Brick-and-mortar retail is hot in this specialty segment
Multi-brand and vertically integrated beauty stores are shaking up the beauty industry — and growing at a rapid rate.
With hundreds of new doors opening in various formats, cosmetics specialty and vertically integrated stores, such as Ulta, Sephora, Bluemercury, NYX, Kiko Milano, and e.l.f., have grown at a compound annual growth rate of nearly 19% over the past five years, according to a report by research and consulting firm Kline. Such stores now account for an estimated 20% of total beauty market sales.
Kline's "Beauty Retailing USA: Channel Analysis and Opportunities Report" cites such examples as Bluemercury, which recently opened a digitally enhanced flagship location in New York City, with plans to open 40 more stores by the end of the year, and Sephora, which recently opened its largest store in North America, in New York City, and its smallest location, the 2,000-sq.ft. Sephora Studio, in Boston.
"This concept (Sephora Studio) is one step towards creating more curated and digital experiences for consumers in the real world. Alongside digital tools, increasingly demanding younger generations require one-on-one services, including 15-minute facials and 45-minute makeovers that drive consumers seeking a spa-like experience into stores," the report said.
In addition, vertically-oriented boutique -styled beauty stores, such as NYX, e.l.f., and Kiko Milano, are conquering local malls with unique concepts targeted to younger consumers at lower price points. These brands are increasingly offering digital enhancements, such as NYX's iPads that help create different looks with beauty influencers/vloggers walking consumers through the replication while in store.
"Enhancing a customer's experience with a brand is one of the key reasons for the incredible growth of these free-standing beauty stores," the report stated.
Meanwhile, department stores are mimicking tactics applied by successful multi-brands specialty stores to draw more traction, according to the report. In early 2017, Bloomingdale's launched its first Knockout Beauty boutique composed of prestige brands with a natural/organic slant. Nordstrom's beauty area continues to evolve, bringing in brands with limited distribution. Nordstrom also added beauty concierges in remodeled locations to help guide consumers across brands, showcasing the top products in each beauty category. Neiman Marcus' interactive Memory Mirrors to help consumers remember the steps and products used during the in-store makeover.
J.C. Penney turns TV show into women’s apparel brand
J.C. Penney has entered into an ambitious partnership with a Lifetime reality fashion show.
The department giant has launched the first-ever "Project Runway" brand, with the collection inspired by the popular show and its design contestants. Currently available in over 500 Penney stores and online, the line made its debut with a summer preview collection featuring designs inspired by season 15 winner Erin Robertson, with the full assortment planned for Sept. 8.
"Millions of viewers aspire to emulate the fashion-forward looks first conceptualized during a Project Runway episode," said John Tighe, chief merchant for J.C. Penney. "This strategic collaboration enables us to work directly with up-and-coming design talent from Project Runway and increase our assortment of contemporary apparel, while gaining a fresh perspective on what women are seeking when curating the ultimate wardrobe."
In addition, Penney announced it will be the exclusive retailer partner for "Project Runway" seasons 16 and 17, along with "Project Runway All Stars" season 7. As part of the collaboration, throughout each season of both shows, Penney will sponsor a design challenge. The winners will have a special, limited edition run of their winning design produced in New York City, which will be immediately available to the public at J.C. Penney.com, and in select stores the following morning. Each season's winner will also have the chance to collaborate with J.C. Penney on a capsule collection for the Project Runway brand.
For the entire season of Project Runway All Stars, Penney plans to translate the winning look from every episode into garments that will be available exclusively on J.C. Penney.com every week, giving fans instant access to the latest styles from the show. And each show will also showcase "The JCPenney Accessory Wall," featuring a curated selection of shoes, handbags, fashion accessories and jewelry from various brands sold at Penney. In every episode, designers will be encouraged to complete their runway look using accessories displayed on the wall.
Penney is supporting its new brand with an integrated marketing campaign that includes dedicated Project Runway television spots and engaging fans of the show on popular social media channels. It is also spotlighting the collection through a dedicated microsite at jcp.com/projectrunway where customers can shop the latest Project Runway assortment inspired by the show and the challenge episodes.
"This partnership with J.C. Penney is one of our biggest retail collaborations since the series first began more than a decade ago," said Harvey Weinstein, co-chairman of The Weinstein Company, which produces the Runway shows. "It also marks the first time the entire Project Runway franchise has partnered with a leading, national retailer and introduced a line of Project Runway clothing that will be available year-round."
