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Remote Control: HSN or QVC

Once dominated by QVC, beauty's TV shopping wars are heating up as HSN unveils a new strategy and declares itself ready for prime time.

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Beauty Inc issue 02/13/2009

The stigma is gone.

Once shunned by luxury beauty firms, TV retailers are now highly sought after, having proved their prowess at attracting viewers, telling compelling brand stories and moving a major amount of product in mere minutes. They’ve proven so successful that the question today isn’t whether TV shopping is right for your brand. It’s which of the two major players, namely HSN or QVC, is right for you—and whether they’re willing to take you on.


While there are a handful of others, the electronic shopping airwaves are dominated by the Saint Petersburg, Fla.–based HSN and the West Chester, Pa.–based QVC. Competition between the two is intense.

Both companies’ network signals reach more than 90 million U.S. homes, and each has carefully honed its personality, with QVC as the established, upmarket player, and HSN, the upbeat entertainer combining content and commerce.

HSN came first, making its debut on air in 1977, nine years before QVC got its start. But over the last 23 years, QVC has built itself into the larger, more formidable player with a global reach and revenues of $7 billion, more than two times the size of HSN Inc. Formerly IAC Retailing, HSN Inc. includes the Cornerstone catalogue business. Its TV shopping business accounted for approximately 65 percent of the company’s total revenue in 2007, or $1.89 billion. Health and beauty, not including fitness products, made up 19 percent of HSN’s sales, or about $359.1 million.

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Click here to view a by-the-numbers comparison of HSN and QVC >>
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QVC, which stands for Quality, Value and Convenience, got a head start in prestige beauty. It started courting department store brands back in the late Nineties and its decadelong quest has paid off handsomely. QVC also has a global reach, with networks in the U.K., Germany and Japan. In 2008, QVC’s global beauty business totaled more than $950 million.

Although the distance between the two is great, HSN is gaining ground. It launched a full-scale offensive to close the gap with QVC, which began with a network overhaul shortly after the arrival of chief executive officer Mindy Grossman in 2006.

 

“From our standpoint, QVC has an established business and has shown spectacular growth over the last eight to 10 years,” says Dan Brestle, vice chairman and president of the Estée Lauder Cos. Inc. North America, which sells Bobbi Brown, Clinique, Prescriptives and Ojon on QVC, and whose BeautyBank division developed Eyes by Design especially for HSN. But, says Brestle, “HSN is becoming a force to be reckoned with.”

The success of both HSN and QVC has attracted dealmakers, and plenty of private equity firms looking for high-margin businesses. “Selling premium cosmetics on TV can be a very profi table business,” says Cathy Leonhardt, a managing director at investment banking firm Peter J. Solomon Co. “For TV retailers, their shelf space is time. An important productivity metric is sales per minute.” Industry experts estimate that many beauty brands can generate between $1,000 to $1,500 in sales per minute. More established TV brands yield far more.

In addition to attractive financials, the promotional value of a TV appearance can’t be underestimated. “Television retailers play a significant role in building brands’ businesses, because they are a self-funding way to develop brand awareness and directly reach customers without having to be concerned with store traffic,” says Michelle Taylor, senior operating partner at JH Partners. The San Francisco–based private equity firm has invested in Bare Escentuals, Jurlique and Kate Somerville Skin Health Experts, which all do business with QVC, and GoSmile, which has a partnership with HSN. Taylor says a successful brand is typically on air every six to eight weeks.

Regardless of their difference in size, the shopping giants are endlessly compared and sometimes even lumped together. Naturally, executives from each are quick to point out their competitive edge to potential brand partners. “QVC is two-and-a-half times to three times larger than the next largest electronic retailer in the U.S., so there’s the immediate advantage of customer access and revenue potential,” says its president and ceo, Mike George, referring to the network’s lead. “But that is really just the starting point. The reason we’ve been the leading player for so long is we focus on how to respect and build the brand….We build their brands in the right way and in a way that has high customer integrity. Not only are we a lot larger than the next player, but because of our size and reach, the incremental benefit that brands get outside of QVC [at retail stores] is also bigger.”

George would not comment on how large the sales boost might be, but in general terms, brands that do business with either HSN or QVC say there is roughly a 10 to 20 percent sales bump at retail immediately after a show airs.

For it’s part, HSN has been reaping the benefits of new marching orders from its ceo. The results of Grossman’s revamp began to take root in late 2007 when HSN inked high-profile deals with the likes of Sephora, followed by the Estée Lauder Cos. and Coty Inc., in a swift bid to bolster its beauty authority.

During the reassessment phase, HSN sold its international operation in Germany, a small auction channel in the U.K. and a second U.S. channel called America’s Store. “I believe you focus on the biggest opportunity and put your talents against it. That’s what we’ve done,” says Grossman. Since the revamp, HSN has added more than 40 brands to its beauty portfolio, with a deal with makeup mecca Sephora ushering in nearly half of them.

