Beauty shoppers are suffering from asset re-flux heading into the holiday season.

This story first appeared in the November 21, 2008 issue of WWD. Subscribe Today.

Even before the table has been set for the annual Thanksgiving Day bingeing, the idea of shopping seems to have left a bad taste in consumers’ mouths.

They are already holding onto their wallets tighter and forgoing beauty purchases. Beauty sales are down 1 percent heading into the holidays, marking the first negative sales trend leading up the season since The NPD Group began tracking sector sales in 1997, said Karen Grant, the firm’s global beauty industry analyst. From January through September, fragrance sales dipped 2 percent, makeup declined 2 percent and skin care ticked up 1 percent, said Grant, adding that in nine of the last 11 years, makeup had been the growth leader. As shoppers begin to settle into their shocked state, Grant said, “Consumers will adjust to the new reality and find new shopping patterns, and learn to adjust to new spending limits.”

They are reeling from the “credit-fueled asset bubble” that burst, primarily from the sharp pierce of the housing sector, said Mitchell Hara, a managing director at the boutique investment bank Peter J. Solomon Co.

Shoppers have good reason to feel queasy.

Speaking at the Fragrance Foundation’s state-of-the-industry panel discussion on Tuesday, Hara said the economic crisis has already wiped out about $13 trillion in consumer wealth. He noted that the unemployment rate stands at 6.5 percent, and projected it could reach 7 to 8 percent next year. Those numbers don’t bode well for retail sales. Consumer confidence, he said, has already plunged 58 percent year to date, and U.S. consumers’ skittishness seems to be contagious. Referring to global markets, Hara said, “The U.S. makes up 25 percent of the global economy. When we sneeze, they get a cold.”

As for the state of the economy, “It doesn’t look good from where we stand,” he said, later adding, “I think we are in the eye of the storm.”

Looking for a meager ray of hope? Hara said the outlook is not as dismal as it was during the Great Depression. Then, some 9,000 banks failed over a 10-year stretch, compared with the 21 banks that recently have gone under, he said. What’s more, today the government has stepped in to restore liquidity and available credit, but those actions, said Hara, have yet to have a positive impact on consumer confidence.

“Either way you slice it, Santa will be holding court at Wal-Mart this year,” he said, adding he expects the first glimmer of a turnaround will likely appear in the fourth quarter of next year.

Hara’s fellow panelists — including Susan Babinsky, senior vice president of consumer products for Kline & Company Inc.; Lynn Franco, director of the Consumer Research Center at the Conference Board; Wendy Liebmann, chief executive officer and co-founder of WSL Strategic Retail, and Robert Mettler, president of special projects at Macy’s Inc. — cast their outlooks in varying shades of gray.

Franco said, “Consumers’ sense of purchasing power has been tremendously reduced.” The Conference Board expects to see job losses through September 2009. “It’s going to be a tremendous challenge to get them out there to spend” this holiday, she added. “We’re waiting for the other shoe to drop…it’s not one shoe. The whole store has come down.” That said, she forecasted consumers will spend less in the stores, and their shopping online will slow.

Liebmann, whose firm closely tracks consumers’ shopping habits, declared, “She’s not a happy shopper.” Turns out, she’s angry and that anger has been percolating over the last eight years, as she adsorbed the effects of the dot-com bomb, terror attacks, natural disasters, product recalls and now the market’s implosion, said Liebmann. In an act of protest, of sorts, WSL reports that one-fifth of shoppers are avoiding the temptation of going into stores altogether. “Fifty-four percent of women told us they avoid going to stores where they tend to overspend,” said Liebmann. Her research indicates that eight out of 10 shoppers are dealing with the current chaos by attempting to control the little things. “Here’s the thing,” Liebmann told an audience of beauty executives. “The little things? That’s what we are.”

In a world where layoffs and plunges of the Dow Jones are rampant, is beauty still relevant? It’s a question Mettler said he asked himself seven years ago, and is pondering again today.

“Is the beauty industry relevant?” he asked. “Yes, but with one big caveat: We have to change. We can’t continue to do the same old stuff.”

Recently, Macy’s efforts to break long-standing beauty merchandising rules, many of which it established, have included outfitting select Bloomingdale’s stores with Space NK boutiques, and clearing room for natural-positioned products in an open-sell concept called Beautiful Planet.

Attracting increasingly pragmatic shoppers will require fresh ideas, including technology that speaks their language, and for Macy’s, an open-sell environment where beauty shoppers can touch and smell products, said Mettler. “This is a generation who has been brought up with choices,” he said, citing that 50 percent of women say they don’t have a favorite beauty store for their needs. Their options are endless: department stores; specialty shops, including Sephora, Space NK and Bluemercury; mass-class hybrids like Ulta and CVS’ Beauty 360; TV retailers, and e-commerce sites.

Preparing for the upcoming holiday season requires humble expectations. Kline & Co.’s Babinsky said the firm is forecasting flat to negative fragrance sales. She added that gift-with-purchase programs, long considered the bane of the fragrance shopping experience, might be the category’s savior this holiday. In the mass market, she anticipates a rash of buy-one, get-one-free promotions. Grant of NPD said retailers are heading into the holiday season with leaner inventories, which will allow them to take a more aggressive promotion approach on select items.

Liebmann said shoppers are willing to buy should innovative and bold propositions emerge: “Only the bold will win in this environment.”

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