Surprisingly, in this omnichannel world not all retail investment is headed for digital. This fall, a pile of cash has come home to the world of brick-and-mortar, and just in time for the holidays.
This story first appeared in the December 13, 2013 issue of WWD. Subscribe Today.
There has been a seemingly rapid succession of brightly lit, sparkling new and expanded renovations of department store beauty selling floors, with unveilings hitting a crescendo of one a week this fall. In years past, there was the high-tech dazzle of the new Bloomingdale’s floor at 59th Street, followed by a partial redo of the Saks Fifth Avenue floor in the flagship, then the modernizing of Lord & Taylor’s flagship beauty floor.
But the trend shifted into high gear this year with the beginning of Macy’s $400 million renovation of its Herald Square flagship, the enlargement of the fragrance component at Saks and the Barneys New York transformations on Madison Avenue and in Beverly Hills. Then Hudson’s Bay Co. reworked its floors in six stores in Canada, and Nordstrom launched a whole new beauty concept that is due to be expanded to a total of nine stores by January. There also is the long-discussed $200 million redo of Saks on Fifth Avenue, a subject that was rekindled following the chain’s acquisition by Richard Baker and his recruitment of Marigay McKee from Harrods as Saks’ new president. Sources speculate that the ground floor will be redone with a target date of 2015. A Saks spokeswoman said there is no comment at this time. There was a similar report about Bergdorf Goodman, but a spokeswoman said there are currently no such plans. Meanwhile in Paris, both Guerlain and Marionnaud have redone their flagships on the Champs–Elysees.
All this investment in beauty retailing—coming in such a concentrated time—begs the question: Why all of a sudden? It also makes a loud statement—considering all the drilling and sawing—about the essential importance of the more than $11 billion prestige beauty business in the life of North American department stores.
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“The surprise should be not that department stores are doing it; the surprise is why everyone isn’t doing it,” observes Leonard A. Lauder, chairman emeritus of the Estée Lauder Cos. Inc. and arguably the most astute connoisseur of department stores in the industry. Lauder maintains that the cosmetics business has proven its mettle during the recession as a P&L mainstay. “We’ve reached a historical tipping point,” he says, referring to “the realization on the part of department stores that during the recession [the cosmetics departments were] the bedrock of their sales growth, profitability and sales generation. Those three things give them a stability in sales and earnings that no other department can bring them.”
In addition to citing studies showing beauty brands generating more sales on a unit basis “than almost anything,” Lauder ticks off a list of profit-fattening extras: “guaranteed sales, no markdowns, demonstration paid and advertising paid.”
He should know. Lauder has devoted his long career to fomenting a sea change in retail dynamics by leading a movement to create a community of brands designed to live exclusively in department stores, rather than the age-old method of conceiving a brand first, then distributing it where suitable. As the Lauder group built critical mass on the selling floor, followed by L’Oréal and others, the cosmetics department became a destination—not just an impulse attraction. Brands built clienteles with round upon round of new-product launches and promotional firepower of direct mail and gift-with-purchase sales-builders. Beauty became a portal for the store and its various other departments.
As Terry J. Lundgren, president, chief executive officer and chairman of Macy’s Inc., said recently, “Our cosmetics department is tied to the full store; this is our front door. If we don’t make a good first impression with cosmetics, the shopping experience is lost. Cosmetics is intended to be our best foot forward.”
Some others view the motivation as a fight for market share while shoring up the department stores’ defenses against the growing challenge of Sephora, which has had a profound impact on cosmetics retailing and merchandising in the last decade. Terry Darland, president of LVMH Beauty, points out that Sephora has 16 stores in Manhattan alone, with little cannibalization. “If you want to see what is trending in cosmetics, go walk around a Sephora for a few hours,” she says.
Arnold Aronson, managing director of retail strategies at Kurt Salmon, notes that in terms of contribution to net profit, “in terms of percentage, cosmetics is bigger than many other departments in a store.” He adds that “the cosmetics companies have done a pioneering job in clientelling.” How to lure customers back has been a hot topic among department store retailers in the last couple years as the market-share skirmishes have heated up.
So how important is beauty? Karen Grant, vice president and global industry analyst at the NPD Group Inc., cites some publicly available figures showing that beauty generates 12 percent of total store sales at Saks, 11 percent at Nordstrom and 15 percent at Dillard’s. Beauty’s share of sales at Macy’s can be considered in the same range, she estimates. It also can be deduced that beauty has been gaining on in-store competition for sales. “Historically, we continue to see that prestige beauty outpaces the total department store,” she says. As the latest available example, the September figures showed total prestige cosmetics sales up 6.7 percent while department store revenues as a whole were down 1 percent.
The spate of floor renovations may also be motivated by a need to compete with cyber retailers, Grant theorizes. “Everyone is talking about showrooming,” she says. “[Customers] come in and don’t buy. The greater the environment, the more likely is the hope that [shoppers] will finish that transaction in-store and go on to other adjacencies,” she says, referring to nearby departments, like fashion accessories. “The majority of sales are still going to be generated in the brick-and-mortar space,” Grant notes, adding that the objective is to make the online and offline work together.
Darland at LVMH observes that as the entry to a store, a beauty department has to look good, and she has noticed that the architects of the renovations have brightened things up with a noticeable increase in counter illumination. She says: “To me, they are creating showtime.”