Beauty Retail Flies High, Even as Apparel Struggles

June 5, 2017

Apparel may not be flying off store shelves but lipstick sure is.

Skyrocketing beauty sales are driving an increase in beauty retail concepts, from Sephora and Ulta Beauty, to smaller multibrand concepts such as Bluemercury or Space NK to monobrand boutiques that envelop their shoppers in a 360-degree brand experience.

The reason that beauty succeeds, where apparel sometimes does not, is differentiation, according to Jane Hali, chief executive officer of Jane Hali & Associates, a retail investment research firm.

“There are so many different brands producing different kinds of beauty regimens — you can’t say that one line is directly the same as another line — but in apparel, we are seeing a sea of sameness — everyone has cold shoulders, everyone has the same kind of design,” Hali said. “It’s hard to shop the mall and not see the similarities in apparel — they’re all quite competitive with each other. Beauty offers uniqueness and newness.”

 

Beauty’s vertical integration also benefits companies looking to open shops, said Ross Kaplan, executive managing director at Newmark Grubb Knight Frank. “The biggest issue right now is rent for a lot of these retailers…[between] the cost of goods, the markup and then paying for rent and operating expenses,” he said.

Beauty stores aren’t necessarily taking the space vacated by apparel companies that are shuttering doors, Kaplan noted. Recently, Macy’s, Sears, The Limited, BCBG, American Apparel, Wet Seal and others have said they will close stores. But in beauty, store openings are more common and have been announced by Ulta Beauty, Bluemercury, Cos Bar, Rituals, E.l.f., Hourglass and other brands and chains. 

“I don’t think they’re taking over traditional retail locations — Ulta was a bank corner, and there was a pharmacy vying for the same space,” Kaplan said, talking about Ulta’s first Manhattan location, slated to open in October, and adding that NYX took over a Starbucks space for its New York opening. Ulta’s Manhattan store will follow the 10,000-square-foot blueprint of its other outposts. 

What beauty companies are doing, he said, is outbidding other potential renters.

“Because of the vertical integration, the markup is better and enabling [beauty] tenants to pay more rent than someone who is just reselling goods,” Kaplan said.

“People are shopping in a much different way,” said Karen Bellantoni, vice chairman of real estate brokerage firm RKF. “That woman who normally would have gone into a Neiman Marcus or a Bergdorf [Goodman] or a Barneys and bought $150 worth of creams, now they just go to Kiehl’s because it’s easier for them to do that — they don’t want to go into a department store.”

“They’re buying lipsticks, they’re buying lotions — a lot of it is coming from social media,” she said, noting the following of beauty-focused celebrities such as Kylie Jenner and Gwyneth Paltrow. “People are spending their money on beauty.”

“YouTube has brought a new level to the beauty business. It invites you to go to the store and duplicate what you’re seeing on YouTube — that’s been happening globally,” Hali said. “Everything at retail is not only about the product — it used to be the product. In today’s world, if you don’t have the right social media no one’s going to know about your product.”

While makeup companies are opening up shops — NYX and E.l.f. among them — wellness-oriented beauty companies that are less tutorial driven are venturing into retail as well.

“Color brands have been important, but I’m also seeing [interest from] the essential oils, sage stores,” Bellantoni said. “Rituals is expanding like crazy.”

Part of that comes as part of the wellness wave, Bellantoni noted — people are simply more interested in better-for-you-type products, like essential oils.

Rituals, which creates products centered around the mindfulness of various rituals, is focused on opening more doors, particularly in the U.S., ceo Raymond Cloosterman has said. He expects the brand to grow about 30 percent for 2017, and attributes part of that to store openings. With its latest New York store in Grand Central Station, Rituals joins a handful of other beauty brands located in the hub: The Art of Shaving, Aveda, Diptyque, L’Occitane, MAC and Origins.

That beauty-cluster concept is common in Manhattan and has also taken root in Brooklyn, San Francisco, London and Paris.

“If you have more [stores] in the space on a main street, it’ll drive more traffic and that’s what you want — you want traffic,” Hali said. “And [clustering] will drive traffic — we’re seeing that in the activewear space as well.”

From the angle of the brands, the idea is to simply be where the consumer is, according to NYX ceo Scott Friedman. “We want to be where our consumer shops,” Friedman said. “Some of the other cosmetics retailers, they had already done that work — they want to be in those same places, because that’s where the consumer is. It’s logical there would be an overlap.”

Opening beauty stores in clusters seems to work for consumers, according to NPD global beauty analyst Karen Grant. “You’re in that mode in certain neighborhoods…it’s a little annoying sometimes when there’s this one shop and you have to go back downtown,” she said. “If there’s a neighborhood, you [can] think about it almost like a strip mall and browse and see what’s going on….It puts you in this adventure, treasure-hunting mode and that’s very stimulating. Sometimes it’s great to be that lone wolf in the area, but the neighborhood itself has to lend itself to you [being] the treasure that’s found there.

“If you’re part of a really great lineup, you likely will get some residual benefits because you’re part of the lineup,” Grant added.

Once a consumer enters a beauty store, they’re looking to be immersed in a brand world.

“It’s the full expression of the brand,” Friedman said. “We aren’t pulling away from the strong partnerships we have with Ulta [Beauty] for instance — we think that putting some NYX stores in key urban centers is the best way to express the brand and it gives people more awareness of what NYX means.”  

