As the National Association of Chain Drug Stores prepares to celebrate its 90th anniversary, the mass market is gearing up for what could be its most pivotal juncture in the beauty business in the past decade. The NACDS Annual Meeting kicks off at The Breakers in Palm Beach, Florida, on Saturday.
Beauty is at a crossroads. While the mass market accounted for the majority of sales in the $93 billion beauty industry, according to Circana (formerly IRI and NPD), the $27 billion prestige segment has been growing faster than mass while also experiencing lesser price increases.
Whether the mass market will benefit from what many believe is a looming recession will be among the biggest topics when leaders from brands including Coty, L’Oréal, Markwins, Unilever, Maesa, Kiss and Revlon meet face-to-face with representatives of more than 50 retailers. The meeting will offer a chance for Revlon executives to present their reorganization plan following its exit from bankruptcy. Also included on the roster is Amazon — a formidable competitor to both mass and class — and one that will surely be part of discussions.
The question of whether shoppers will trade down or even trade out of beauty will be one of the hot topics during the four-day gathering that will feature an address from Dr. Anthony Fauci, whose call for vaccinations drove shoppers to pharmacies in droves. NACDS will be missing the nation’s largest drug chain (based on store count). CVS executives will be absent following the retailer’s exit from NACDS last summer, a loss of almost 10,000 doors. CVS did not comment on the departure, but industry sources speculated it was linked to NACDS support of the regulation of Pharmacy Benefits Management practices.
Also gone this year are lavish parties once associated with the annual gathering that have been eliminated or pared down for 2023. The industry is ready to get down to business and there is a lot at stake.
“At the annual meeting, we look forward to having meaningful conversations with key players in the personal care, health, wellness and beauty industry to bring additional digital/e-commerce capabilities to life, find ways to lead in channels of the future, and continue to drive supply chain practices with a key focus on sustainability,” said Esi Eggleston Bracey, president of Unilever USA and chief executive officer of personal care. “We’ll also be sharing how brands like Dove, Vaseline and Degree are contributing to people’s wellness. We stand committed to overserving the underserved and driving inclusivity through our purpose initiatives laddering up to each brand’s mission.”
Coty U.S. managing director Debbie Erickson plans to highlight the company’s ongoing turnaround exemplified by its 10th consecutive quarter of growth with strong performance in both the Prestige and Consumer Beauty divisions. “We are very proud of sustainability initiatives announced this year from product packaging and formulation to fulfilling our gender pay gap commitment,” she said. The company will also tout its #UndefineBeauty campaign, which focuses on changing the perception of beauty. Coty has asked leading English dictionaries to update their definitions and has launched a global petition to generate support.
No matter how it is defined, beauty is the third largest producer behind pharmacy and over-the-counter medications for most drug chains, producing anywhere from 6 percent to 10 percent of total sales. The category ranks within the top five priorities at Walmart, according to Creighton Kiper, vice president beauty. A lesser factor in grocery stores, it is increasingly important, with chains like H-E-B, Hy-Vee and Wegmans opening beauty departments that rival specialty stores. For those retailers, beauty gross margins help offset razor-thin profits in food.
The race for market dominance will be closely monitored and could determine how much attention the category gets at mass in the future. While it is important, slow inventory turn has always put beauty on the hot seat to perform. And competition from prestige retailers remains fierce, a dynamic expected to continue. “Among beauty shoppers who reported reducing their overall spending due to inflation, seven out of 10 said they were not cutting back on their beauty spending,” said Larissa Jensen, beauty industry advisor at Circana. “Consumers have shown us that when economic sentiment gets shaky, they turn to prestige beauty products for an emotional lift. This ‘treat mindset’ is a big piece of what ties the complete beauty industry picture together.”
Scott Emerson, president of The Emerson Group, concurred that the mass/prestige ratio will remain static. “The people buying $200 serums will still buy $200 serums despite a troubled economy,” he said. “During economic uncertainty, beauty becomes an accessible indulgence, and shoppers typically don’t trade down their beauty products.”
