They say winners aren't born, they're made — but very few retailers were made to thrive in a pandemic.
Retail has been hit — and hit hard — by the coronavirus pandemic, with widespread store closures that are just now turning into reopenings. As retailers start to welcome customers back into stores, the experience will look completely different. Many have reduced hours and are implementing various protocols to promote social distancing.
That's going to be difficult for most retailers, but beauty is a high-touch segment. Previous standouts like Sephora and Ulta, both of which offer in-store services, are going to have to change the way they do things — and it may alter growth ambitions for them as well. Prior to the pandemic, Sephora had announced plans for 100 new stores across North America, its biggest expansion in the region since entering the market 20 years ago.
Now, those plans are likely in question.
Ulta in April pulled back on previously announced plans to open 75 new stores in 2020, which followed several years of strong store opening rates.
When questioned about its expansion in late April, a Sephora spokesperson told Retail Dive the company had nothing further to share.
Yet it largely feels like growth plans are a thing of the past. The focus now for beauty brands and retailers is how to survive in a changed landscape — and who will come out of this crisis on top.
"Overall, brands that have DTC capabilities, retailers that have essential goods obviously are advantaged, and the ones that have a very strong e-commerce channel are also advantaged," Andrea Szasz, principal in the Consumer practice at Kearney, said in an interview.
That may sound clear-cut, but there are other factors weighing on the success of beauty retailers, from the potential failure of department stores to beauty brands that came into 2020 with strained finances, making the pandemic even harder to weather.
Retail's pretty side hits an ugly roadbump
It's impossible to talk about the impacts of the coronavirus on beauty without mentioning department stores — a traditionally big sales channel for beauty brands, and a part of the sales floor that has been lucrative for them. In recent years, department stores have invested in their beauty sections to drive more sales and keep customers in the store through services.
At the moment, though, the long-term viability of department stores is in question. The coronavirus outbreak has not been kind to the sector: Already, Neiman Marcus, J.C. Penney and Stage Stores have filed for bankruptcy after the pandemic accelerated their respective financial declines.
Prior to J.C. Penney's filing, Instinet analyst Michael Baker said a bankruptcy from the department store could free up share for Ulta, as Sephora is located in 660 of J.C. Penney's 846 stores, "and some of those would likely close during a bankruptcy situation." Indeed, J.C. Penney's initial plans include approximately 242 store closures, though it is not immediately clear how many of those are occupied by Sephora.
Baker estimates J.C. Penney generates around $500 million in sales from Sephora, and the partnership already came under threat before J.C. Penney's bankruptcy, as the two squabbled over the terms of their relationship. Though the court tussle ended with both retailers reaffirming their partnership, it is not yet clear how many stores J.C. Penney will ultimately close in bankruptcy and it would likely be a blow to Sephora to lose that distribution channel.
"This news does not come as a surprise, given JCPenney has faced an increasingly difficult situation with the additional strains affecting all retailers in the wake of COVID-19," a Sephora spokesperson said in response to questions about how the bankruptcy could impact its business. "We remain committed to the unique beauty experience that Sephora has co-created with JCPenney over the last 14 years and plan to continue our relationship during their reorganization process. We hope JCPenney will emerge stronger."
"This is an accelerant of the death of the mall."
Principal in the Consumer practice at Kearney
The struggles department stores are facing now could also mean eventual growth for Ulta and Sephora, as the shrinking segment pushes consumers to other physical stores for their beauty products. It also likely means Ulta and Sephora have made a good bet with moving their standalone stores outside of the mall.
"This is an accelerant of the death of the mall," Szasz said, noting that social distancing regulations will likely give an advantage to retailers with street access. "If you are able to access a store that is not within an area of congregation that is completely closed like a mall itself, it would be an advantage. In fact, as we were interviewing consumers, the results seem to be that an environment as big as a mall, with all those kinds of shut doors and the constraints of being surrounded by so many people, was not something that people would feel comfortable with."
As far as beauty manufacturers like Estée Lauder go, S&P Global analyst Diane Shand said some of the sales they get from department stores that have filed for bankruptcy will likely just shift to a different store, noting that many of them are "channel agnostic."
But some brands are better off than others. Estée Lauder and L'Oréal have pretty strong positioning, but even Estée Lauder will see "a significant hit" from the pandemic, as the company relies on travel sales, as well as department stores and specialty retailers, fellow S&P analyst Mariola Borysiak said. S&P revised its outlook on Estée Lauder to negative at the end of March for those reasons.
Shand and Borysiak said many others in the segment went into 2020 already challenged, including Coty. In mid-May, the company struck a deal with private equity firm KKR that would give it an initial investment of $750 million and included selling off a majority stake in its professional beauty and hair businesses, Wella, which it is spinning off into a standalone company.
Prior to that news, which will give it an influx of cash for the time being, Shand said that Coty's consumer beauty business could benefit during the pandemic, but that the company relies heavily on luxury, which is driven by fragrances — and fragrances don't do well during a recession.
Cosmetics, which was already in a downcycle heading into the pandemic, is also a category that's likely to suffer, as consumers have less need to wear makeup every day.
"We're seeing a lot of trends that had started before the pandemic be accelerated and accentuated by the pandemic," Andy Mantis, chief business officer of 1010reveal, said in an interview, noting skincare categories have benefited. "When that turns around, it's hard to say, but I would expect these trends to be accentuated."
In the meantime, businesses focused on selling the more discretionary items of beauty, like fragrance and certain areas of makeup, will continue to suffer, along with those with weak financial stability.
Anastasia Holdings and Natura & Co make the list of at-risk beauty companies during the pandemic, according to Shand and Borysiak. Multi-level marketing companies "will really suffer," Borysiak said, because in-person consultations are not much of an option anymore.
