During a recent visit to a New York pharmacy, Hana Ben-Shabat unwittingly became a data point proving the conclusions of her own research for management consulting firm A.T. Kearney on the increasing importance of the sale of beauty products online overall and via Amazon in particular to satisfy skin-care shoppers’ needs.
This story first appeared in the November 8, 2013 issue of WWD. Subscribe Today.
She had her eye on a retinol moisturizer, but had concerns about its ingredients. “It’s not a very well-known brand, which is why I was suspicious to begin with. I thought, ‘I’ll go and check it out online,’” recounts Ben-Shabat, a partner in A.T. Kearney’s retail and consumer goods practice. “Once I went online, I actually ordered it on Amazon. I don’t think this is an outstanding example. There are many examples like this.” Skin-care shoppers everywhere are behaving more and more like Ben-Shabat, scouring Web reviews and brand content; buying products for the first time or the hundredth time online, looking for bargains or chasing the latest product craze hitting social media.
Thus far, many small and midsize skin-care brands have taken the initial steps toward capturing these customers by being online. That was the easy part.
As the beauty e-commerce landscape evolves, the next steps will be harder. The virtual ground is shifting under skin-care brands’ feet, and they have to decide what direction to head in. Among the quakes redefining the online landscape are Amazon’s bold play for luxury offerings, Target’s recent acquisition of DermStore.com and Walgreens’ purchase of Drugstore.com, Beauty.com and SkinStore.com before that. Such moves are redefining the relationship between offline and online skin-care environments, and redefining the sector as some of the biggest names in retail look to get a piece of the action.
“Omnichannel retailing is advancing in the U.S. at an exceptionally fast rate. Beauty is one of the most user-researched categories online, and we know guests are accessing information online when looking for new products or to update their skin care and beauty regimen,” says José Barra, senior vice president, health and beauty at Target, adding, “Target’s goal is to provide guests with a seamless experience, regardless of when or where they shop. We’re working to integrate our stores and digital platforms to provide today’s digitally connected guests the services they want.”
But on the information highway, choosing the wrong route can have severe consequences for skin-care brands. “We are living in a world today where growth is really hard to achieve and when you have your major retailers, big boxes or specialty, that are growing at 2 to 3 percent, you’ve got to follow the shopper. If you don’t have that digital shopping opportunity, that is a big issue and it is especially a big issue for the younger population,” says Wendy Liebmann, founder of WSL Strategic Retail. “To think that you can launch a brand or grow a brand dramatically over the next decade without participating or creating a digital proposition, it’s just not going to be possible.”
While online sales of skin care are still dwarfed by retail figures, shoppers are flocking to skin care online at ever-increasing levels. In a survey of 502 online beauty and personal-care shoppers, A.T. Kearney found that 64 percent bought skin-care products online either frequently or occasionally, the peak percentage across seven beauty categories. According to Euromonitor International, Internet retail accounted for 12.2 percent or $1.4 billion of the total $11.67 billion U.S. skin-care market in 2012, up from 11.6 percent or $1.26 billion of the $10.88 billion market in 2010, and 10.5 percent or nearly $1.14 billion of the almost $10.85 billion market in 2008. Skin-care sales growth for the period at stores outpaced Internet sales, accounting for 68.8 percent or $8.03 billion in 2012, 67.8 percent or nearly $7.38 billion in 2010 and 64.9 percent or $7.04 billion in 2008.
At individual skin-care brands, Arthur Swanberg, an e-commerce consultant and former president and chief executive officer of DermStore. com, estimates the Web regularly constitutes 5 to 15 percent of sales. The percentage at a young, Internet-savvy brand can be much larger. Online sales are responsible for roughly 35 percent of three-year-old Miracle Skin Transformer’s business, for instance, and they jumped 47 percent from last year. “In the foreseeable future for a brand, is it going to be 50 percent of your business? Probably not, but it is going to be continuously growing,” says Swanberg.
For the domestic skin-care sector overall, Euromonitor predicts that sales will climb 7 percent in constant value terms through 2017. Analysts expect e-commerce will be the heavy lifter when it comes to that future sales growth. Donna Barson, a senior associate at Kline & Co., surmises, “It is definitely going to grow. People like to get things from the convenience of their own home.”
Ben-Shabat agrees, noting, “It will increase, and there are several reasons for that. One is just the whole notion that buying these products online is getting accepted by customers, and the second thing is Amazon. Amazon is going after this category in a big way.”