At the same time, retailers like Walmart, CVS and Walgreens have upgraded their beauty departments, while Walmart and Target are also partnering with specialty retailers to bring prestige to their aisles.
Vennette Ho, managing director global head of beauty and personal care at Financo Raymond James, portends a shift. “We believe that there will be some migration from mass to prestige, driven not simply by price but also by people emphasizing ‘quality for value.’”
Ashley Helgens, vice president of Jefferies, doesn’t rule out a trade-down. “We are seeing beauty get more promotional, but I don’t think we will see any massive trade-down until this quarter or next. I do believe beauty is something you buy regardless if you are in a recession or not. If you look at the data from the last recession, there definitely was a trade-down going on.”
She singled out mass brands that are well-positioned to attract shoppers. E.l.f., for example, operates at lightning speed and benefits from a strong social media presence. “They have the ability to innovate quickly and get products on shelves in as little as nine weeks,” Helgens said, noting the brand is attracting both prestige and mass shoppers.
The mass versus class distinction is extinct, suggested Scott Kestenbaum, chief growth officer for Maesa. “Most modern beauty shoppers do not make this distinction. For many years, we have seen a blurring of the lines between these two channels,” he said. He noted that prestige retailers like Sephora, Ulta Beauty and SpaceNK have diversified their footprints by forging partnerships with retailers like Kohl’s, Target and Walmart. Meanwhile, mass market retailers are continually expanding their masstige offerings with brands like Kristin Ess Haircare, Naturium and Being Frenshe, which look, communicate and perform like prestige brands but at more accessible prices.
“In an inflationary economy, when consumers have less discretionary income, it may be intuitive to anticipate consumers trading down,” Kestenbaum said. “However, history suggests that beauty does not follow this trend.”
While there is chatter about shoppers going downscale, there are indications mass retailers can sell pricier beauty. Sales in 2022 from Ulta Beauty at Target were more than four times higher than in 2021 and the growth was almost entirely incremental, according to Christina Hennington, Target’s chief growth officer. Beauty is delivering the highest growth rates of any category in the store.
In announcing another 250 Kohl’s stores that will add Sephora, bringing the total to 850, the company said the partnership has been “mutually” beneficial. Kohl’s projects that Sephora at Kohl’s will grow to hit $2 billion in annual sales by 2025. Last year, nearly 8 million Kohl’s customers purchased beauty products at the Sephora shops at Kohl’s. In the fourth quarter of 2022, total beauty sales increased 90 percent.
Walmart’s Kiper said the partnership with SpaceNK is going well from a performance and learning standpoint. “What we’ve been talking about recently is how many of our $100,000 [income] are coming into our stores and staying. We’re learning what works and what doesn’t. There isn’t really a price ceiling,” he said during a recent CEW event. He noted that the store continues to test and learn. There are a handful of Walmart stores dubbed Beauty Shop, where Walmart is tinkering with the beauty department. “I always say there is no finish line, you have to continue to improve,” Kiper said.
Another issue sure to be on the agenda is price hikes. The industry can’t count on price hikes to grow anymore, insiders said. “How can we work together to execute price decreases? We need to start measuring units, not dollars,” said Emerson. “Within the past five months, we’ve seen the gap between dollars and units rise from 5.2 percent to 9 percent, and now, we’re at 13 percent.
“There are still many more issues to come that we haven’t thought about,” he said. “So, how can suppliers and retailers work together to meet these challenges?”
Emerson believes prices have hit a ceiling. “Most brands took meaningful price increases in 2022 to offset supply chain costs; we don’t think many brands have many opportunities left in this regard as consumers are feeling the pinch across all categories.”
Eric Weeks, president of sales at Markwins Beauty Brands, said his meetings will delve into the impact of inflation and average unit price growth versus units decline with a goal of finding ways to mitigate that trend and take costs out of systems.
