The top specialty retailers in the U.S. hold a unique vantage point from which to observe the continuing evolution of consumer behavior patterns and the fundamental changes likely ahead for the beauty segment in 2004. These retailers have welcomed a new consumer in beauty, who is an increasingly sophisticated, product-educated, convenience and service-craving customer, now shopping across classes of distribution and looking for both innovation and value. This beauty consumer is more demanding than ever and expects her trusted retail relationships to help her edit choice, provide a welcoming environment for shopping, give her “theatre” when she wants it, or provide her with in-and-out convenience when her schedule demands speed. She still wants newness, but she is also in-tune with brand ethics and the price/value equation, and, at the same time, has a new appetite for luxury that is more discerning than in the past.

The fragrance department at Barney’s New York is home for independent brands.

A Shift in Decision Making
“The fundamental thing that pulls all the macro trends together is the notion of taking control of our lives where we have that chance—and shopping is one of the ways that we can (take control),” observed Wendy Liebmann of WSL Strategic Retail. “The consumer wants to be the brand-maker, not just the brand-buyer, the one who decides what shopping location is right for her,” Liebmann said.

In many ways, the consumer is “pushing back,” by trying to take control of emotional and economic capital through the brands and stores she chooses to patronize, according to Leibmann. “We are used to creating the beauty brand and having it define the shopper—now it is the reverse,” she explained. “The new consumer wants to define, not be defined by, her shopping channel and beauty brands.”

The challenging market for fine fragrance is a prime example of how consumers are looking for a new way to shop, according to Timra Carlson, president of NPD BeautyTrends. “We may witness a more pronounced change in the way fragrances are organized and chosen by consumers in 2004,” Carlson said. “A new way is by fragrance family (florals, orientals, citrus, green, water, etc). In 2003, retailers were beginning to respond to this trend. Sephora has embraced fragrance families and uses them to help customers find their ideal scents. That also provides alternatives for fragrances a customer typically gravitates toward.”

Ask the Experts
The author asked some of the leading specialty retail executives in the U.S. what lies ahead for the beauty sector in 2004.

The experts interviewed are:

Burn was a hot “grab ’n go” gift at Fred Segal stores and Barneys this past Christmas and a good example of the trend to unique, home items.

How Is your Beauty Consumer Changing?
Today’s beauty consumer definitely has more beauty choices and isn’t loyal to only one retail channel. Studio’s Coe-Hutshing said, “The consumer has a global navigation system. They’re going everywhere, as well they should. There is viable product at every price point in every market now.”

“We now have to face a client who has a tremendous number of choices, and has done her homework before she comes through the door,” added Sephora’s Olum. “These are high demand clients both in terms of service and product.”

Ulta scores with shoppers because the store allows them to choose across price points. Kirby pointed out, “At Ulta, 60% of women who buy prestige in our store, also buy mass on the same visit. At holiday time this goes up to 70%.”

But, “Value doesn’t just mean price anymore, it means what the product does for the consumer or means to the consumer,” said Douglas’ Donnerstag. “The customer is willing to spend money, but it has to make sense for them.”

Olum agreed, saying, “Customers are not afraid to pay high prices, especially in skin care. The importance is value. They are willing to spend the money if there is performance.”

At prestige locations, consumers demand service. “The customer wants to feel special,” stressed Donnerstag. “I gave my store managers the Mitchell book, Hug Your Customer, and asked them to consider the alternatives for our business. The customer appreciates the small, genuine gestures, like bringing the product to the car because the customer can’t find a parking space.”

Barney’s O’Neill explained, “The consumer is more demanding regarding customer service and their expectations, and will let us know if they are not satisfied. The environment has to be pleasant and efficient. They want to be pampered when they’re in the mood, but be served quickly and conveniently when rushed.”