The $61 billion e-commerce giant put its cards on the table last month in its bid to attract luxury beauty brands by unveiling the Luxury Beauty Store. Twenty-four brands signed up to participate in the launch, including Ahava, StriVectin, Dr. Brandt, Clark’s Botanicals, Dr. Dennis Gross Skin-care, Cane + Austin, Dr. Alkaitis and DDF in skin care. “We’ve put a great deal of time and effort into developing an elegant and refined experience for shopping luxury brands to ensure customers have the best possible experience when shopping for their products. We’ve done this through enhanced images, product details, editorial content and more—plus all of the features customers love most about Amazon like fast, free shipping and world-class customer service,” says Chance Wales, Amazon’s director of beauty and health & personal care. “We think we offer a great opportunity for brands to access Amazon’s more than 215 million active customer accounts.” Whether the majority of premium skin-care brands agree that Amazon is a great opportunity is another matter. Of course, brands realize Amazon is huge— and it is huge in the beauty space even if brands don’t officially partake in it. In its survey, A.T. Kearney found that Amazon was the leading online beauty destination for 28 percent of respondents, the highest percentage for any online retailer. Sephora.com was next with 18 percent.
For brands, though, bigger doesn’t always equal better. The discounting that takes place on Amazon—especially by third-party retailers selling wares on Amazon Marketplace—casts a long shadow over the Luxury Beauty Store. If selling on Amazon means having to discount or signals to consumers that they are involved in discounting, luxury brands want no part.
In his pitch for the Luxury Beauty Store, Wales underscores that full-price purchasing by Amazon customers isn’t an anomaly. “Millions already do. Our customers are sophisticated and affluent, and they are coming to Amazon in search of luxury beauty brands,” he says. However, he doesn’t give assurances to skin-care brands that are seeking to wipe Amazon clean of discounts on their products. “Amazon sets its retail prices independently, as do our third-party merchants,” says Wales.
Amazon does seem to understand that brands have a problem with discounting on Amazon, though. To help control pricing on Amazon and appeal to full-price shoppers, brands reported that by joining the Luxury Beauty Store, Amazon has agreed to limit the sales of their products elsewhere on the site to approved resellers specified by the brands.
“Their intention is to try to copy and to out-power the Sephoras of the world. In order to do that business right and to get their Amazon customer to buy there, they have to bring the brands in and act like any other retailer,” says Michelle Williams, owner of the beauty sales, operations and product-development firm Michelle Williams Group, which works with Cane + Austin. “They pay for the goods like a regular store does and that was not the financial model of what the old Amazon arrangements were. It was more like giving a percentage of whatever you sold.”
The new arrangement appealed to Williams, who believes the site’s shoppers for everything from books to boots will buy beauty as well. In the early days, things haven’t gone completely according to plan, though, for Cane + Austin. In the list the brand gave to Amazon of authorized resellers, it included pure-play e-tailers and excluded small brick-and-mortar shops that turned out to have presences on Amazon. That has effectively shut out a wide swath of retailers carrying Cane + Austin from selling on Amazon. Williams says the problem has given her a grasp of just “how powerful that entity is as a search engine.”
Liebmann agrees that Amazon’s size is a critical factor, but says that beauty’s biggest prestige brands most likely won’t shift their anti-Amazon stances—at least, right now—because e-commerce alternatives from their established retail partners have gotten stronger. “There was a greater urgency three or four or five years ago, when they were the only game in town,” she says. “There is less of an urgency now when it comes to some categories such as premium skin care.”
Emerging brands don’t necessarily have that cushion, however. “Amazon can make a great platform for companies that are still building their brands. The small and midsize companies that are not part of the big beauty conglomerates, for them it can be a good platform and, for Amazon, a good business,” says Ben-Shabat.
Dr. Alkaitis, an organic skin-care line founded by research scientist Saulius Alkaitis, is one such brand. Its namesake creator noticed that Amazon was going upscale in a number of areas and thought it wouldn’t hurt to try out the Luxury Beauty Store. If the concept succeeds, he supposes Amazon could be a sizable business for his brands. “The possibilities are there,” he says. “Let’s see what happens. I know it is a work in progress. I’m not married to it.”
To Swanberg, Alkaitis is onto something. Big or small, he encourages brands to embrace Amazon. “I see it as the channel of the future. A lot of brands that do well with Amazon are luxury brands that sell to Amazon directly. If you are not on Amazon, someone will be selling there on your behalf,” he says. “If you are a brand working with Amazon you have much more of an opportunity to work with them trying to maintain the price of the brand versus if someone else is selling to Amazon, then you have no control over it whatsoever.”
Amazon also gets more attractive if costs swell to chase sales in alternative online platforms. “It is getting tougher and tougher to get margin online,” says Swanberg. “Online is all about numbers. You can measure everything and a lot of people have gotten more savvy with that. It is no longer a space with people who don’t know what they are doing. The barriers to success are going to be tougher and tougher. The nice part is that you are not limited by the number of doors like you are in the retail environment, but you are limited by where you can advertise and promote your product. I see key words getting more expensive.”