Innovation, better service and elevated experiences will drive the industry’s growth, said Wendy Liebmann, chief executive officer of WSL Strategic Retail. “We are hearing a lot of discussion about selection and merchandise mix. How much is too much? Is more always more? A lot of retailers are looking to reduce stock keeping units to create a better experience,” she said. “They are reorganizing stores to make them more open and easier to shop.”
Tighter departments could make it more challenging to add new items that have unknown potential. Weeks said there is a delicate balance between established brands and emerging contenders. “Legacy brands are rather stable and somewhat predictable versus new market brands that are short-term winners but are largely uncertain two or three years after they are initially set [in planograms],” he said.
One segment where retailers plan to add new items is wellness. “We’re looking for our supplier partners to help us deliver health and well-being-led assortments to our patients and shoppers,” said Heather Hughes, group vice president of beauty, personal care and seasonal, at Walgreens. Bridging the gap between health, well-being and beauty is at the top of her to-do list. Skin care continues to be a “huge focus” for the chain, especially brands bringing professional quality products with ingredients such as retinol, salicylic acid and vitamin C.
Wellness was redefined post-pandemic, said Kestenbaum. “It has evolved towards a multidimensional approach to holistic well-being, including mental and emotional health. Consumers are looking for community, experiences and products that make us look as good as we feel,” he said
“Retailers have taken notice of this and have rushed to capitalize, many with mixed results,” Kestenbaum continued, noting that retailers like Whole Foods, CVS and Thrive Market, that were born with health and wellness as part of their DNA, are connecting well, but others, who historically have not focused on health, are finding it a bigger leap. “Customers find it challenging to understand how a retailer selling cigarettes and sugary food can offer guidance on a healthy lifestyle,” he said.
Emerson said wellness is a whole-body beauty experience that benefits brands like Dr. Teals and Lumify and that they are becoming part of the daily beauty routine as shoppers seek to look and feel well-rested. “The healthy skin revolution is only becoming more significant,” he said. “Last year, dermatological skin care was the most prominent beauty trend. Now shoppers are adding sun protection, daily supplements and hydration products like Liquid IV to achieve healthy skin from the inside out.”
Eggleston Bracey added that well-being goes beyond products. “A key component is giving back to the community. Doing good makes you feel good,” she said. “People want to vote with their dollars by purchasing products that offer superior quality and value and do more by doing good. People want to live long, healthy lives, making choices that are better for their bodies and for the environment. Wellness is moving beyond just what people eat, to how the products we love make us feel and what we are putting on our bodies for that all-encompassing sensorial experience.”
She cited SheaMoisture as an example, noting it reinvests at least 1 percent of net sales directly into economic opportunities for underserved entrepreneurs and Black business owners.
It has been seven years since Unilever purchased SheaMoisture’s parent Sundial Brands and for many entrepreneurs, it is a case study in building and selling a brand. Just when it seemed M&A activity was cooling off, Procter & Gamble snapped up Mielle Organics and most recently L’Oréal purchased Aesop for $2.5 billion.
Nascent brand founders hope there are still deals in the offing. “We are excited about the potential for more transactions in mass beauty and personal care this year. Historically, there have been fewer transactions in mass given that the barriers to entry for independent brands are generally higher at mass than in prestige. However, we’re now seeing more independent brands break out, which drives M&A opportunities. We expect to see more as independent brands continue to scale nicely,” Ho said.
As NACDS celebrates its history Liebmann noted the presence of future leaders on the attendee list. “A next generation of leaders is emerging including a lot of women,” she said. “There is a generational shift that is important. There is also an interesting mix of companies from Amazon to smaller brands.”
Perhaps the entertainment at the meeting illustrates the direction with a young pop trio called AJR opening the conference and the legendary Gladys Knight in the starring role as closer.
Source: WWD