Beauty at Retail

Consolidating department stores, shop-at-home convenience and the Internet phenomenon — what it all means for beauty, skin care and fragrance manufacturers.

By Joanna Cosgrove, Contributing Editor

Beauty products and fragrances are in demand and consumers are keen on scrutinizing every purchase channel for the best deal on the top products. But “channel surfing” can pose a real problem for manufacturers who aren’t diversified into these channels properly. Today’s beauty consumer is fickle. She isn’t brand loyal and she certainly is not channel loyal. So in an age of department store consolidation, competing with ever-growing big players and overall belt tightening, what’s a manufacturer to do?

In defining the market for beauty, department stores still rank as the number one venue for prestige beauty sales, although they aren’t faring as well as they once were. According to a study from NPD Beauty, a division of The NPD Group, a market information company based in Port Washington, NY, sales of prestige beauty products, which are sold only in department stores, make up one-fifth of total beauty sales and generated $7.8 billion in 2004, up 4 percent from 2003. Mass merchants like Wal-Mart and Target secured 17 percent of industry sales; and direct sellers and TV shopping and drug store channels captured 13 percent. What’s noteworthy: beauty sales garnered on TV shopping channels have tripled and beauty product purchases via the Internet have doubled in sales since 2002.

Karen Grant, senior industry analyst, NPD Beauty, estimates that from 2002-2004 the beauty industry grew about $2.5 billion, however it’s a lot more fragmented and is growing in newer channels. “The food/drug/mass channel is doing well, considering it’s where beauty represents a significant portion of sales, however it’s not doing as well as prestige,” she said. “We’re seeing growth overall, which is a good sign in terms of sheer dollar volume, but sometimes (the numbers are impacted by) larger sized items that are higher priced. There are a lot more two- through six-ounce products coming onto the market because people are looking for more value.”

In the mass category, the penchant for beauty is so fervent that the channel has undergone a reputation makeover—mass has gone “masstige.” “The masstige market is booming as brands try to improve their image and revenue in response to consumers’ higher standards,” offered Kenneth Hirst, president and founder, Hirst Pacific Ltd., New York, NY.

Regarding how total beauty sales are segmented across the channels, Grant said food/drug/mass accounts for one-third of all sales, followed by department stores which own about 20 percent of market, then come the direct sellers (Avon, HSN, QVC), and specialty stores like Victoria’s Secret round out the top four.

Perfumania, a chain of specialty fragrance stores with a retail website, enjoyed a healthy sales gain of more than 9 percent last fiscal quarter, making Ray Piergiorgi, vice president of merchandising and marketing, very optimistic about industry trends, especially in light of the many new fragrance introductions due to debut in the second half. “This kind of theater and excitement gives consumers a reason to visit stores and hopefully walk away with fragrance purchases,” he said, adding that the consolidation of department stores is an “opportunity” that creates an environment where beauty product manufacturers look for alternative distribution opportunities while forcing them to be more creative with their marketing and promotional strategies.

“We have in the past two years been going through a metamorphosis in terms of revamping the look of our stores, adding open sell formats and improving the overall shopping experience, making us a leading destination retailer for fragrance and beauty products,” he said.

The Internet continues to be a channel to be reckoned with. Web site like Perfumania.com, Sephora.com and eLuxury.com, which offer products spanning color cosmetics, skincare, fragrance and hair care products, represent the fastest growing channel for beauty products. The NPD Group’s latest report, Emerging Channels: Beauty Care Products on the Internet, revealed that women spend an average of $83 per year on beauty products through the internet. The study found women increased their spending on beauty over the web by 38 percent in the past year, more than any other channel of distribution.

Additionally, one in five women told NPD they intend to spend more over the Internet for beauty products over the next year than they did in the past, making it the number one ranked channel for future purchases. As to why the Internet was so highly favored, seven out of ten women said they enjoyed shopping on the Internet because it’s “easy to use.” Product availability followed as the second reason, with 56 percent of women saying there are “more products I like.”

Quality and cost issues were also among the reasons why women intend to purchase more beauty products over the web. Nearly one-quarter (22 percent) of consumers thought that the “quality of products have increased” and 20 percent said that the “quality of services increased.”

“Today, consumers are shopping at a variety of channels, causing the retail environment to become more fragmented,” said Timra Carlson, president, NPD Beauty. More and more consumers are cross-shopping at specialty stores and alternative channels such as TV, warehouse clubs and most notably, the Internet.”

Disappearing Department Stores

Department store consolidations have been ongoing for years and the biggest downside of this trend is the market contraction that follows. After a downsizing, “retailers have to be very careful that stores within their portfolio have distinct presences and messaging to attract and appeal to consumers,” said Grant. “For manufacturers there are potential stock issues — products that may have been heading to the shelves of certain stores, additional product stocks that were destined to be shipped but are now obsolescent stock.”


Direct to Retail (DTR) is another outcome of these consolidations. “The changes in retail that have threatened the department store’s survival – be it the rise of discounters, the increasing power of web-based retail, the ubiquity of brands, the proliferation of choices, the parity of product quality and best practices, or the empowerment of the consumer, and so on — the result is a continual onslaught against manufacturers’ margins, and a mandate to differentiate in a way that resonates with clarity among specific consumer segments,” commented Bill Goodwin, president and creative director of Media, PA-based Goodwin, a firm that operates on the premise of “strategy and design for youth brands.”