NYX officially opened its first freestanding store in Manhattan’s Union Square neighborhood — near a MAC, Fresh, Bluemercury and Sephora — but before that, the L’Oréal-owned brand had an inkling that freestanding retail might work, Friedman said.

“I’m sure L’Oréal had that idea from the beginning, but we did as well. When we went through the sale process we suggested NYX would be an ideal brand to launch freestanding stores in some markets, and the reason we knew is that several of our distributors had launched NYX stores and they were successful,” Friedman said. After about a year’s worth of work, NYX rolled out its current store formats, which are technology and experience heavy, and aren’t aimed at competing with retail partners.

“There were certain markets where for NYX, the proper distribution channel didn’t exist,” Friedman said. “You want to partner with someone like an Ulta in the U.S. or Boots in the U.K. — it’s those channels where the beauty junkies shop where you have a mix of prestige and mass price products, something with the right traffic, and in some markets, that didn’t exist.”

One of the main things brands get from opening their own stores is a chance to give shoppers a more concrete sense of their overall vibe — essentially, to charm them, Grant said. “Monobrand [stores] have been something we’ve been seeing for a few years from Europe as well,” she said. “Brands are coming in and saying ‘Here’s who we are and what we are.”

“These are places where you can totally immerse yourself into the brand, and where the sales are totally devoted to the brand and are well versed,” Hali said. “The brand store itself gives you experiential retail that you’re not going to get in the department stores.”

 

It’s a strategy that can work well for brands that started online and are now looking to translate that experience into stores, something Glossier, for example, is in the midst of doing.

“It’s almost like creating a brick-and-mortar version of what’s going on online,” Grant said. “You can go in and explore this world….When a monobrand concept is done in a really explosive way, it can be like, ‘Wow — who knew you were so big, who knew you were so cool.’ There’s the power of that.

“It charms them, it elevates the brand to a whole other level in the mind of that consumer,” Grant added.

And lots of beauty brands have signed up to do just that. E.l.f. Beauty has plans to open several freestanding stores per year, Glossier has retail plans in the works, and Hourglass Cosmetics is adding a New York outpost on Crosby Street. Multibrand retailers don’t seem to be falling behind — Ulta Beauty is plotting 100 new stores per year until the chain gets up to around 1,700 locations. Bluemercury cofounder Barry Beck has said the chain has room for another 300 stores in the U.S. Natural beauty store Credo has Chicago plotted as its fifth location. Forever 21 is also delving deeper into beauty with Riley Rose, a new beauty, accessories and lifestyle store concept.

MAC, which has long history of freestanding stores, is working to update some store formats to include digital, and to make sure the artistry-focused vibe of its monobrand boutiques isn’t lost as it ventures into specialty retail.

The brand is undertaking a handful of initiatives to try to shore up U.S.-based sales, which have been negatively impacted by declining foot traffic in mid-tier department stores. Among them is the company’s decision to enter Ulta, but also a plan to upgrade certain freestanding doors with more technology. The company’s store in Times Square serves as an example — equipped with iPads, shoppers can learn various makeup techniques without enlisting a salesperson. “The MAC store will become more omnichannel,” said Lauder ceo Fabrizio Freda after the company’s last earnings report. The changes include “more digital activation inside, where the consumer can engage with the education and customization process on their own…filled with more creative makeup artistry ideas that can better inspire the consumer,” he said.

And for MAC, the issue of branching beyond its boutiques includes making sure the company’s artistry history doesn’t get lost in the shuffle. “The issue is not just a distribution problem, it’s where can MAC express the key MAC dynamic, including the amazing services and amazing artistry that the brand is based on and where there is high traffic of interested Millennials,” Freda said.

As a whole, the Estée Lauder Cos. Inc. has grown its freestanding door count significantly over the past five years to almost 1,400. (For fiscal 2013, the company had about 820 doors.) MAC, as of March 31, had about 630 doors, while Aveda had roughly 120, Jo Malone London had 100, Origins had almost 100, Bobbi Brown had about 80, Clinique had about 50 and Estée Lauder had about 30. Most of the company’s stores are concentrated in North America, but the company is expanding in other geographies. Lauder has more than 50 freestanding stores in China, for example, including both MAC and Bobbi Brown locations.

A key to both freestanding doors and multibrand beauty boutiques is the experience a customer has when they walk into the store.

Beauty brands are fast learning — more so than the fashion folk — that a laser-sharp focus on the in-store experience and experiential retail is the key differentiator in a fast-growing, rapidly evolving landscape.

The brick-and-mortar shopping experience is paramount, as customers are more informed and connected than ever before. They are doing research on their iPhones and consulting with apps long before stepping foot in a store, and once they enter their local Sephora or Ulta, the expectations are high. Shoppers want dynamic, in-store experiences that are largely digital in nature (and sometimes involving a human element), including newer technologies like augmented reality where they can “try on” different kinds of makeup through an interactive mirror. Its experiences like these that are putting beauty in the driver’s seat when it comes to experiential retail, experts agree.  

“The apparel players have a longer way to go to catch up, but it seems like they are struggling with financial performance and [declining] sales, which they consider to be bigger problems than finding the right customers experiences and innovations that might help them with that as well,” said Salvador Nissi Vilcovsky, founder of Memomi, creator of the Memory Mirror Platform and Makeup Mirrors that could be found in retailers like Neiman Marcus and Sephora in Paris.

Even with all the beauty retail plans in place, Hali contends there is still an opportunity for more freestanding beauty doors to open. “Further expansion will be from a lifestyle perspective,” she noted.

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