Trends in Beauty Retailing
“When you look at Q4 results, the bottom end did well, the high end did well, and the middle continues to erode,” observed Kirby. “The paradigm has shifted from a distribution-centric mentality that relied on the customer going wherever her brand was, to a service-centric mentality that relies on service and shopping experience. The consumer is prepared to walk away from her favorite brands if the service and experience is not what she wants. 2004 may be about bringing the two (desired brands and service/experience) together.”

“Retailers must have an identity,” said Coe-Hutshing. “The world has gotten smaller and what once was esoteric and exclusive is not so any more. The certainty and sense of discovery, the tactile experience, the choices, the conversation, the music, the way they (the shoppers) feel about being at the store—it’s all important. That’s true in every sector of the market—even in utilitarian sectors like drug stores.”

Coe-Hutshing added, “There is a shift in our business toward ultra luxury merchandise. The trend is toward high end luxury—no matter what is going on with the economy.”

Prestige retail must come to terms with competition from all classes of distribution, according to Donnerstag, who noted, “When I observe the market and see where it is headed, the overused term of importance is cross-shopping. It is something that concerns me as a fine perfumery. We are losing more customers to CVS, Walgreens, and Wal-Mart, for daily products like cleanser. In the upscale industry, these items are not affordable. The same customer that buys Neutrogena cleansing foam, may also buy La Prairie or La Mer moisturizer. What do I have to offer to keep this customer in my store? In fashion, we are used to consumers shopping Armani and Gap—we are now getting used to it in beauty.”

Gift-with-purchase is not the sure thing it once was. “A lot of consumers still get excited when they see the word ‘free’ but it doesn’t build a loyal consumer,” stated Olum. “She needs to feel safe in her purchase and that is where sampling is important, but she doesn’t need to get 12 pieces of free product.”

O’Neill agreed saying, “So many retailers are giving the store away in terms of gift cards and discounts. We are challenged to compete with that and still maintain our business. We all have to rethink our consumer—what we have to do to keep them, how to bring in new consumers, and how to do this and maintain the integrity of the store.”

There are still successes, according to Burstell. “Looking at Fall 2003, it is clear that there were superstars within different lines and product stories. At Bendels, these included Trish McEvoy’s Fast Track Case, Diane von Furstenberg’s Stop Traffic Red Kit, and M.A.C’s Playboy lipstick. The trend in 2004 will be towards items, as retailers become more sophisticated at identifying those products that can really take off.”

The industry is also learning from its focus on youth culture and now understands that even young consumers want sophistication and innovation. Bendel’s Burstell said, “We are going from “You go, Girl!” to something more grown-up. The industry has been skewing younger and younger in focus and we feel a shift back to more classic, grown-up beauty and sophistication.”

Studio’s Coe-Hutshing agreed, and added “I did a whole teen outpost in my store years ago, but they were going straight to the Nars counter!”

With more than 80 doors in the U.S., Sephora is a major partner with ‘indie’ brands.

Opportunities in 2004
Ulta’s Kirby said giving consumers access to new products is key to generating new sales. “We’ve gone to brands outside of retail and we’ve formed partnerships with brands from QVC, such as i.d. bareMinerals makeup. At 130 doors, we can’t take edge trend brands and make them mainstream, but we can take lesser known brands that are positioned to our target customer and perhaps grow them more quickly, even from markets outside the U.S.”

Customized offerings are a great opportunity. “There is still more growth possible because this business is becoming a bigger part of the overall beauty market and there is repeat business,” said Burstell.

O’Neill concurred, saying, “I still see strong interest in customization. IMX custom lip gloss uses computer technology so that she (the consumer) can choose the color, texture and flavor. In fragrances, Susanne Lang offers customized scents exclusively to our customers. Editions de Parfums Frederic Malle, although not customized, offers the experience of selecting your signature fragrance as unique and individualized.”

At Fred Segal’s Studio, Coe-Hutshing said, “We are creating the bulk of our growth out of our existing brands. In late 2002, we discontinued 25-30% of the existing brands we carried and renewed our commitment to what we kept—some of the best brands in the industry—and to finding gems among them.”

