Retail’s Tidal Shift

Erosion of the department store business is creating a clamor for freestanding stores plus Internet and TV ventures.

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Beauty Inc issue 06/15/2007

The first stirrings of a retail sea change are being felt through the prestige cosmetics industry, as manufacturers make subtle adjustments to their long-standing distribution strategies in the wake of the calamitous department store consolidations of the past two years. It’s now a multichannel world.

This story first appeared in the June 15, 2007 issue of WWD.  Subscribe Today.

Specialty store chains, TV shopping and the Internet have been cultivating their own consumer  constituencies favoring new shopping habits and preferences. A number of major brands have responded by reaching out; some by opening freestanding stores to better cement the consumer bond based on service.

“Five years ago, 100 percent of our business was done in department stores,” says Edgar Huber, president of the Luxury Products Division of L’Oréal USA. “Today, 25 percent of our business is done outside department stores.”

Freestanding stores, specialty store chains like Sephora and Web sites account for that. Huber points out that this spring, for the first time, apparel ranked number one on the Internet, eclipsing traditional e-commerce staples. “This is a clear sign to the cosmetics industry that people now trust in this way of shopping,” Huber says. “It’s a great future for us.” In March, L’Oréal announced that it was shutting down its nearly 300-door, brick-and-mortar U.S. distribution of Biotherm in favor of marketing the brand over the Internet. The result: over $300,000 in a month, a sales record for the Biotherm site, according to industry sources. “You have to go where the customer is and make it an easy shopping experience to seduce them,” Huber notes.

Little Pieces in an Omelette

Dan Brestle, chief operating officer of the Estée Lauder Cos., sees alternative forms of business like little pieces in an omelette that can extend and enrich a brand’s consumer mix. Alternative distribution can add sales growth, but the new channels cannot replace the historic core, he claims. Whether it’s Estée Lauder or Avon or Procter & Gamble’s Cover Girl—the major brands were built in a specific channel of distribution, he maintains, and those brands cannot swap their natural habitat for another without a loss of brand integrity. One of the less problematic alternatives is TV shopping, which is divorced from brick-and-mortar. Brestle noted that TV shopping was once looked upon as downmarket. But that was before the renaissance of QVC as the premier prestige TV channel. Bobbi Brown went on the air and, according to industry sources, rang up $1 million in 40 minutes. “You can put Bobbi Brown on TV,” Brestle says, “but her primary channel is still specialty stores.”

The ascendancy of QVC was not lost on Tampa, Fla.-based Home Shopping Network, which rose to the challenge last December by inaugurating a show with Sephora. The channel has been building its beauty portfolio with brands like Wei East; Talika eye products from France; Napoleon Perdis cosmetics from Australia; Ready to Wear Beauty, a makeup artist brand by Philippe Chansel, and Cynde Watson’s Color Theory, another artist brand of pencils and color sticks.

The Federated Department Stores (now known as Macy’s) takeover of May Co. and its closing of at least 82 doors sent shock waves through the industry. Brestle outlines the steady erosion: Lauder did business in this country with 175 department store nameplates in 1970, 75 in 1990 and 16 today. The business has not shrunk so much as shifted. At Roosevelt Field Mall on New York’s Long Island, there were three department stores and two specialty stores in 1990. Today the mall still has three anchors, but those are surrounded by 18 specialty stores, all of which sell beauty. “We should own the mall,” he observes. “The young mall shoppers are comfortable going from store to store, just as their mothers were comfortable going from floor to floor in department stores.”

New Stores, New Alliances

And it’s not over yet in the view of one of the most highly regarded retail analysts, Paco Underhill. “If I were a prestige brand, I would look at the department store channel with a great deal of trepidation,” he declares. “Federated [Macy’s] would be healthier if it closed [another] 15 percent of its properties.” He adds, however, that “what is healthy at Federated is extremely healthy.” Neither does Underhill subscribe to a doomsday scenario. “The department stores aren’t going away,” he says. “The format is not dying, it’s just maturing.” However, Underhill foresees more brands opening their own stores. He also indicates that there is room in the market for more midtier beauty-focused chains like Ulta.

Another top analyst, Wendy Liebmann, president of WSL Strategic Solutions, says, “I think the Federated-May merger is going to force people to rethink beauty distribution in ways never faced before.” Judging from conversations with clients, she says that Federated’s increased dominance has prompted manufacturers to search for retail outlets that are less demanding in their standards and more profitable with which to deal. That could lead to alliances and combinations with upgraded J.C. Penney and Kohl’s, the UnderhillInternet, QVC, Sephora and Ulta, she suggests. Liebmann notes there was a parallel experience in the mass market when Wal-Mart hit a domineering mass. The manufacturers, she says, “learned that they had to help other channels do the business; they had to teach the other channels how to grow.”

Karen Grant, senior beauty industry analyst at The NPD Group, points to the results of an emerging channels study done by the consumer tracking firm. While the Internet ranked 10th two years ago in a similar survey, online shopping is now seventh. Specialty stores, like Victoria’s Secret Beauty, are third. Only 2 percent of the audience buys products in dermatologists’ offices but 50 percent of those said they are willing to buy more. The same is true for patrons of TV channels, the Internet and kiosks, Grant says, also citing salons and spas.

Distribution as Branding

Jonathan Zrihen, president and chief executive officer of Groupe Clarins USA, is using distribution as a tool to reach out and build consumer awareness. The Clarins brand, which boasts three freestanding stores in New York, has branched out into Sephora—including participating in the Sephora shows on Home Shopping Network, and has gone live on its own e-commerce Web site. But at the heart of the sprawling distribution matrix is the 1,000 department store doors that Zrihen sees as the crux of the Clarins proposition. Whether promoting brand awareness on TV or providing customer service in the freestanding stores, Zrihen’s strategy is “for us to increase share in department stores.”

Like Zrihen, Pamela Baxter, president and ceo of LVMH Perfume and Cosmetics, North America, views the DNA of a business consisting of the brand and its customers.

When she took over in January 2004, the Dior beauty and fashion distributions were out of alignment, with the former sold in department stores and the latter firmly rooted in high-end specialty stores. Baxter shut down one-third of the department store distribution to put fashion and beauty more in synch. She also steered star products into the appropriate retail channels; a trendy makeup line that was designed for Japan went into Sephora. “The biggest mistake that brands make is to get greedy and roll out too fast,” she notes. “Productivity drops off; service levels drop and the customer base drops.”

Mixing Mass and Class

At Elizabeth Arden Inc., the operative word is diversity, where different distribution strategies are mixed to maximize store productivity. E. Scott Beattie, chairman, president and ceo of Arden, asserts that the success of some of the more inclusive distribution approaches overseas, such as Boots The Chemist in the U.K. and Shoppers Drug Mart in Canada, are putting pressure on long-held U.S. notions of separating mass and class. He points to both Walgreens and CVS, which have been importing upscale niche brands from Europe as a way of differentiating their assortments. He also sees the Internet and TV shopping as “different ways to educate consumers” about skin care and cosmetics brands, which require an inordinate amount of service and information. One challenge that department stores face, he notes, is how to keep their beauty advisers sufficiently educated in the face of new knowledge.

Coty Prestige is also pushing the boundaries of traditional distribution with a number of initiatives, including the marketing of fragrances via vending machines, according to Dennis Keogh, senior vice president of U.S. marketing for Coty Prestige. Starting in July, Coty will test-sell fragrance brands—including Jennifer Lopez, Kenneth Cole and David Beckham—in a dozen vending machines operated by Zoom Systems, in malls, airports and resorts.

Everyone, it seems, is getting creative.

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