As the beauty industry faces the critical fourth quarter, some key industry analysts think it’s high time the American department store gets its mojo back.
This story first appeared in the October 17, 2014 issue of WWD. Subscribe Today.
On the surface the news is OK, if not great, due to a weakness in the skin-care category. “I don’t think it’s going to be an amazing year,” says Karen Grant, vice president and global beauty industry analyst at the NPD Group, “but I do think that we have enough momentum overall to carry us and give us some lift in the holiday period [in the neighborhood of a couple-percentage-point increase].”
Her optimism is based, in part, on a strong surge in makeup and the relative health of fragrance in the $10.8 billion prestige beauty category. According to NPD, for the year to date through August, total beauty sales in the prestige market were running 4 percent ahead, on an adjusted calendar basis. Makeup was soaring at plus 7 percent; fragrance was 3 percent ahead and skin care, which had been the leader, was bringing up the rear with a 2 percent increase for the period. Carol Hamilton, president of L’Oréal Luxe USA, points out that fragrance has actually exceeded expectations lately. For August, L’Oréal had expected the prestige fragrance category to eke out a 3 percent increase and it came in at plus 4.5 percent.
But that’s where the good news ends for department stores, which comprise 70 percent of beauty’s prestige category. The other components are what NPD calls fine department stores (Neiman Marcus, Saks Fifth Avenue, Nordstrom, Bloomingdale’s and Lord & Taylor) and the specialty chains, led by Sephora, Ulta Beauty and Blue Mercury.
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According to estimates pooled by Alexandre Choueiri, president of International Designer Collections at L’Oréal USA, when the onion layers of the prestige category are peeled back, department stores come up flat to a bare 1 percent gain in the year to date through July for the fragrance category—the key business this time of year—while fine department stores had an 8.7 percent advance and the specialty chains jumped ahead by 10 percent. This means that department stores, the bulwark of prestige retailing for the last century, are being outstripped by a mode of competition—beauty chains—that could be barely imagined 30 years ago. How retailing has diversified over the last decade is illustrated by Marc Rey, president of Coty USA and Coty Prestige USA. His philosophy is simple: “Win everywhere.” Rey is spreading his attention and his money across an array of channels from department and specialty stores to Ulta and Sephora to QVC and all the dot-coms in between. “I want to be where the consumer goes,” he asserts.
But it may not be so simple. Rey agrees, “It’s very unpredictable, this year.”
Retail guru and author Paco Underhill also cites statistics on the flatness of department stores. “That’s a very 20th-century dipstick [looking at a balance sheet at the end of the year] on what is a 21st-century problem,” he says, noting that a small handful of American stores are thriving while “a whole bunch are doing really poorly.”
So how can U.S. department stores gain a higher growth trajectory?
Drawing a comparison with London retailers, which have become a touchstone of success lately, Underhill says American merchants are “clueless” where the Brits excel—catering to rich offshore tourists, who can generate almost 60 percent of a store’s receipts. He sees numerous opportunities to cultivate well-heeled visitors, as the British do, with programs such as delivering the shopping bags of rich Saudi Arabians to their hotel rooms so they don’t have to carry them around.
Underhill, like others, says retailers have to use their assets, such as the “ability to curate and organize presentation, not for the ego of the brands, but for the convenience of the customer. That is particularly poignant for those stores which are outside of the urban core, where people are desperate for education.” He adds, “How can we start to transform from the sale as the driver of traffic in a door to the event as the driver? It could be fashion shows, it could be back-to-school events, it could be looking 20 pounds less. It’s just issue after issue, which could be setting your own style, how do I match cosmetics and a bag.” He calls it “being able to find ways to give away information.”
The department store industry is also challenged by the problem of how to put consumer data into the hands of sales people who need it to intelligently interact with their customers (“Are you still wearing that suit you bought two years ago, Mrs. Brown?”). “We are doing a lot of collecting of data but we aren’t doing a lot of getting it to wisdom,” Underhill says, referring to the information pyramid.
Wendy Liebmann, chief executive officer and founder of WSL Strategic Retail, says she is always struck by “the holistic view of beauty” at Selfridges in London, where offerings range from high-end $80 lipsticks to pharmacy products—and all points in between. “They are the experts in everything beauty,” she says. “U.S. department stores continue to sell beauty the way they sold [it]—for the most part—for 25 years,” Liebmann says, while crediting Nordstrom and Macy’s for making some innovations. “Retailers have to make the experience different but they also have to make the feel of it different,” she says. “They have to mix up the brands, and make [them] different, like indie brands or services that you normally don’t see.”
“If you don’t create a reason for them to come and buy,” says Grant, “they can get it online.”