Bite Beauty hit upon the concept for its recently opened New York store when it did an event at Sephora’s Yorkdale location in Toronto that allowed customers to customize their lipstick colors and watch their personal colors be made. “Yorkdale showed me that there is this behind-the-scenes, Willy Wonka aspect that is really fascinating to people,” says Langmuir. “Our focus first and foremost in the store is to spend the time we need with each person to personalize and customize the product. We can only maybe connect with 100 people a day. It is not how we are going to completely grow our brand, but the meaningful connections that you have with people transfer well beyond that person. A client will come in and make a lipstick and then two weeks later she will bring three friends.” An added bonus of the customized product is that Bite Beauty’s store is not eating into its Sephora business. Langmuir says that 5 percent of the New York store’s sales are from the ready-to-wear line carried at Sephora.

Services, such as brow shaping and makeup applications, have also become a common denominator for brands to attract new customers. Not only do they provide a point of difference from what’s available virtually—“Nobody has learned yet how to wax brows online, and I don’t think they will,” chuckles Aurelian Lis, general manager of Benefit Cosmetics for North America—but there’s also a measurable impact on sales. “The services we offer in our retail locations are a way we distinguish ourselves and a reason for our consumer to be there. She comes in regularly for them and is very loyal,” Lis says.

 

Underhill elaborates that such bonds are extremely strong. “People like being touched,” he says. “Being able to touch people in the right way makes a very human connection and human connections are one of the ways we build brand loyalty.”

Technology, too, is enabling brands to enliven the in-store experience. Make Up For Ever has video recording studios where customers can film in-store lessons in order to follow them at home. Those studios are being transitioned to HD capabilities to correspond with the brand’s HD foundation franchise. At TheBalm’s new San Francisco store, seven iPads enable customers to capture the process of putting together their look. “With the technology available, it made perfect sense to answer what I think is a big problem, and that is not knowing what to do with the makeup when you get home,” says Marissa Shipman, the brand’s founder. “You don’t look like everyone else on YouTube, you look like you. This gives you an opportunity to know what is going to work for you and how to make it work.”

Benefit has begun to leverage technology to enhance personalized customer service. “Our artists and aestheticians have access to what somebody has purchased before when they are speaking to a customer,” says Lis. “We have new online scheduling tools, so everyone can book appointments online for brow services. We use these tools to improve the quality of service.”

Case envisions technology enabling individualized customer attention no matter if the customer is at a store in India or New York. “We need to make sure the technology enables us to track her journey all over the world,” she says. “In the store of the future, you will be able to have a Jo Malone stylist who knows you, who you can communicate with in another country when you might need some advice. The experience needs to be seamless for it to be really impactful.” (Bobbi Brown is launching an app in the U.K. that reaches consumers across the brand’s retail partnerships, moving the brand closer to realizing Case’s vision.)

For its part, MAC is putting a greater emphasis on tailoring stores to specific audiences. Gager notes that the brand is working on at least five different formats, including a fashion-centric store that appeals to trend-driven customers, a lipstick kiosk, and a youth-oriented store that is scheduled to open at The Florida Mall in Orlando later this spring. Buglisi Weiler views the tailored formats as an extension of product assortment shifts that have taken place in stores for a long time to adjust to regional preferences.
Corlett says such a strategy addresses the “all about me” ethos borne out of the Internet. “I spend hours online with me and the me look-alikes,” she says, “so when I go to shop, I want to be around me, too, and I want to see products for me. I want to have sales associates who understand me.”

The “all about me” effect of social media extends to stores directly as well. At Bite Beauty, Langmuir says customers generate a “tremendous number” of Instagram and Facebook posts and Vine videos. “Almost everyone who comes to make a lipstick posts something, right there [in the store],” she says.

At Nars, chief executive officer Louis Desazars says the brand is looking to turn its stores into a clubhouse of sorts. “We have been exploring different ways to turn our boutiques into destinations for our community of online fans, who we call NARSissists,” he says. “We host events where they come together and share their favorite products and application techniques with each other in person. This is one way that we’re bridging the online and offline experience.”

For many brands, retail stores are as much about marketing as about moving the merch. Although she didn’t discuss the profitability of MAC’s premier flagships, Buglisi Weiler outlined how the brand places those prominent stores in areas with costly real estate to capture high customer traffic. “It is almost like permanent advertising. If you can put your brand in front of 180 million people a year, that’s better than any magazine that I know of,” she says. “The more people we put this brand in front of, the more opportunity we have to recruit, and part of our recruiting strategy is putting ourselves in the busiest cities on the busiest streets in the world.”

Underhill calls this approach the “cathedral strategy.” “I build the cathedral, people come in and marvel. It is a way to reinforce the brand even if customers do their purchasing at the local church,” he says
Other brands prefer to create a sanctuary. Benefit often constructs smaller stores in quainter neighborhood areas. Hennessy is adamant about placing stores in locations that buttress the brand’s chic luxury positioning. In Paris, he’s holding out for a space on the Rue de Castiglione, and in Dubai, he’s targeted the luxury wing of the Dubai Mall.

Beyond streets and malls, beauty stores have been popping up in rather atypical locales, including hotels, airports and train and subway stations—L’Oréal situated an interactive kiosk at the Bryant Park subway station in New York. Benefit kiosks have been proliferating in such environments. When he was at a convention in Las Vegas, the reason for Benefit doing these kiosks became clear to Lis. “I stood next to our vending machine for five minutes, and there must have been half-a-dozen people who came up to it and they Instagrammed it with hashtag Benefit. It is about surprising our existing customers in places that they would not otherwise expect, and we use it as a way to introduce the brand to new customers as well because it is such a large traffic hub.”

MAC has a penchant for train stations. “The whole philosophy is putting the brand in front of as many people as possible,” says Buglisi Weiler. “Our business model is driven by transactions.”

If these unusual stores and kiosks don’t make money, most brands are willing to take the financial blow. It’s long been the case that big brands handle losses at a handful of high-profile stores, but it is increasingly the case that smaller brands are tolerating retail losses, too. Thomas’ objective is to have Caudalie’s stores break even. He says, “Our profits come from the retailers. That is our story and our life. That is our heritage. We didn’t expect profits from the boutiques.” 
Bite Beauty’s New York store is profitable, but Langmuir had expected it to take a loss and was OK with that. “I thought, ‘What’s the liability? How much am I going to have to take from my other business to fund the store?’” she says. Her goal with the store is to make relationships with customers and to gain knowledge about them. “With an online experience, you collect a lot of data. You might know who she is, how old she is, the other brands she might be interested in, how much she spends, but truly having a face-to-face and getting to know who she is, is a totally different set of information,” she says.

The willingness to suffer losses might be the result of a reexamination of the interplay between retail and wholesale. It was an oft-heard mantra in the past that freestanding stores would cannibalize a brand’s wholesale partners, but the opposite has proven to be the case. Make Up For Ever has adopted the strategy of opening stores in malls where it has existing distribution at Sephora, including Westfield Topanga, Garden State Plaza, King of Prussia and Westfield Valley Fair Mall in 2013. “We are finding very minimal cannibalization,” says Noah Rosenblatt, vice president of retail for North America at Make Up For Ever. “The big question when we decided to open freestanding stores was, will it build awareness? It is really about being able to thrust the brand in front of the customer more regularly and that is why the cannibalization is so low.”

In the end, online or off, it boils down to the big O. “The future of the world is omnichannel,” pronounces Case. “You want to meet the customer on her own terms, wherever she is.”

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