DISCOUNT DIOR

The last bastion of the department store has fallen

Obsession
Fashion
Obsession
Fashion

Ten years ago, you would have had an impossible time finding high-end cosmetics outside of a department store, let alone on sale.

Now, facing assault from both fellow brick-and-mortars as well as online-retailers, the inevitable tide of discounting has reached the department store’s ground floor: after first diluting the prices of nearly everything else, markdowns have finally hit the makeup counter.

The beauty bar has been the centerpiece of department stores for decades. In the face of storewide markdowns, luxury cosmetics have outlasted apparel, handbags, and accessories, remaining as dependable merchandise for stores and a pricey splurge for customers.

Makeup, a retail mainstay

In addition to brand recognition, the historically high price of luxury makeup is a result of packaging and marketing, with the makeup counter serving as a particularly aggressive form of promotion. Upon entering a store, patrons are greeted by brightly lit, glass-protected products. Sales people stand by to sell the products, which can be tested and returned after purchase. (A former Nordstrom employee told me customers would return half-empty bottles of foundation and used lipstick after months.) In any case, the experience is indulgent, especially compared to a trip to the drugstore.

While the move to discount luxury cosmetics is unprecedented, it’s unsurprising. With mass closures and slumping stocks, department stores are the faltering giants in a battered retail industry. Macy’s recently ran a nationwide cosmetics sale, while its daughter store, Bloomingdale’s, began offering loyalty members generous rewards on cosmetics. Stores whose stocks aren’t suffering, like Lord & Taylor, are following suit.

And it’s not that people aren’t bothered with nice makeup anymore. The Wall Street Journal reports that according to the NPD Group, sales of high-end makeup in the US have increased 11% since last year for a total of $8 billion in sales (paywall).

Specialty beauty stores—one giant beauty bar?

Rather than Amazon—the thorn in the side of most of the retail industry—it’s good old brick-and-mortar stores like Ulta and Sephora that customers are turning to. As department stores continue to swan dive, WSJ reports that 20% of the market share of cosmetics has gone to specialty beauty stores, with department store dominance dipping from 23% to 19% over 10 years. Coupled with the looming threat of e-commerce, cosmetic reductions look a lot like a last-ditch effort by department stores to pull in customers.

A study by TAB Analytics found that cosmetic sales were a $13 billion industry in 2015, with over half of the transactions occurring in mass market environments (food, drug, and club stores) and the rest in specialty outlets, including department, specialty beauty, and online retailers.

Within that category, brick-and-mortar beauty and discount stores made up nearly 20% of those transactions, department stores around 15%, and online sellers around 11%.

Here’s the exact breakdown:

The ULTA effect

Could this mean brick-and-mortar can win out—in the beauty industry, at least? Ulta doesn’t rely on e-commerce, instead depending largely on a strong loyalty program and customers’ ability to test products without the help of a sales person. Moreover, the store’s wide range of cosmetics, from drugstore to prestige brands, has earned it a reputation of being immune to Amazon, which has a less robust beauty department built on third-party sellers with varied delivery times.

Ulta was named one of the year’s best stocks but took an unexpected plunge on the news of department store discounts. As a result, the question some investors seem to be asking is if Amazon gets a better grip on beauty, or discounting becomes ubiquitous, could there be a ripple effect that kicks specialty stores too?

Former Bloomingdale’s CEO Michael Gould told WSJ that discounting can be addictive—a quick fix with devastating consequences. Apparel retailers relied on markdowns as e-commerce begin siphoning customers, but once they did shoppers stopped bothering to come in unless there was a sale sign in the window.

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