Despite the fall-off on sales in department stores, the prestige makeup and fragrance business is finally growing after years of decline, according to NPD. However, even as the economy has improved over the last seven years, the skin care category is under pressure; it is concerning to think what will happen to the category when we hit another downturn.*
Meanwhile, the mass market in makeup and skin care has seen anemic growth over the last five years.*The last time the makeup category saw growth was during the last recession. Fragrance in mass has always been difficult.
Even Elizabeth Arden, a public company, had a lot of its business tied up as a third-party distributor, in addition to its own prestige fragrance brands.
And the Cotys of the world realized that gaining traction in the mass fragrance business was tough, since the prestige brands had opened the flood gates to sell their wares at discounted prices.
And, when you look at the mass and prestige channels, things become even more muddled. Let’s take a closer look.
What’s Really Going on in Prestige?
Save Chanel and Estée Lauder, everyone in prestige fragrance has been selling directly or through third parties to save face. When I use the term “third parties,” I am including international distributors and many big travel retail operators that get huge discounts from the brands and are, at the same time, pushed to buy more by the brands.
It is guaranteed that distributors and pseudo travel retailers will divert if pushed too hard. This is why there are the multimillion-dollar, third-party wholesalers like Quality King. Even Elizabeth Arden, a public company, had a lot of its business tied up as a third-party distributor, in addition to its own prestige fragrance brands.
The category lines are very blurred these days.
With its Revlon acquisition, it will be interesting to see if Revlon will continue this style of commerce to the mass trade. I am including, here, international distributors and many pseudo-travel retailers and neo duty-free operators that get huge discounts from the brands and, at the same time, are pushed to increase purchases so the brand salesperson can make their budget.
The brand is the one ultimately responsible for controlling where their product is sold. If they do not push the distributor or travel retailer to buy more than they need, the business would essentially be healthier from a channel standpoint but perhaps not as profitable.
Why Mass Beats Prestige Retail
The category lines are very blurred these days. Prestige fragrance brands launch in the selective channel and, months later, end up in Target, Walmart and the drug stores. This is by design.
The mass market, despite its heavier discounts, makes three to four times the profit as the prestige channel. The reason for this is that the prestige brands spend heavily in department stores to create a need in the consumer to buy the brand.
Mass channels, on the other hand, get the product at a lower price than the department store but do not spend one penny in marketing to drive sales, as the product is sold at a 20–40% discount. This is something the industry does not talk about.
Having spent three of my five years at P&G as head of diversion control for the prestige fragrance division, I learned a lot about the gray market, which accounts for about 1/3 of the prestige fragrance business.
There was a time when where a brand sold determined its positioning. This strategy no longer holds true.
Another interesting retailer is Costco, which generally buys direct from the prestige manufacturer but also buys fragrances from third-party wholesalers. The retailer will buy from wherever the deal is better, which is the same position as Walmart.
Walmart buys Elizabeth Arden brands from the company but will also buy its brands through gray market. Walmart wants the goods and does not really care where they are sourced from. This has gotten them into trouble in the past when they were misled by a third-party distributor into buying some counterfeit goods.
It is common practice today in many product categories, from health and beauty care to food, for third parties to comingle real product with counterfeit. Hence, where you buy does matter. So, if a consumer is looking for a prestige brand they may be better off going to a prestige retailer such as Macy’s, Belk, Dillard’s, Sephora or an authorized hybrid retailer like Ulta where there is no doubt of its authenticity.
How Diversion Impacts Professional Products
Diversion is a way of life in the prestige category, but it is also omnipresent in the professional salon category. How is this strategy rationalized? Intuitively it sounds counterproductive. There was a time when where a brand sold determined its positioning. This strategy no longer holds true.
Mass and class are difficult to define for brand distribution today.
I was one of the marketers that did this when I sold NYX as a mass priced brand to Sephora in the Pacific Rim. There, it became one of the top 10 lines in the store in India, Singapore and other markets.
So, how can one sell mass in a prestige store, and how can brands that claim exclusive distribution sell in mass and still get respect from customers and consumers?
Salon Brands’ Little Secret
In the professional channel, Paul Mitchell has spent millions in advertising telling people not to buy their product in mass stores, but somehow every mass drug store and almost every MVR has the brand.
The brand’s products don’t just fall off a truck. The reality is that both prestige and salon brands have determined that selling in the mass trade is a necessary evil to fund the legitimate trade, which is slowing in growth but still requires investment to stay viable.
Pure Mass is Toughest
As shown here, mass and class are difficult to define for brand distribution today. I congratulate the true mass brands as they have the toughest job. They have only one channel to compete in, unlike prestige and salon, and retail management at mass stores, in general, are much more difficult and demanding in their sales requirements.