Revlon, which was downgraded to CC by S&P in late April after news it was pursuing a recapitalization, could benefit if the company was financially better off, but Borysiak said that it needs to address its capital structure and has a lot of debt maturities to deal with.
"To be honest, seeing this company benefit in the near term — we're not going to see it," Borysiak said. "Maybe down the road, but the question is: Would they last long enough?"
Best poised to weather the storm
Despite the challenges posed by the pandemic, there are still some bright spots in beauty, and some essential retailers that could capitalize on their beauty share in the meantime. Specifically, drugstores and mass merchants, which tend to cater to the more casual beauty user, have a big advantage when it comes to in-store shopping, though foot traffic wins for anyone are relative at this point.
On March 13, toward the beginning of the coronavirus outbreak in the U.S., CVS foot traffic saw an increase of 49% year over year, but traffic turned negative March 18 and has stayed so since, according to data collected by foot traffic analytics firm Placer.ai. On May 11, traffic was down 37% at CVS, 29% at Walgreens and 31% at Rite Aid (though it has fallen as far as 52%, 46% and 50%, respectively during the pandemic).
Still, that pales in comparison to Ulta's foot traffic, which was down 81% on May 11, while J.C. Penney was down 93%, Nordstrom was down 96% and Macy's was down 92%. Excepting one day in April, which was being compared year over year to Good Friday 2019, Ulta's daily foot traffic was down over 90% every day from March 20 to May 3.
Target and Walmart, meanwhile, enjoyed the least disruption, with traffic down significantly less, and even increasing in the low single digits at Target toward the beginning of May.
Both the drugstore and mass merchant sectors have made moves in the beauty space in the past few years, with CVS and Walgreens using partnerships with DTC brands to up their in-store services, and Target making a point of launching exclusive lines that hit on important trends in the space. The big-box retailer has also run an accelerator program for beauty startups for a few years, which also helps it form relationships with new brands. Even Walmart has moved to make private labels in the space.
While those retailers could get near-term boosts from beauty sales as customers shift their spending habits during the pandemic, Shand said more spend is likely to move online than to drugstores. According to an April 7 report from the NPD Group, beauty has already seen an encouraging rise in online sales. Online, which typically accounts for about 20% of total prestige beauty sales, "captured close to 90%" in the week studied.
"At some point, people are even kind of relieved to be able to go somewhere else."
Principal in the Consumer practice at Kearney
The real question, though, isn't if essential retailers have an advantage in beauty at this specific moment, but whether they will take this time to invest and be more of a force to be reckoned with in the future.
"Now, everybody's buying there, but … consumer fatigue would suggest that at some point, people are even kind of relieved to be able to go somewhere else," Szasz said. However, investments in omnichannel to make buying online and picking up orders convenient could gain the mass merchants new segments of the market, she said. And as smaller beauty retailers potentially close some stores, or shutter entirely, there may be space to acquire new customers for stronger players.
That contraction will likely impact DTC brands as well. Sephora and Ulta have both built strategies around nabbing exclusives with hot and up-and-coming DTC brands, but with the pandemic forcing both of those retailers to shutter their stores temporarily — and the new normal likely keeping many shoppers home for weeks or months to come — brands primarily selling through those distribution channels are likely hurting.
DTC brands are fortunate in that they have strong online selling capabilities, but they also rely on funding rounds for cash and were already struggling with some operational hurdles before the coronavirus outbreak.
Glossier, one of beauty's DTC darlings, on May 18 said it might be "among the last to reopen" and would begin furloughing its retail employees on June 1. The brand has been largely successful, partnering with big players and cultivating an in-store experience that features lots of product testing and lots of conversation between customers and associates. Because it operates largely online, physical pop-ups and permanent stores often had many visitors at once, which now may make it harder to reopen.
While Glossier's strong presence in the beauty world may keep it from going under, others surely will — or be acquired by larger rivals, Szasz said.
"Direct-to-consumer brands are the ones that should be winning, but because their cash flow is strained, then in reality, the larger businesses that have an omnichannel business or a DTC business that is much more mature, are much more advantaged to survive and weather the storm than the smaller brands that are cash constrained," Szasz said, noting tightened venture capital funding. Some of the smaller players that do make it through "could actually come up as a winner out of the crisis," but Szasz added that "many of them will be shaken out in the meantime."
Who wins and who loses may also be decided by what category a startup chose to launch into. Skincare, for the moment, has seen increases in online sales. According to Inna Kuznetsova, interim CEO of 1010data, online sales of anti-aging and moisturizer were up, as well as other more essential segments of beauty, including soap, shampoo and conditioner. Online sales of shampoo have jumped 70% during the pandemic, while conditioner and body wash have both increased 50%. But not all areas of makeup are falling out of consumer interest.
"There are certain things that you still need to use and buy to look good [on video calls]," Kuznetsova said. "You need concealer and foundation and mascara."
Lipstick and eyeshadow, however, declined. Earlier on in the pandemic, the NPD Group found that some self-care items were growing as well, despite the overall decline in beauty spending. Body oils, home scents, nail care and hair color all grew in the week ending March 28, "and some in the double-digits," according to an April 7 report.
Even in the darkest impacts of the pandemic — the store closures, layoffs and consolidation — there may be some bright spots for the strongest in the beauty segment.
"For every smaller player that goes bankrupt or that struggles in the market or furloughs or lets people go, there's so many talented, beauty-passionate and technologically savvy people that are on the market," Szasz said. "So I think that this is exactly the time for some of the traditional players to rejuvenate and to find great talent on the market that can really bring them to shift their focus to the digital, new forms of customer engagement."