KEYNOTE: MICHAEL STEINBERG
Byline: Soren Larson
Hold on, department stores, there’s no need to panic — not just yet.
It’s true the mass market has overtaken department stores in overall beauty sales, and the color cosmetics category at mass, in particular, has grown at a much quicker rate than at its prestige counterpart.
Still, department stores continue to have a number of advantages and only need to concentrate more intensely on technology and service to hold their position, or even regain lost ground.
That’s the viewpoint of Michael Steinberg, chairman and chief executive officer of Macy’s West, who focused on the upside of the department and specialty store business in a keynote speech that opened the Summit’s daily sessions.
According to government statistics delineated by Steinberg, overall growth in the cosmetics industry has slowed over the last three decades, from an annual rate of 11.5 percent in the Seventies, down to 8.9 percent in the Eighties and 4.9 percent in the Nineties.
“On one hand, [the slowdown] reflects our success in reaching consumers,” said Steinberg. “The high growth rates have slowed as we have exhausted the base of new customers. Cosmetics is an important element of beauty and fashion to most women today.”
However, the merchant noted, there is a “hard edge” to this success. A mature industry means that growth for vendors and retailers must come from others’ market share as it becomes more difficult to add to the customer base. Competition will become increasingly fierce, and “weak competitors will not survive.”
Topping it off is a shift in beauty sales from department stores and direct brands to mass. Sales of mass brands were nearly level with those of department stores five years ago, Steinberg said; now, they are almost three points higher in share at 44.3 percent of total cosmetics and fragrance sales. The direct segment has dropped half a point to 14 percent of the market.
“My agenda for today’s meeting describes this phenomenon as the migration from department stores to mass,” said Steinberg. “This description sounds like the beginning of a stampede.”
He added, however, that the situation “from up close is far different than the sales totals suggest. When you look behind these numbers, there are some important differences between categories.”
The mass end has gained the most market share in makeup, where it has registered gains of 5.2 percent per year in the last five years, compared with only 2.2 percent for department store brands.
Mass vendors have gained a bit of share in the faster-growing treatment category, where sales have increased 7 percent a year, while department stores have almost kept pace at 5.8 percent growth annually.
In the fragrance category, Steinberg pointed out, department store brands have gained share at the expense of mass names. Upmarket scents have grown at 4.1 percent per year, compared with 2.5 percent.
“This share concern for department stores, then, is not across the board,” said Steinberg. “Rather, [the situation involves] tough challenges in color, near equal success in treatment and opportunity through increased growth in fragrances.”
In each of these three product categories, Steinberg discussed his own strategies as to how department and specialty stores can withstand the mass market onslaught.
“Color is a category where mass has taken effective steps in both product development and marketing,” said Steinberg. “While fashion leadership has been the hallmark of the department stores, mass brands have used their considerable scale to improve their consumer image.”
Increasing investments in product development have allowed mass brands to create more attractive options for their customers, he said, citing as an example the nail enamel field. In addition, nontransfer lipsticks and base products, which were introduced in mass, gave another edge to their product lines.
Along with the innovations has come a dramatic increase in advertising investment. Mass brands have increased advertising spending 50 percent in the last three years, compared with department store brands’ 25 percent.
“They now dominate national magazine advertising for color products, especially in youth-oriented print,” said the retailer. According to his statistics, spending on cosmetics ads by mass brands last year was $573 million, versus the $337 million doled out by their upscale rivals.
“All of these marketing and technology investments have been directed at a category which responds well to strategies that increase impulse purchases,” he said. “The challenge for department store brands is to find their own strategies for attracting this fickle customer.”
Steinberg highlighted a shift in the mass market to more premium-priced products, a point that would also be made by Cosmair president Guy Peyrelongue, a fellow keynote speaker, who pointed out that L’Oreal’s Plenitude kicked off the trend.
Unit sales in facial treatment, Steinberg said, have changed little at mass in the last couple of years, suggesting that much of the sales gain may be coming from trading up existing customers to higher-priced items.
“Treatment customers depend on their products to deliver benefits that are long-term and hard to measure,” Steinberg noted. “Given these characteristics, perceptions of quality and value may actually be enhanced by the higher price of department store lines. Not surprisingly, the most successful recent mass introductions have been premium-priced brands.
Successful new technologies continue to start in the upmarket brands and migrate later to the mass category, Steinberg said, citing alpha and beta-hydroxy acids, retinol and other moisturizing innovations.
“It seems that department store brands will always retain this advantage,” he said. “Customers trust new product technology claims from lines which have been built on a quality reputation.”
As mass moves into higher-priced technologies, customer education has become an increasingly important investment, Steinberg stressed. Some mass retailers have installed beauty advisers, copying department store techniques, while others have improved point-of-sale materials that inform shoppers about the benefits of new technologies.
Nevertheless, department stores have a significant lead over mass in customer service and education, in Steinberg’s view. The higher prices of the products make it possible for stores and vendors to afford to hire, train and support high-quality beauty advisers.
Steinberg said the image-driven fragrance business thrives in the upscale, service-driven environment of department stores and specialty stores.
Mass scents have not been able to achieve the fashion cachet that is so important to most fragrance customers, he said, and as long as department stores remain the fashion innovators for fragrances, widely based distribution remains their biggest risk.
Across all categories, Steinberg said, department store lines must focus on what they can do to maintain their high value to consumers.
In color, since department store brands offer similar product technologies at higher prices, fashion must be a stronger focus of product marketing.
Makeup artist lines have been the biggest success of late in upmarket stores, Steinberg noted. These lines have “reenergized color sales, especially with younger customers. “We must give credit to high-end specialty stores who recognized this success early and moved quickly into this segment.”
The major department store brands need to create new lines or products that reach the younger, makeup-artist consumer, he said.
Steinberg also made a point that would be reiterated in a later panel discussion: Open-sell or assisted-sell concepts are “an important breakthroug for department store color sales.
“They allow customers to walk up and touch these impulse items. They get beauty advisers out from behind the counter so that they can better help customers try product. They create newness on the floor.”
Steinberg suggested vendors consider developing a moderate-priced line to round out the store’s assortment. “Price differences versus mass on basic products can sometimes be significant, and many department store customers remain sensitive to price,” he said.
In treatment, given the short time span in which mass manufacturers are able to replicate department store innovations, upscale brands will need to increase research and development spending and accelerate the product introduction rate, Steinberg said.
The merchant went on to tackle the seemingly omnipresent topic of gift-with-purchase promotions: “Department stores must also learn to wean themselves from the addiction of gwp’s. Consumers are not responding well to these promotions, and bigger and bigger ‘g’s’ is not an effective answer for either the vendors or the department stores.”
Steinberg acknowledged that the inability of vendors and stores to keep beauty advisers on staff for long has created a revolving door problem.
“Experienced beauty advisers are a competitive advantage,” he said. “They are better able to sell complex products and build customer relationships. Therefore, turnover is beginning to be addressed as a critical issue for retailers and their vendor partners. “Pay may also be an issue,” he continued. “To be competitive in this economy while maintaining our selling cost, we may have to reevaluate staffing strategies to insure adequate associate commissions.”
In essence, department stores are battling increased competition from the mass market in areas where prestige retailers only recently thought they had the business by the tail.
“This competition is good for the consumer, but will be hard on weak companies that do not wake up to the new realities of product development, marketing and selling in this industry,” Steinberg said.
“Cosmetics competitors need to keep moving forward — or they will be moved aside.”