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Analyzing 2018 Beauty Sales: Gains Driven by Skin Care and Brick-and-Mortar

A renaissance in brick-and-mortar helped bolster beauty sales during the holiday period.

While the department store beauty business limped through a disappointing December, it has emerged from 2018 with a 6 percent increase for the full year — the same level as in 2017 — amid major beauty floor makeovers yet worries about an uncertain economy.

The stagnant growth comes as The NPD Group has issued its annual numbers — skin care is booming and makeup is not — and as Saks Fifth Avenue and Bloomingdale’s bet heavily on beauty with the launch of expansive and glittering new selling floors in their Manhattan flagships. The industry is also awaiting the opening of Neiman Marcus in Hudson Yards in March, and the coming of Nordstrom’s new women’s store on West 57th Street in the fall.

Brick-and-mortar is responsible for the bulk of the $18.8 billion in U.S. prestige beauty sales that transpired in 2018, according to the NPD Group. Skin care posted the biggest jump with a 13 percent gain to $5.6 billion in sales, further outstripping the former leader — makeup — which managed to barely eke out a 1 percent increase for the year, compared to a 6 percent gain in 2017. Fragrance, which built up an 8 percent gain for 2018 through October, came out of the holiday period with a year-end increase of 4 percent to $4.3 billion. The highest percentage increase was generated by hair products, which saw a 25 percent increase to $730.1 million.

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While beauty numbers broadly were up for 2018, December was soft, said Larissa Jensen, executive director and beauty industry analyst at NPD.

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“We are expecting declines pretty much across almost every category in this holiday in December,” Jensen said before final numbers were out, noting that Black Friday and Cyber Monday fell into November’s retail calendar, but in 2017, Cyber Monday fell in December. “That is why we had a super strong November this year,” Jensen said. Also, the first week of January 2019, generally a listless shopping period, fell into December, diluting December and weakening January. “December is soft, in part, because you’re including a week where…not very many people go shopping,” Jensen said.

The 2018 business was also up against strong comparisons from 2017 — a “phenomenal” year — Jensen said. “There was a lot of momentum,” she said, adding that Christmas kicked off like Christmas 2017 — “a swing of momentum for fragrance and skin care. For sure, makeup has been soft for mostly the entire year.”

Skin care is being driven by the growing popularity of natural-oriented products, according to Jensen. Specifically, the category of products that NPD calls “Clean and Pure” — like Pacifica, Bare Minerals and Drunk Elephant — are the drivers. “With natural skin-care brands growing at twice the rate of total skin care, we expect this growth to continue,” Jensen wrote in her Jan. 11 outlook for 2019.

But now there are indications the skin-care business may be slowing, in the judgment of Stephanie Wissink, equity analyst at Jefferies. “Through the third quarter, the skin-care business had started to trail off a bit,” she said, referring to NPD data. “We are on the backside of what we describe as a hyper cycle of consumption. It seems like 2016 was the peak of a consumption cycle elongated into 2017 a bit by skin care that really focused on serums and masks, concentrated ways to rejuvenate your skin quickly. That was a response to potentially overuse of makeup.”

She noted that 2016 was the peak year for buying and using cosmetics. “Then 2017 and 2018 were about skin care. Now that cycle is peaking a bit, too. She’s got her regimen. She’s just not seeing as much excitement in terms of newness in the marketplace.”

According to NPD, natural skin care accounted for $1.6 billion of total 2018 sales, up 23 percent from the prior years. Body care and sun products — sunscreen and self-tanners — were also up, as were lip treatments, toners and facial sprays.

“What is fascinating about the beauty cycle we experienced post-recession,” Wissink continued, “is that the number of brands that entered the marketplace was mind-blowing. The rising tide lifted all brands and now we are in the backside. This is going to be the curative wash out. Not all brands are going to survive this,” she said, adding, “I wouldn’t be surprised if 15 to 20 percent of the brands that entered the market during the hyper cycle don’t survive.”

The flood of indie brands — many of which operate outside traditional distribution channels like Macy’s or CVS — are having a cumulative effect on the major players by eroding their base.

“We are seeing the impacts and ripple effects. Even though we are not always able to capture the sales of a brand outside our world,” she said, referring to NPD’s tracking system. “We can see the impact of what they are doing in our world. And this is across all retail, not just beauty.”