Some beauty categories that offer opportunities for the specialty store include affordable, upscale hair products, according to Donnerstag, as well as sun care products. Olum agreed that hair care, especially color, which still does not have a foothold in prestige, has possibility. She added, “Ethnic products have potential, as the fastest growing demographic category is women of color. The key issues are product offering, how we market those products, and service.”

Home products offer another growth opportunity. Coe-Hutshing explained, “As long as I’ve been in business, whenever there was a void in the market, I’ve filled it with my own products. In 2003, we didn’t have the quintessential high-end one unit holiday gift (grab and go)—so I had been working on a line of scented candles for two years and I rushed it into the market for Christmas. The brand, Burn, went in both Fred Segal stores and Barneys and it was the highlight of our season sales.”

Burstell added, “Designers have raised the level of awareness of what will work in the home. We feel there’s a big opportunity in this category and will be launching Henri Bendel Home in Q2 or the second half of 2004, encompassing candles and travel items.”

O’Neill said, “The home category has always been strong for us and candles continue to be a big seller (Diptyque, Red Flower, and Burn from Studio at Fred Segal). Allora home fragrance oil is also a top seller. We haven’t launched that many new items in this category, but business continues to grow.”

Is There Still a Place for ‘Indie’ Brands?
Burstell said, “We are still looking for indie brands, but leaning more classic for 2004. Our business in late 2003 exhibited this trend with strength from M.A.C, McEvoy and Mercier and the strength of Diane von Furstenberg’s color launch. We still want to have fun, but the offering is going to be more grown-up.”

“Barneys is still continuing to launch indie brands, but you have to look a little harder to find the interesting concepts,” said O’Neill. “There’s not a lot out there. Color is still very important to Barney’s—it brings in customers.”

“Ultimately it is about the experience in-store, how you interpret that experience has to be appropriate to your consumer,” explained Kirby. “We’re not in the cosmetics industry, we are in the business of indulgence. Product is the price of entry, but what will bring the customer back is the experience.”

Donnerstag said, “For me it is a unique item business, especially if it fits in the home trend (Fresh’s Sake Bath, Jacqua’s Marshmallow body cream, Do Not Disturb’s lavender infused mittens, booties and wraps). People need fun in their life—so the individual fun products are always important.”

“Even with the exchange rate, I am spending a lot of time in Europe with my buyers sourcing the small, unique things that my customer appreciates, Donnerstag noted. “With the added buying power of 430 stores in Germany, I am able to leverage that for my 12 doors in the U.S.”

Olum said, “We are still finding exciting concepts from small entrepreneurs who see what is happening in the market and are very quick to react. We are really able to partner with indie brands and we feel a great responsibility in that regard.

“At the same time, in the industry we often walk away from our core business because we are looking for newness. It is still important, for example, to get customers into a core skin care regimen and the same can be said of color.”

Coe-Hutshing added, “Some of the new things we are doing are even old brands—like Laszlo—but launching it to a whole new demographic. I look at my customer and try to find what I can give them that is really good, not just new.”

Sector Forecasts: Color Cosmetics
“In color, there will still be a focus on professional products, as they are loyalty-building offerings for brands,” said Burstell.

At Sephora, “Color is always dominated by newness and innovation and driven by creativity, including new formulas, different delivery formats and new technology,” said Olum. “As a result, the category continues to grow, particularly in lip gloss and mascara.”

At Studio, “Color is still a huge part of our business (30% of sales year round) and artistry relationships are ones that our customers rely on,” said Coe-Hutshing. “That customer, because she is a fashion customer, drives our business.”

Treatment Products
“The treatment market will remain flat for Bendels,” predicted Burstell. “The derm brands are very important, but where is that trend headed? Will customers eventually be going to doctor’s offices for these products?”

Olum noted, “Skin care continues to be more and more important, with the world of competition expanding to the medical community. Can we come up with less invasive techniques to capture that business? We want to keep our minds open to alternative brands—exciting research coming out of skin care.”