And as logic dictates, when marketers are squeezed, the trickle down effect most often impacts their packaging suppliers. But “problems arise when brands don’t spend enough time and money on R&D for packaging,” argued Hirst. “From years of designing fragrances, cosmetics and beauty products I have seen the benefits of good branding and design, and the pitfalls of short sightedness. The problem is you get what you pay for, and sales are often determined by products’ design and packaging.

“We’ve witnessed a sea change from some manufacturers/marketers, who have largely taken to two extremes while others remain somewhere in between,” Goodwin said. “Yes, there are those who have done the expected — cut costs, reduced budgets, turned to strategic sourcing partners, improved efficiencies among a host of other cost-conscious activities. Yet others have seized this moment as an opportunity to recognize the intrinsic value of packaging as a critical component in the marketing mix. They’ve deliberately elevated the value of design and experience, including packaging, as a paramount strategic differentiator both at retail — and ultimately in people’s lives.

“In a cover story in Fast Company, A.G. Laffley, CEO of Procter & Gamble, stated, ‘We want to design the purchasing experience, we want to design every component of the product, and we want to design the communication experience… I mean, it’s all design.’ He also said, ‘We need to make the (customer’s experience) better, but better in her terms,’ clearly acknowledging the influence of women, who make up to 85 percent of all household purchase decisions,” Goodwin added.

Identifying the Consumers

So just who is this consumer who wants beauty on her own terms? To borrow an idiom coined by Goodwin, she’s a “prosumer,” who seeks goods on a personalized level.
“You can’t con a prosumer given their empowered state as proactive, informed customers with access to tools and info like no other time in history,” he said. “Today’s beauty/fragrance/per­s­onal care consumer is less likely to be defined by one brand rather than, like consumers in most categories where brands are icons of cultural currency, maintain a stable of new and perennial favorites which meet their desires.”

Goodwin further postulated that divergent social trends have spawned a host of extremes in every facet of our lives, giving rise to this “personalized prosumer.” “As consumers, mass customization has afforded us a cornucopia of choices, including products in every imaginable configuration,” he said, citing the success of polar opposites in the personal care realm pitting MAC versus Dirty Girl, and the high-end lux appeal of Neiman Marcus against masstige Wal-Mart.

As “personalized prosumers” shop retail in “a state of parallels and paradox,” Goodwin forecasts that a number of different retailers will prevail. “For basics, little will change as discounter and drug store chains like Wal-Mart, Walgreen’s, Eckerd, CVS and others fill the need through price battles and the like,” he said. “Target has many opportunities to provide unique offerings within their growing consumer segment — be it through DTR, celebrity designers or the company’s distinctive merchandising/marketing campaigns. Yet boutiques and department stores still remain an inspiring experience for the core beauty seeker, to which pricy premium brands and experiences appeal.

“The reality is that products in this category are experiential initially, transactional secondarily and aspirational ultimately,” he said. “As a result, consumers must first experience products which they believe may provide benefit (before they are) added to their preferred list. In the interim they generally keep those products to which they are attached.”

Building a Business Blueprint

Now that the consumer has been identified, it’s time to study up on what beauty manufacturers can do to better appeal to her eye — and wallet — in such a highly fragmented retail environment.

First, recognize and embrace that the consumer has many choices. Then seek ways to personalize your product. “There are lots of brands out there catering to different ages, skin types, skin colors and problems. The market has become very specialized,” observed Hirst. “What was once a moisturizer is now ‘Ultra Facial with SPF 15’ or ‘Hydra Complete Multi-Level.’ It’s very competitive and very niche, particularly in skin care.”

Hirst contended that competition is good for the industry, and although individual companies may suffer, the industry grows as a whole. “It encourages innovation: new products, better products, interesting packaging, exciting point of sales and eye-catching advertising,” he said.

Diversifying your product into a variety of channels might capture some additional sales, but there are also ways to succeed within the department store environment, offered Grant. “Manufacturers must look to see if they are really maximizing their opportunities, making their environment into something where people would want to come in and shop for their brand,” she said. “Some of the smaller brands that have come into the market are having explosive growth so the department store environment is not a bad environment to be in, it’s a question of whether you’re able to engage the consumers, bring new consumers in and retain the consumers that you do have. That’s the biggest challenge manufacturers have to tackle.”

The retail landscape is populated by a lot of big players who present themselves as specialized brands capable of customizing to meet a consumer’s various needs — this in and of itself is the best lesson for manufacturers looking for a way to survive the retail squeeze. “Beauty shoppers aren’t brand loyal, they pick products from a variety of brand labels. These big players maintain a variety of products in their various lines so they can appeal to a broad variety of needs, leveraging the strength of their overall house. Adopting a broader approach while maintaining a niche appeal is how manufacturers are going to have to continue to be competitive today.”

“In 2005, the winning brands and retailers will be those that clearly define their consumer segments and then develop the right products and shopping experience to appeal to them,” said NPD Beauty’s Carlson. “Some consumers are looking for value, while others want fun or affordable luxuries. The main thing consumers want is that special experience whether they find it in a store or from shopping at home.”