The problem seems the most pronounced in cosmetics, a category fragmented by newcomers, especially those that were born on the Internet. “There’s so much, there are so many options. But I think it has been hit the hardest by the digital natives,” she said.

Jensen said the word she’d pick to characterize today’s beauty sector is “disruption.”

“Whether we look at categories, brands or retailers, there are sweeping changes taking place to the market landscape,” she said. “New retail concepts and technologies are changing the way we create, market, purchase and use beauty products. Brands and retailers must not only be cognizant of these transformations and act upon them, but identify new white space opportunities to captivate consumers and further differentiate themselves from the crowd.”

Despite the influx of indie beauty brands and amount of disruption, Jensen said the industry’s department stores are experiencing a renaissance.

“Brick-and-mortar did see a turnaround,” she said. “That’s part of why we are seeing these bigger numbers in fragrances and skin care. Because in the past, it was online, dot-com, that was growing and sometimes was the only thing adding volume to the category. So, without brick-and-mortar, which is like 80 percent of your sales, you’re not really going to have any momentum.”

The retail renaissance comes after moves by many department stores to upgrade and expand their beauty selling space. Among the moves being made in the realm of physical retailing is the dramatic expansion of selling square footage in the Manhattan flagship of Bloomingdale’s, a number of programs put in place by Macy’s and the complete reconception and relocation of beauty in the Fifth Avenue flagship at Saks.

At Macy’s, which reported earlier this month that fragrance performed above the 1 percent corporate average increase, and cosmetics and skin care were below, there has been a consistent effort to revamp the product assortment.

Macy’s has recently added skin-care brands including Mario Badescu, Rituals, m-61 and Sunday Riley, according to Nata Dvir, Macy’s executive vice president and general business manager of beauty. The store also has instituted seasonal selling events, like 10 Days of Glam and VIP Sales.

The chain also is investing to improve the shopping experience as part of Macy’s Growth 50 strategy. Efforts include improved lighting, elevated shopping fixtures and more flexible store layouts.

While Bloomindgale’s main-floor beauty department didn’t open until Jan. 16, its new Fragrance Hall was up and running during December with more luxury brands, like Creed, which had been doing business in only 11 branches. Shops for Le Labo, Maison Francis Kurkdjian and Atelier Cologne added customization and personalization, as did six new spa rooms. The business’ 75 new brands are mostly in fragrance.

“This is a story about elevating service and elevating products,” said Stacie Borteck, Bloomingdale’s vice president and divisional merchandise manager. She echoed the assessment of some market executives that the dramatic renovations at Bloomingdale’s and Saks are an exercise in premiumization. “Actually, it’s more accessible luxury,” she said.

These stores are also making statements with dramatic renovation of the beauty floor. Bloomingdale’s main beauty floor measures 36,408 square feet plus an additional 1,100 square feet for outposts across multiple floors, mostly on the second and third levels. While the total space allocated to beauty expanded by only 5 percent, the fragrance selling floor grew by 25 percent. Moreover, some brands are still planning to move in — OPI will open a nail bar with a Good Hair Day, commonly known as GHD, hairstyling component. Glowhaus, a magnet for Millennials, has succeeded so far on the contemporary floor, Borteck noted, and is opening a second location on the main floor next to MAC in February. Charlotte Tilbury, who has a shop on the main floor, is opening a second on two.

A department store must be more than a place to buy makeup or clothes,” Tilbury said in a statement while traveling. “It’s a place to be inspired, to discover and learn, to experience and to enjoy — a theater and a playground.”

Judging from the dazzle of illumination on the new beauty floor, Bloomingdale’s is determined to convey a sense of theater.

It seems to be working. “We had also a very strong fourth quarter with brands like Chanel, Tom Ford and Acqua di Parma,” Borteck noted, singling out Givenchy’s launch of L’interdit. “Our fragrance business in general was very strong and our artisanal, or more luxury brands, outperformed.”

Speaking more broadly, she added, “It was a strong Christmas, leading with high-end skin care and high-end fragrances.”

For 2019, Jensen expects current trends to remain in place, though she cautioned the category could slow given macroeconomic factors.

“Given the high adaptability of the beauty industry, I expect growth to continue in 2019, though it may be at a slower pace given the current economic uncertainties,” she said. “I expect we’ll see an amplification of trends and themes that have already taken shape, including brand transparency, heightened importance of companies taking a stance on key social issues, as well as the evolution of experiential retail and pop-up concepts.”