NEW YORK — Beauty merchants, increasingly dotting the countryside with more doors, are catering to a new breed of consumer and becoming a thorn in the side of department stores.
Beauty shops and specialty chains have enticed women, young women in particular, with a smattering of niche brands and exclusive products, service and spaces perfect for browsing and sampling at whim. It’s a marked departure from department stores, which are anchored by established brands encased in glass counters.
With the most notable beauty shops and specialty chains — Sephora, Ulta, Bluemercury and The Body Shop, recently acquired by L’Oréal — eyeing more real estate to expand their brands, the question is whether the channel is increasing beauty sales or simply siphoning them from department stores.
If Sephora’s success is any indication, the answer is a little bit of both. In a recent report, Morgan Stanley & Co. analyst William Pecoriello stated that Sephora’s deal with J.C. Penney could put the beauty chain, which generates roughly $500 million in U.S. sales, on track to capture an estimated 40 percent of the growth of prestige cosmetics over the next two years, and help boost the chain’s sales 30 to 40 percent.
Karen Grant, senior beauty industry analyst for the NPD Group, said Sephora and its peers are indeed fueling sales growth by pulling in a younger consumer. According to NPD, 55 percent of women 18 to 24 years old report that they shop in specialty stores, compared with 40 percent of women 18 to 64 years old.
Grant added that chains like Bath & Body Works, which has nearly 1,600 doors, have made beauty more accessible and given the business a foothold outside the mall. But rather than push department stores into extinction, BBW are existing right along side them, commented Leslie Wexner, chairman and chief executive officer of the Limited Brands, at the recent WWD Beauty CEO Summit. “[People] said, ‘You’re going to put the department stores out of business.’ Never did,” said Wexner. “I don’t think we dented them. They have their own set of issues and they’ve been reinvented.”
NPD data indicates that from 2002 to 2004, U.S. beauty sales grew by at least $2 billion to $40 billion, which includes travel retail and estimates for Limited Brands. Industry sources indicate that the increase marks an acceleration from the previous two years, 2000 to 2002, when sales grew $1.1 billion.
“More people are entering the category, and we think that growth rate is accelerating,” said Grant.
Take department stores out of the equation, and industry experts estimate that the specialty beauty channel is growing at an annual rate of 20 percent.
As for how many of these stand-alone beauty concepts the market can tolerate, Grant looks to the hypergrowth of apparel stores as a guide. “If there is pent-up need, there’s still an opportunity to grow.”
She acknowledged that while more beauty outlets are generating more dollars, a market saturated with beauty merchants will result in cannibalization, particularly as regional players become national chains.
“Beauty is more accessible than ever,” agreed Alexander S. Panos, managing director for TSG Consumer Partners. But with the average shopping center housing two department stores, BBW and perhaps Sephora, mall shoppers can find a similar mix of beauty brands in multiple locations under one roof.
“Why do I need to buy the same brand in four different stores in one mall?” asked Panos, adding that a handful of stores stocking the same brands will likely negatively affect same-store sales growth.
“The winners will be those with the best service and exclusive brands,” Panos said.
Outside the mall, on quaint city streets, several other concepts have taken root, such as Bluemercury and Pure Beauty. Some are flourishing, courting shoppers who have defected from department stores. For instance, Bluemercury — which combines spa services with retail — recently opened its 13th door, and plans to expand to 300 stores by 2011.
“We’re the neighborhood store that knows everything about beauty and skin care,” said Marla Malcolm Beck, ceo of Blue Mercury Inc. “The consumer wants us to solve problems,” said Beck, adding that if a customer has a particular skin care concern, she can speak directly to Bluemercury’s spa aesthetician. “If you solve her problem, you have a client for life,” remarked Beck.
Combining products and services didn’t work for Pure Beauty, however. In late May, the private investment firm Cameron Capital Corp. received approval from the U.S. Bankruptcy Court for the Central District of California to acquire 43 of Pure Beauty’s 48 units for approximately $10 million. “The concept just didn’t work, particularly on the retail side,” said Cathy J. Leonhardt, director at Peter J. Solomon Co. “It’s hard to be good at products and services.”
But plenty of formats are gaining traction.
Beauty merchants say their growing door counts are expanding the industry, but also grabbing dollars from competing channels.
“We believe that BBW stores are both trading up consumers from mass and trading over department store shoppers,” said Camille McDonald, executive vice president of merchandise and brand development for BBW.
“The customer knows quality, but it’s difficult to assign a dollar amount to it,” she continued. “But if you form an emotional connection with a shopper, price becomes less of an issue.”
Unlike its competitors, BBW does not have an aggressive expansion strategy planned. “We have one of the best-developed retail networks,” said McDonald, “so it’s not a priority to add locations.”
Bluemercury may cater to the prestige beauty buyer, but it’s also pulling in mass market shoppers.