Fine Fragrance
Burstell predicted that, “The excitement this year in the overall fragrance market will be in celebrity brands and celebrity endorsements of fragrances.”

“Fragrance will continue to be challenging,” warned Olum. “Traditionally the stakes (cost of business) have been very high, which is different from Sephora. It shouldn’t be so expensive to launch a fragrance and that is daunting to innovation.”

Coe-Hutshing noted, “In fragrance, we are revamping our custom-blend mix to be more sophisticated and stylish, while still relatively affordable compared to other offerings at Studio. It really bonds our customer to us when we custom blend a fragrance for them.”

The Men’s Market
“Comparing the men’s market in the U.S. and Europe, there is still huge potential, especially in men’s treatment,” pointed out Donnerstag. “In Europe, it is not unusual for the men’s category to do 27% or 28% for Douglas in Germany, Switzerland, Holland, France, and Austria.”

At Barney’s, “Our biggest growth has been in the men’s category, especially in treatment,” reported O’Neill. “We continue to launch new men’s treatment lines (Bullie will launch in Spring 2004) and have done shaving events with Art of Shaving and Anthony’s Logistics as well as men’s facial demonstrations. We have launched John Allen hair care, Sharps and Brave Soldier skin care this past season.”

The beauty department at Bendel’s is known for exciting product and colorful events.

Hair Care Lines
“Hair care has traditionally not been a successful category at specialty retail,” acknowledged Olum, but, “We have been able to establish a credible business in prestige hair care with Frederic Fekkai, Rene Futerer and Phyto as three of our top brands. Fekkai has done some interesting work with color infused shampoos and creams that extend the performance of salon color treatments. He really has his finger on the pulse, watching technology and the runways.”

“At Ulta, we see growth in hair color and the men’s market, but also continue to see nice growth out of the wellness sector and the cosmeceutical sector,” noted Kirby. “2004 will be a continued progression of what we are seeing—interest in the men’s category, interest in products appropriately positioned to boomers, and a continued shift away from the department store experience in all categories, especially beauty.”

Follow the Leader?
While specialty retail has traditionally led the various distribution channels in innovation for the beauty sector, the real excitement in 2004 may come from the projects at the other end of the market that have the potential to transform the beauty industry. There has already been growth of prestige brands through home shopping channel distribution and the sale of prestige brands at Costco. The Estee Lauder Companies, so adept at riding market trends through the opening of new freestanding retail concepts and the acquisition of brands, now has a partnership with Kohl’s departments stores to develop their beauty departments through its new Beauty Bank division. Where might that project go beyond Kohls? Will it be a multi-brand environment?

Another area of interest is the testing of interesting retail formats from overseas in the U.S. market. “Global retailers and manufacturers tend to know more about what is going on in U.S. market than vice-versa, and much of what is interesting and transformational at retail is happening outside the U.S. market,” noted Liebmann. Boot’s Dispensing Chemists in the U.K. are testing a skin care line with CVS and Target in the U.S. market. In Asia, it has taken its core brands and put them in other stores, rather than open full Boot’s concept stores outside its home market.

How will the nation’s leading retailer —Wal-Mart—define its relationship with Elizabeth Arden? Is this the future fate of heritage brands in the beauty industry—find new channels of distribution or cease operation in the U.S. market, similar to L’Oreal’s decision for the Helena Rubinstein brand? “You have to ask the question,” says Liebmann in reference to the Arden deal, “what will it mean for the equity of brand?”

Success in the beauty industry is a dual responsibility between retailer and manufacturer. What is needed most is the ability for retailers to think more like consumer brand marketers, and vice versa. At the heart of the problem for the beauty sector is consumer boredom due to a lack of anything new or risky. “Economic uncertainty often leads to less risky behavior on the part of consumers, but this is a misjudgement in beauty retailing,” observed Liebmann. “That consumer is still incredibly interested and committed to innovation in beauty.”