Analysis: Amazon can sustain buying sales at the expense of the bottom line
While many other retailers are bumping along the bottom in terms of growth, Amazon increased its sales line (in its second quarter) by almost a quarter. In real terms, this means the online behemoth took some $7.5 billion more in revenue this quarter than during the same period last year. By any standards, this is an impressive performance — but it is doubly so for a company of the size and scale of Amazon.
Worryingly for other retailers, Amazon shows no signs of slowing down. Indeed, growth this quarter was sequentially better than last. Even in a mature market like North America, Amazon still managed to grow its sales line by 26.6%. And all of this comes before the sales benefits of Whole Foods, which will boost future growth rates by around 12 percentage points. All in all, it is clear that Amazon is not only increasing its dominance but is doing so at an ever-faster pace.
Amazon's success is largely a function of three factors. First, a solid proposition that delivers what customers want. Second, the successful creation of an ecosystem of products and services which, for many, make Amazon the first port of call for online purchases. Third, constant innovation and investment in new products, services, and technologies.
The first of these is somewhat obvious in that Amazon's platform is easy to use, carries a very comprehensive range of products at good price points, and allows maximum flexibility when it comes to delivery and fulfillment. As much as these factors are simple to explain, they are difficult to achieve at scale — which is what prevents so many other retailers from growing at the rate of Amazon. That said, we would caution that others are trying to catch up, most notably Walmart which is investing more in online both through acquiring new brands and enhancing its service. In our view, this does not pose a near term threat to the Amazon juggernaut, but over the longer term, it has the potential to take the edge off market share growth, especially in the U.S.
The second factor is mostly a function of Prime, which creates stickiness around the Amazon brand when it comes to buying products. While Prime has already been a considerable success, we are encouraged by its continued growth, including the fact that more people joined during the recent Prime Day than at any other point in Amazon's history. Along with other subscription revenues, Amazon Prime fees generated some $2.2 billion of revenue this quarter – 51% up over the prior year. As much as other retailers offer variations of the Prime service, none of them offer a fraction of the benefits Prime has. In our view, this is one of the most defensible parts of Amazon's proposition.
The third factor of constant innovation is apparent from the laundry list of releases and achievements Amazon notches up each quarter. New products, like Echo Show and enhanced Fire tablets, create additional revenue opportunities. Meanwhile, new content helps cement the loyalty of Prime customers; and innovations in grocery pickup expand Amazon's reach. Taken together, the stream of initiatives is one of the underpinnings of Amazon's superior growth. Aside from a few notable exceptions, like Apple, few retailers even come close to having Amazon's energy and stamina in trying and launching new things.
As good as Amazon is at generating sales, it is far less successful in turning those sales into profits. To be fair, much of this is deliberate: Amazon chooses to reinvest in its business and to sacrifice profits to boost its market share and dominance. However, such a strategy shows up in a weak set of bottom line numbers. Indeed, in its latest quarter, Walmart made more net profit in a week than Amazon did during the entire three-month period.
As we predicted in our last note, Amazon's profitability is getting worse rather than better. This quarter, operating income fell by 51% while net income dropped by an even sharper 77%. Some of this is down to increased innovation costs; some is the result of expansion into new markets; some is because of higher content costs; and, some is a function of higher fulfillment charges. However, it all adds up to one thing: Amazon is buying sales at the expense of the bottom line. In our view, this is a sustainable position both because Amazon is cash generative and is not losing money; nevertheless, it takes some of the shine off Amazon's success.
The unfortunate truth for other retailers is that Amazon's growth and success will force them to reduce margins, especially if they want to grow in e-commerce. And while Amazon is comfortable operating with relatively low profitability, many other retailers — and their investors — are not. This is something that will create some significant pain points over the coming years.
For Amazon, boosting profit remains a challenge in the near term. In our view, the company needs to get a firmer grip on fulfillment costs and may also need to review the cost of creating content in the years ahead. Alternatively, Amazon may opt to increase the price of the Prime subscription in line with enhancements to membership benefits.
This becomes even more urgent as the Whole Foods acquisition proceeds. The need to reduce prices at Whole Foods, increase investment, and integrate the business will all have a temporary dampening impact on profit. Amazon can cope with this, but it still needs to keep an eye on its bottom line.
Longer term some of the issues will start to correct themselves. Investments in logistics and Amazon's commitment to building a strong physical presence, for example, will all help to mitigate fulfillment and delivery costs. Equally, the development of more own brand product in fashion and other categories will enhance margins and help Amazon to differentiate itself from other players. In this regard, it is clear that Amazon is playing a long-term game and, in our view, it remains fully on course to win.