The pair joined forces in December 2006 via a live broadcast from Sephora’s Fifth Avenue store in Manhattan. The alliance single-handedly put HSN’s beauty business on the map in the eyes of many, giving it instant credibility, something that rival QVC had been carefully cultivating for years. It also linked HSN with a host of upmarket brands—Clarins, Bliss, Cargo, Dior and Murad— that may not have had the inclination to sell their products on TV were it not for the prompting of an important retail partner, Sephora. “Going on HSN was more of an opportunistic move than a strategic one,” admits Jonathan Zrihen, president of Groupe Clarins USA. “But I see it as a very interesting public relations exercise to touch consumers that we may not have touched….At the same time, it is generating a certain business, otherwise it would not be a good opportunity.” In addition to being included in the Sephora shows, Clarins now airs three to four freestanding segments on HSN annually. “You need to be where consumers want you to be, as long as you showcase the brand in the right environment with the right equity,” says Zrihen.

Referring to the shot in the arm that Sephora gave the network, HSN’s senior vice president of beauty Michael Henry says, “Sephora was an eyeopener for many brands. It was clear that HSN was able to deliver on its own rebranding and companies saw an opportunity for HSN to bring their brands alive in the same way.”

Since joining HSN in 2002 from L’Oréal, where he was vice president of Lancôme promotional marketing, Henry has worked to broaden the once skin care–heavy portfolio, which was highly dependent on three brands—Signature Club A, Perlier from the Borghese family and Serious Skin Care from Jennifer Flavin-Stallone, wife of Sylvester Stallone. Today, there are some 70 beauty brands in the mix across color cosmetics, hair care, fragrance and bath and body.

To make the shift from a value business to a prestige-orientated one, Henry recalls: “We didn’t bring new brands on in a highly promotional way. We focused on star products, stories and strong entrepreneurs. Then we began moving existing brands to that strategy.”

In addition to piggybacking off of Sephora’s might, HSN has attracted foreign-born brands, including Liz Earle Naturally Active Skincare from the U.K., Napoleon Perdis makeup from Australia and M. Asam from Germany. It also continues to add department store brands. This month, the network has secured a month-long exclusive for the launch of Sarah Jessica Parker’s latest trio of fragrances, the Lovely Collection, while last December, HSN featured Lancôme’s Oscillation vibrating mascara. “HSN is a great way to demonstrate a product breakthrough,” says Henry. In a six-day stretch, between Lancôme and a Sephora segment that featured DiorShow and Givenchy Phenomen’Eyes, HSN sold more than 33,000 mascara tubes, says Henry.

“We make brands come to life,” says Grossman. “It’s not just entertainment. It’s a combination of entertainment and commerce. We believe in really being able to understand brands and being able to bring them to life in a unique and compelling way.”

Grossman, who joined HSN from Nike Inc., where she served as global vice president and head of the company’s $4 billion apparel business, says, “I’m probably not the most traditional retailer, but I understand brands. We look at brands as partners, not as vendors, and look to develop them in a sustainable success over time.”

The goal, says Grossman, is to leverage brand content across multiple platforms, including hsn.com, which accounts for about 28 percent of revenue, and social networking sites such as Facebook and YouTube. HSN gets one million page views a month on third-party sites like these, says Grossman.

As a point of comparison, about 25 percent of QVC’s revenue is done via its Web site.

“We don’t even think of ourselves as a TV retailer anymore,” says Grossman. “We think of ourselves as a network of experiences with TV being the critical component. It’s a different world than it was 10 years ago.”

Different though their strategies are, the potential for growth is crystal clear for HSN and QVC. Though today’s electronic retailers have eradicated the taboos of the past about buying products from television, still only a small percentage of women have actually done so. The NPD Group reports that electronic retailing is still a small part of the overall beauty business, with a mere three percent of women reporting they buy beauty products from the TV shopping networks, according to Karen Grant, vice president and global beauty industry analyst. But when it comes to the 45- to 64-year-old set, NPD found women are just as likely to shop via television as they are in high-end department stores. They gravitate toward the glow of the small screen to learn, firsthand, from the creators about what makes the item in their well-manicured hands indispensable.

“QVC seems to be the TV station they are more likely to watch,” says Grant. “But regardless of what channel they watch, consumers are just as likely to purchase from QVC and HSN. About 77 percent of women who watch these channels say they’ve purchased a product from them in the last 12 months.”

QVC’s lead in beauty can be traced back to the arrival of Allen Burke, who joined the retailer in 1997 as director of beauty and cosmetics. Burke, who was previously divisional cosmetics merchandise manager for Dayton Hudson Corp.’s Marshall Field’s department stores, began his role at QVC with bold strokes.