Certainly, competing with Amazon is no easy task. When discounts are pervasive, squeezing profits out of skin-care retailing online is a challenge, says Joel Schlessinger, M.D., founder of LovelySkin.com. LovelySkin.com is presently profitable and its sales are up 30 percent over last year, but it wasn’t profitable for its first five years in business. “There really is a finite amount of profit in this industry, especially when you take into account free or reduced shipping cost, the delivery of product and fulfillment of product and spoilage,” Schlessinger says. “When SkinStore.com was sold to Drugstore.com, they had revenues of something like $42 million and profits of $200,000. It was absolutely insane to think how much they made and how little they actually profited from it.”
For those that have figured out how to be profitable, it’s been fortunate that there “are certain niches that Amazon hasn’t conquered yet, and we hope that Amazon doesn’t figure out the secret sauce to them,” Schlessinger continues. He insists it takes much more than price to win over online shoppers for upscale skin care products, especially cosmeceuticals. “It may sound trite or simplistic, but it all comes down to customer service,” he says. “For the first couple of years, I or one of my staff answered e-mails. It was so important that we gave the right advice. I became too busy to do that, and it was terribly disappointing to me that I couldn’t be the only individual to answer the medical questions that came in, but I have well-trained staff for that.”
Amazon isn’t the only player trying to cook up that secret sauce. Target’s acquisition of DermStore.com demonstrates the retailer’s interest in the upscale skin-care sector, a move that Liebmann compares to Amazon’s acquisition of Diapers. com. “That was a very smart way to move into a different area, one they felt they couldn’t compete in,” she says.
The eventual result of the acquisition could be brands sold by DermStore.com making their way onto Target shelves—a development which may not be palatable to many brands. “From Target’s point of view, it’s about brand acquisition. Target has a long history of seeking out brands that are not necessarily widely distributed,” says Barson.
Swanberg says, “It is brilliant from Target’s perspective because you will develop relationships with these brands from Day One, and you will be able to find out what’s successful. You have all that data now, which is invaluable information for a retailer. The more online information you have, the better you can do with brands in the offline environment.”
Barra didn’t dampen speculation that DermStore.com brands would wind up at Target stores, noting, “DermStore.com allows us to expand our assortment and their approach provides rich insights for Target.”
If the plan is to cascade DermStore.com brands into Target, the reception to that plan may not be totally welcoming. Asked about DermStore.com brands heading to Target, Annette Rubin, chief operating officer of HydroPeptide, says, “I don’t think that the brands that are carried there will allow that.” Professional and prestige skin-care brands are convinced mass channels don’t mesh with their traditional distribution networks, she declares. Swanberg disagrees. Although there wasn’t a flood of brands going from SkinStore.com.com to Walgreens’ stores after the drugstore chain bought the Web site, he considers Target a different beast. “Walgreens is a much more difficult environment. In the world where I operate and for the brands that I tend to work with, Walgreens is probably farther down the food chain. That’s truly mass and there probably is that separation between a lot of the brands that you would find from SkinStore.com being willing to go into a Walgreens, whereas I think a lot of the brands on DermStore.com might be willing to go into Target,” he says.
Jan Marini begs to differ. She explains she placed her namesake brand on DermStore.com—and LovelySkin.com and SkinStore.com as well—because it follows MAP or “minimum advertised price” policies, vows not to sell unauthorized merchandise and has expert support available. “They have a professional staff, and we can train them. It’s not as if someone comes online, and there is no professional help. It is a little bit of a hybrid for us, but it is still within our marketplace,” says Marini.
In fact, that help is a differentiator for DermStore.com and its ilk, and they are enhancing it. “Most of the online stores offer online help to be able to guide you, whether it is live chat or questions and answers. People there can help you in your online purchase the same way as if you were physically in a store,” says Barson.
Dan Obegi, chief executive officer of DermStore.com, is confident that his site’s superior service will win over skin-care customers online. “It’s not enough to build a business around price and getting stuff delivered quickly, but what people will come to expect more and more when they are doing business online is a high level of service,” he says. Because Obegi maintains it can’t compete on service and prestige brands won’t succumb to its overtures, he says Amazon “will have less of a share of the skin-care market” in the years ahead.
Over at Amazon, Wales indicates the future for Amazon in prestige skin care is much rosier than Obegi imagines. The Luxury Beauty Store’s early progress is evidence. He says, “Customer response to the new store has been very positive so far. We already have millions of customers searching for and purchasing luxury beauty products, and we expect that number to continue growing.”