And kudos to companies like Dana who are trying to bring back mass-priced older fragrance brands and trying to make them relevant for today’s sophisticated consumer.
Diversified Retail Strategies that Work
It goes without saying that Ulta had a brave marketing strategy in the United States, creating three unique shopping environments for mass, prestige and salon. This has been one of the most successful initiatives in beauty retail.
Shoppers Drug started this strategy in Canada with its Murale stores, which are adjacent to their mass pharmacies. CVS had tried something similar with its Beauty 360, which failed. Following its Duane Reade acquisition, Walgreens has experimented in New York, Chicago and Los Angeles with its Look Boutique.
Walgreens is continuing to develop this concept in its mainstream stores by adding beauty advisors to create more of a prestige environment, similar to its partner in the United Kingdom, Boots. This strategy is already successful on the prestige side of Ulta and at Murale in Canada, so time will tell if Walgreens can interpret this for itself.
It is clear that mass in the drug store channel is looking to emulate a lot of elements of prestige to capture some of that market's customers. If this works, it will put further pressure on prestige channels, mainly department stores, to come up with new and improved strategies.
Prestige is developing into its own hybrid of prestige product at a value price.
Another new strategy gaining traction is the move of prestige department stores to carry select mass-priced brands. For example, Dillard’s has opened up Edge Beauty departments within select stores, in which NYX is being sold. This initiative is extremely successful to the point that Dillard's is looking to incorporate other brands.
I witnessed this trend personally when, at the 2016 Cosmoprof North America in Las Vegas, many prestige retailers came to the Note Cosmetics stand. They liked the brand's prestige look and image and were amazed that its pricing was at the upper end of mass (L’Oréal/Revlon).
From the 1940s to the 1980s, department stores embraced mass and prestige brands, so you could say that the traditional prestige channel is coming full circle. Beginning in the 1980s, mass brands were exited as more prestige brands developed.
Now it is clear that, although mass retailer growth is under pressure, there is a hybrid strategy underway, championed by successful retailers like Ulta. And it looks like some version of this strategy may be entering the department store channel.
So, is it better now to be a mass or a prestige brand?
As mentioned in my last article, "The Beauty Startup Guide to Retail Survival," Sephora did this successfully by adding NYX in Singapore without damaging their image as NYX was exclusive in the market and was not available in mass distribution.
This is a similar strategy I am considering in the Americas with Note Cosmetics, which looks and performs like a prestige brand but is priced at premium mass, giving us many options for its positioning.
Further evidence of the change in prestige retail complexion is Nordstrom. The retailer just reported record earnings. However, the growth in sales did not come from their 100 full-priced stores but rather from the 200-plus Nordstrom Rack stores, which are soon to grow to number 1,000.
Perhaps, then, prestige is developing into its own hybrid of prestige product at a value price. The TJX and Ross model seems to be the future.
Where Does Your Brand Belong?
How can new brands make sense of the tumult of change in beauty retail? Mass retailers are looking to create prestige environments and prestige is looking for more exclusive brands that they can be sure will not end up discounted. So, is it better now to be a mass or a prestige brand?
Both channels are costly and getting riskier. There are very few new mass brands launching as the category is an expensive business for new startups. Prestige presents fewer doors and higher price points, so in some respects it can limit your brand’s financial exposure.
When I advise my CEW Mentornet mentees about channels, I tell them that the least risky is e-commerce, of course, followed by home shopping, for which there is inventory risk but almost no investment. However, there comes a time, unless a brand is a pure e-commerce play, that brick and mortar is analyzed as the next step for distribution.
What does mass offer that prestige does not?
Price Point Matters If the brand’s price point is very high, more than $30 per SKU, your only option may be to go to the prestige channel. However, if you have not yet defined your price positioning and the COGS (cost of goods sold) are low, you may be in the enviable position to do a price-sensitivity analysis to find the best option.
The brand I am launching in the United States, Note Professional Cosmetics, is a good example. The packaging and bulk can easily compete with the top prestige brands as they are all made in our own factories in Europe.
However, the owners believed there was too much competition in the prestige channel and, instead, saw an opportunity in the mass channel as there is no makeup brand in the $10 range with this quality.
If you are lucky like I was to have a brand with this flexibility, you may be in a position to look at many channels.
Assessing Mass Vs. Prestige
What does mass offer that prestige does not? Both channels are consolidating. Both are demanding investment in building retail offtake.
The makeup and skin care business is a lot bigger in mass. The U.S. makeup business in mass is about $7 billion, without e-commerce or direct sales, while prestige is about $3.5 billion at retail. On a unit basis, mass is more than five times larger than prestige.