“We are converting drugstore shoppers to a little luxury,” said Bluemercury’s Beck, who opened her first store in 2001 in Washington, D.C., and is gearing up to enter New York state later this year. “They are showing willingness to trade up to a $16 bottle of Bumble and bumble from an $8 bottle of shampoo from the drugstore. We see our top clients come into our store every two weeks. She’s using Bluemercury as a substitute drugstore.” Those top clients spent $1,000 per year at Bluemercury, according to Beck.
“It’s a rebellion against the department store model,” declared Paco Underhill, founder, ceo and president of Envirosell, a New York research and consulting firm, referring to the expanding cast of beauty retailers. “Having a salesperson between you and the product can be intimidating.” That said, beauty shoppers seem to be happily gravitating toward the open-sell environment that retailers, including BBW and Sephora, offer.
Grant noted that NPD data indicates that 67 percent of women who shop in fine department stores cross-shop in specialty stores, and 92 percent of women who shop in the specialty channel do so for the simple fact that they can touch, feel and smell the product.
With a willing customer pool to target, beauty merchants’ greatest task now is differentiating themselves from one another.
All eyes are on Sephora, which since its entry into the U.S. market 11 years ago has established something of a gold standard for beauty retailing. Products are displayed in an open-sell environment (not a glass case in sight) where shoppers can play and sample; sales associates are informed about all 50 brands and do not work on commission, and displays are rotated to feature the hottest new arrivals.
“What we truly do every day is evolve the concept,” said Betsy Olum, senior vice president of marketing for Sephora, noting that today’s store format is dramatically different from the original prototype. For one thing, said Olum, it’s brighter, and display fixtures are easier to shop. The “Eye Do” display features a handful of the best mascaras, as deemed by Sephora, so “the customer can find them all in one place,” said Olum. A more dramatic move to help Sephora nose ahead of its competitors is its recent partnership with Klinger Advanced Aesthetics, which is intended to meet consumers’ demand for spa treatments. In July, the two companies plan to open a side-by-side retail concept in NorthPark Center located in Dallas.
“Services are a big part of the industry right now, but they’re not part of our expertise,” said Olum, explaining why Sephora linked arms with Klinger. Sephora also is the exclusive retailer of Klinger’s Cosmedicine, a line of over-the-counter-grade skin care products.
“Sephora has established itself as beauty authority, which has a halo effect on its brands,” said Jane Terker, Klinger’s chief marketing officer.
Luring beauty’s early adaptors with exclusives, such as Cosmedicine or the lip plumper LipFusion, is all part of Sephora’s strategy. Olum would not comment on what the company’s most loyal customers spend annually, but the retailer is testing a loyalty card program in Dallas and Chicago, and will likely extend it to another major city this year. Clients can sign up for the program at in-store kiosks, where they are also asked to input their beauty profile.
One industry pundit cautioned that while Sephora is an expert at incubating niche brands, once those brands expand beyond its doors, they threaten to aid competing retailers aiming to steal sales.
BBW’s evolution from gingham tablecloths and flavored lotions to purveyor of prestige brands has made the specialty chain Sephora’s archenemy.
BBW has 75 flagships, or locations carrying multiple outside brands, and plans to added 20 to 25 units this year. And with Federated Department Stores shuttering doors, BBW has been attracting interest from scores of prestige beauty firms.
“Every single day we receive calls from manufacturers,” said Leslie Faust, senior vice president of BBW Flagships and C.O. Bigelow stores. “The perception from outside vendors is that BBW has enormous brand awareness,” she asserted, “and they would like their brands to be included and benefit from that.”
She contends that “BBW appeals to mass shoppers looking for more service [than is typically found in a drugstore], and department store shoppers looking for objective sales help. People shop for pleasure, and they want of lot of the experience on their own terms.”
The multibrand format seems to be resonating with BBW shoppers. Faust said the cash register ring has gone up and the flagships continue to increase both units sold per transaction and average dollar sales.
Sephora, meanwhile, is fervently guarding its turf. The chain’s latest salvo in the market-share battle was its deal with Penney’s, which could potentially bolster its reach by 1,019 doors.
“It’s the new alternative,” declared Leonhardt from Solomon, noting that prior to the Sephora-Penney’s union, Sears and Penney’s were the last remaining department stores in need of a solution for beauty. She expects the mix will rely heavily on Sephora private label merchandise with a sprinkling of third-party brands.
BBW executives would not comment on whether Penney’s also approached Limited Brands with the deal.
Given their ability to offer one-stop beauty shopping, specialty stores have woven themselves permanently into the retail landscape. “Specialty stores have always been a powerful format,” said McDonald. “[They] are here to stay.”
Editor’s Note: Adding Up Beauty is a weekly feature on marketing and financial analysis of the cosmetics industry.