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Beauty Retail: Continues to Smell Attractive

Thomas Paulson
Jul 8, 2022
Beauty Retail: Continues to Smell Attractive

L'Oréal and Estée Lauder recently told investors that the prestige beauty category continues to produce robust growth in all four major categories, led by fragrances (the pandemic winner). Moreover, they are not witnessing a slowdown or trade-down. The primary driver of the category’s growth is "valorization" (revenue growth through price increases), product mix (innovation at higher price points), channel mix (more direct sales), promotional rationalization, and other mix management strategies. However, growth is also coming from volume as well, as one-third of L'Oréal’s growth is from volume (L'Oreal continued to take share from the rest of the category).

  • The readthrough from these updates is quite positive for department stores, Sephora, Blue Mercury, Ulta, and others, and is consistent with the message and trends coming out of these chains' 1Q22 updates. Moreover, that trend is supported by Placer.ai's recent visitation growth data for Ulta, as shown below.
  • Estée Lauder’s President of North America Mark Loomis stated, “You've probably heard about Ulta at Target as well as Sephora at Kohl's. We have important partnerships in both those, and those reach opportunities for us are extraordinary. Great opportunity already performing very well for us and have a nice trajectory going forward over the next 2 years.” This was a huge endorsement for these shop-in-shops (or Store-as-a-Service models) and we would expect L'Oréal and Estée Lauder to allocate new product and availability into the shops, driving additional growth and allowing them to comp-then-comp.
  • On the U.S. market, Loomis stated:

Mark Loomis, Estée Lauder President of North America

"I think North America is poised for a very positive recovery...[B]oth makeup and skin care are above the high-water marks from pre-COVID, whereas makeup had been trailing. But I think the positive news is as North America has been opening up and particularly makeup has been very much driven by occasion wearing, mask wearing, negative impacts, all of that has changed, and makeup is recovering very quickly. So I think overall, we're very positive about what's happening in North America. I think the other thing that maybe is worth pointing out is how things have changed both in the sort of the structure of the North American market and what it means potentially for us as a company.

The good news is coming out of COVID, many of our partners have right-sized themselves. And the great news is that strong balance sheet is coming out, good strong footprints. And then our key partners, bricks-and-mortar, have diversified themselves and online. So all of our bricks-and-mortar partners maybe were doing less than 20% of the business online, now 1/3. So it gives them much more agility and ability to reach different types of consumers.

And then what's changed also significantly in North America, for instance, with our business is, we used to be very majority, 5-6 years ago, over 60% of our business in department stores. Today, it's less than 40%. It doesn't mean department stores aren't important, but the emergence of specialty multi has been phenomenal and the opportunity to drive prestige versus mass in the last 5 years and even through the pandemic has been significantly ahead. And companies like Ulta, and you probably might have seen their most recent earnings report, they have been doing phenomenally well. And it's really what we call is where Prestige consumers are born from mass. So that continues to be an enormous opportunity."

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Thomas Paulson

Director of Research and Business Development, Placer.ai

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more.

He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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