Beauty has become a losing game for online retailers.
As the beauty industry has grown in both value and number of super users, fashion e-tailers have rushed to add skin care, cosmetics and fragrances to their assortments, competing with pure players for more market share. . But now it seems many people are biting off more than they can chew.
“The profitability of digital commerce is much lower than people originally expected five years ago,” said Benjamin Bond, vice president of strategy and business development at store intelligence platform Simbe. (At the time of the interview, Bond was head of the consumer practice at strategy firm Kearney.)
The overall softness in the luxury goods market has seen many multi-brand e-tailers lose ground as higher prices and an uncertain economic climate combine to make consumers more bearish. Due to changes in top management personnel, internal operations became even more unstable.
Net-a-Porter has cut its selection of more than 200 beauty brands to more than 70 now in 2022, and brands are expected to slim down further – many of the lines already removed from the site have seen their annual sales decline. It was less than $150,000, according to an email I saw. beauty business. The company did not respond to requests for comment. Meanwhile, Farfetch closed its beauty division in 2023 after just over a year in business amid a series of widespread financial crises, and the London luxury retailer Browns, which it acquired in 2015, also closed its beauty division.
However, beautiful and pure players are also feeling the pinch.
UK-based THG's beauty division, which owns e-retailers Look Fantastic, Cult Beauty and Dermstore, as well as brands such as Perricone MD, is in a similar situation. The company's average order value and number of orders have remained roughly flat since 2021. The division's revenue fell 4.2% to 1.2 billion pounds ($1.4 billion) in 2023, despite rising 2.6% in the final quarter of the year.
And both companies' sales have declined since the THG acquisition, as Dermstore's sales were approximately $194 million and Cult Beauty's sales were $170 million when acquired in 2021. . Representatives for the brand declined to comment, but Lucy Gorman, the division's chief executive, previously told reporters that she expected a return to growth in 2024.
UK-based Beauty Bay, whose brands include Elf Beauty, Sol de Janiero and The Inky List, expects sales to fall 19% to $94 million in 2023, following a further 31% drop in the previous year. It became. Beauty Bay did not respond to a request for comment.
“When you look, [companies] When they launched 10 years ago, they were really leading the way when it came to digital experiences. That lead is shrinking,” said Joel Parix, founder of beauty consulting firm Parix Unlimited and former CEO of e-tailer FeelUnique.
Additionally, as individual beauty brands increasingly build features such as AI-powered recommendations and virtual try-ons on their DTC sites, they often find themselves in increased competition with retailers who carry them. there is. These partners and beauty brands often compete for the same customers and with the same brand assortments.
To overcome the odds, e-tailers need to offer a truly unique proposition or consider a more physical approach. “If you want to sell beauty products online, you have to offer samples, host events, and create content. You have to make the consumer experience unique,” says Parix. .
race to the bottom
In-store, shoppers are unlikely to visit multiple retailers in a day in search of the best price on lipstick. However, online, all these prices are displayed for comparison. Since then, online retailers have been forced into an almost constant promotional war, with each online store offering even more discounts to persuade consumers to shop at their outlets.
“[It’s harder to] We build full-price customer relationships online,” said Oliver Garfield, chief executive officer of Kos Bar, a luxury beauty retailer that operates 21 stores and an e-commerce site across the United States.
E-retailers are also exposed to other fluctuations. Garfield said that while the main costs of a brick-and-mortar store, such as rent and labor, are essentially fixed, e-commerce has variable costs such as seller services and advertising.
“People love e-commerce because you don't have to put in a lot of working capital or take on lease debt,” he says. However, these variable costs can eat into a retailer's profit per dollar without promising an increase in order value.
Parix said customers buying cosmetics, skin care and fragrances often bypass basic customer profiling, making it difficult for retailers to really know their customers. “Beauty shoppers are very price-minded and category-neutral depending on their mood,” she said, adding that shoppers who splurge on handbags may be more frugal when it comes to beauty, and that He added that the opposite is also possible. Pure players may be less affected by this, but for fashion retailers, accurate forecasting is more complex.
stand out from the crowd
To stay ahead of the pack, retailers need to offer clear points of differentiation. We also need to be seen as a beauty authority and a place for discovery. This is even more difficult because influencers have become storefronts in their own right, Bond said.
One of the ways e-retailers have tried to regain some composure is by stocking exclusive brands. Being the only retailer to offer a hot new brand can bring consumers to your website, but once it expires, you're no longer relevant.
Efforts to improve the customer experience can be expensive and complicated when onboarding multiple brands, but online retailers shouldn't automatically write them off. Increase conversion rates by adding features like virtual try-on and concierge support to help customers match shades with confidence. Vertical content, including blog posts and articles, allows you to build your brand universe. A sophisticated sampling service, competitive loyalty program, and personal customer service will also go a long way. Bond advises influencers who want to inspire their customers to “get creative” with his programs and partnership programs, and to ensure a consistent and intuitive user interface with room for personalization. Did. This personalization includes product suggestions based on past orders, replenishment reminders, targeted offers, and more.
However, investments should be considered carefully. “If you want to be more differentiated, [in beauty e-tail], you have to spend a lot of money and there's a pretty good chance it won't be appreciated very much,” Bond said. Competitors can easily replicate many of these efforts, and additional enticements such as same-day or next-day shipping can multiply rapidly. “Running last-mile delivery requires huge margins.”
room for growth
There are bright spots for digital beauty commerce. In other words, it's an area that isn't already overflowing with beauty stores. Notino, a pure play player headquartered in the Czech Republic, will invest his €280 million ($302 million) in August 2023 for expansion into new regions such as Serbia, Norway and Turkey. I have procured it.
In its third-quarter results released in February, Indian beauty giant Nikaa's gross merchandise value rose 29% to 36.19 billion rupees ($433 million). Challenger retailer Tila reached his 1.5 million app downloads in the first few months of its launch in 2023, and has since expanded into brick-and-mortar stores.
And in China, digital shopping platforms like Tmall and Pinduoduo remain the default for many consumers.
But distribution is saturated and competitive in the Western world, and many companies like Sephora have spent decades building customer loyalty, Parix said.
That doesn't mean there's no room for e-commerce in beauty products. The term “omnichannel” is on everyone's lips, with customers and investors alike favoring a combination of physical and digital retail spaces, including buy online, pick up in store (BOPIS) services. Because it generates traffic both online and offline.
However, omnichannel strategies require careful coordination. The relationship between a company's digital and brick-and-mortar businesses can become difficult when constant online promotions and incentives make in-store shopping less appealing. Garfield recalled a conversation he had with a new employee who had just joined the company from Nordstrom. “I asked him, 'Who is your biggest competitor?' and he said, 'Nordstrom.com.'”
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