The average price point for prestige makeup is about $26, compared to $6 for mass. Prestige skin care’s price point is about $50, compared to $12 for mass. Prestige skin care is about the same size as makeup; the mass skin care business in dollars is bigger than prestige, and significantly larger when compared to units.
It may sound, then, that mass is the way to go. Who wants prestige if the business is comparatively smaller and flat to declining? But while the mass market is bigger, it is tougher as well.
More stores means bigger orders and business but it also means bigger returns.
The cost of going to the mass category is where the business may sound less attractive compared to prestige. There are roughly 50,000 mass stores in the United States, compared to about 3,500 prestige stores. This is where strategy gets a bit tricky.
As with prestige, there are only a handful of retailers to deal with. If you look at the two pharmacy chains, Target and Walmart you have the true mass business. Ulta, meanwhile, is a hybrid, with each side of its stores having their own benchmarks and key performance indicators, so it behaves in some ways like both mass and prestige.
I prefer to call Ulta a treasure hunt of beauty as it has no limits on the price spectrum. The retailer is looking just for strong points of difference and unique products to offer the customer.
The other limited hybrid is The TJX Companies and, to a lesser extent, Ross and Nordstrom Rack. These retailers, along with Ulta, are some of the most successful beauty retailers as they attract sophisticated customers with affordable products that are merchandised in an impulse environment.
The prestige channel, as mentioned in my last article, also comprises a short list of chains, so it is also hypercompetitive.
Given the short list of retailers, would prestige, mass or hybrid channels be more financially attractive? It comes down to investment. More stores means bigger orders and business but it also means bigger returns. The mass channel, like prestige, will put your product back on your doorstep if it performs poorly.
The mass channel trade uses planograms that are usually reset twice a year, so your new brand has six months to either perform or get delisted. In the prestige channel, there can be benchmarks other than productivity.
For startup brands that are willing to sacrifice lower volume for a bit less risk, it could be the solution—especially if the brand is partnered with home shopping, which brings incremental volume and free advertising for prestige brands.
Positioning Your Brand
For most startup companies there is not a lot of money left over after building inventory to mount a sizable marketing campaign. As a result, the main financial issue with mass lies in finding a good marketing program or concept that is unique and breakthrough.
One great example of a small company that gained traction quickly is Yes to Carrots, which was a unique concept that rode on the crest of the natural skin care trend.
If you do not have a breakthrough brand, what are the other options? The most effective, in my view, is using social media and digital and grass roots marketing to build awareness quickly for a lower cost.
Startups do not usually want to do their own warehousing and fulfillment because this takes a lot of cash.
The challenge is that everyone is jumping on the social media bandwagon, so it is not as cost-effective as it used to be. Vloggers now charge money and the big cosmetic titans like L’Oréal spend millions to woo them. I am still a big believer in this marketing strategy but it is no longer a cheap option.
Get Your Logistics in Order
Providing logistics and supply chain for mass retailers is a very expensive and risky proposition. Today, Target and other chains will charge you penalties if you either short ship or miss the shipping window.
If you are a startup and successfully launch in mass, you could be financially penalized if you cannot not keep up with supply. In prestige retail your volumes are a lot lower, so it is easier to catch up with volume surges.
There are as many examples of successful startup brands in mass as there are in prestige.
Startups do not usually want to do their own warehousing and fulfillment because this takes a lot of cash. As a result, their distribution will be at the mercy of a third party logistics service. Finding a good partner that will make your brand a priority is hard to find. Third party logistics groups’ fees are high when you are shipping low-priced product due to labor costs.
If your product is about $5 wholesale, your total cost for supply chain could be around $0.75 or more—roughly 15%—which is high. Conversely, a prestige offering may be $15 average at wholesale but its logistics cost is still $0.75—or an affordable 5%.
The bottom line is you need to do your homework and be aware, if you are supplying the mass trade through a third party logistics group, that you could be exposed to penalties and even delisting if you are having supply chain problems.
Next: The Good, Bad and Ugly of Direct Sales
I hope this has given you some food for thought on the pros and cons of the mass channel. The reality is that there are as many examples of successful startup brands in mass as there are in prestige.
In prestige, many recent startup launches owe their success to home shopping or e-commerce, where there is usually less investment and risk. In my next article I will talk about the good, the bad and the ugly regarding of these direct sales channels. Stay tuned.
*I am not prognosticating that a recession is around the corner. I will let the economists and bankers handle that as cosmetics forecasting alone is a difficult arena to manage over the next quarter, let alone the next year.
**According to a recent analysis from Research and Markets, the U.S. mass beauty care market will expand at a CAGR of 2.59% through 2020.