“We wanted to do exactly the opposite of was being done on television in the beauty arena,” he says. “The conventional offering of a television retailer in beauty was a lot of lines that were made for TV. They weren’t addressing who the customer really was. The customer wanted good quality, and they weren’t expecting to get it at half price. They were happy to pay full price but they didn’t want boring product that was artificially hyped.”

To that end, Burke decided to focus squarely on luring prestige brands. When he arrived at QVC, the beauty business lagged behind the well-developed jewelry, apparel and home categories. Bare Escentuals, today one of the best-selling brands on the network, had recently launched, followed by Smashbox Cosmetics in October 1998, Philosophy in June 1999 and brands like Lauder’s Prescriptives in April 2003. Today, QVC’s brand portfolio includes Clinique, L’Occitane, Shu Uemura, Kinerase, Mally Beauty and Frédéric Fekkai.

The network has introduced these brands to legions of new customers. “When a new brand comes on for the first time, the number of customers who never bought from QVC is going to be a very small percent, typically 1 to 2 percent,” says Burke. “But the number of people who are buying that brand for the first time is enormous. It’s not uncommon for it to be 60 to 70 percent of the sales.”

QVC ceo George won’t say where beauty ranks among its businesses, but the category is growing at a double-digit rate, globally. “We view beauty as one of the most important and strategic categories within our portfolio,” he says. “We like beauty because it attracts a diverse and broad range of customers. Beauty is a good category to bring in new customers and in turn migrate them to become core customers….If you are flipping through the channels and stumble upon Bobbi Brown or Kate Somerville or Dr. Denese [Dr. Adrienne Denese, creator of the Dr. Denese New York skin care brand], that’s a very different experience than going up to the makeup counter at a traditional department store or self-purchasing at a specialty store.”

Beauty is also a category with high demand, says George, which is why in September QVC unveiled the Beauty Channel, a 24-hour channel broadcast in the U.K. The first-ever spin-off venture for QVC, it airs a mix of original content and replays of earlier programming. What’s more, sometime this year QVC plans to test an interactive television application that will allow viewers to use their remote controls to buy products or access additional content, and also hopes to create live programming exclusively for qvc.com, a more than $1 billion business.

Both HSN and QVC have served as effective incubators of niche beauty brands, many of which did not have the financial wherewithal to do business with department stores. In the last decade, as beauty shoppers defected from established brands to plucky, emerging ones, they increasingly began to turn to HSN and QVC. Consequently, a number of those brands have developed into major players in the industry.

Tarte, a hip natural makeup line, has seen its sales surge 175 percent since it first aired on QVC in 2005. Fresh from a four-day visit to QVC’s studios, founder and ceo Maureen Kelly says, “QVC has helped fund our growth” by giving the young brand exposure. “We’re a small brand and they held our hand through the process. We’ve had hits, and some misses, but QVC stood with us.” She says QVC also shares marketing and legal resources, often costly expenses for niche brands. In turn, Tarte creates exclusive products for the network and launches new ones on the airwaves rather than in retail stores.

Both Bare Escentuals and Philosophy—incubated by QVC—are now publicly traded companies. When Bare Escentuals first aired in QVC in the summer of 1997, it was primarily a bath and body company with revenues of less than $30 million, recalls ceo Leslie Blodgett. By her February 1998 show, “In 20 minutes, we did as much as we would do in a boutique in a year,” Blodgett recalls. Today, Bare Escentuals generates more than $511 million in revenue. “QVC is massive,” Blodgett says. “There have been shows where I’ve done $1 million in an hour.”

“QVC for us is a great launch platform,” she continues. “It definitely creates awareness in our stores the day of a show. So when we’re on the air, the phones are ringing in the stores.” An appearance on QVC can lift boutique sales by 10 to 20 percent, she says.

Another beauty executive says that for a large brand, an hour segment on a TV shopping channel could generate the same amount of sales a department store does over the course of a year. Six segments, which is typically the number of times a beauty brand appears on air, would be much greater.

Of course, dwindling department store foot traffic only enhances the efficacy of the airwaves. While HSN’s Grossman says she doesn’t focus on gaining from the misfortune of others (read: department stores), she knows should shoppers continue to steer clear of stores—either out of guilt or necessity—it could be a boon to TV retailers.

“In this environment, where we do have the benefit is that we are in people’s homes. We do have the benefit of communicating about product, we have a diverse product portfolio and are able to be flexible and make decisions in real time,” says Grossman. “We are not just a commerce vehicle. We are also a marketing vehicle….That is an advantage in this environment.”

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Click here to view a by-the-numbers comparison of HSN and QVC >>
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