By Suzanne Kapner and Sharon Terlep
Desperate to get shoppers in the door, department stores are
discounting the one item they had long been able to sell at full
price: cosmetics.
Last month, Lord & Taylor offered 15% off almost all
cosmetics and fragrances. Bloomingdale's gave members of its
loyalty program a $25 reward card for every $100 beauty purchase.
The moves followed a decision by Macy's Inc. to offer 15% off
cosmetics, which it touted in nationally televised advertisements
this spring.
"We've seen our competitors start to discount items like
cosmetics, and I'm sure they're saying we're doing it," said Jerry
Storch, the chief executive of Saks Fifth Avenue and Lord &
Taylor parent Hudson's Bay Co., on a conference call last month.
"Once you get into that kind of a situation, everyone is fighting
for every inch."
A decade ago, shoppers would have been hard-pressed to find any
Estée Lauder lipsticks, Bobbi Brown mascara or Shiseido blush on
sale. These "prestige" brands are sold mainly at department and
specialty stores and tend to be pricier than the so-called mass
cosmetics sold at drugstores.
Department stores have long given prestige cosmetics prime space
on the ground floors of their stores, and the brands confined their
distribution to these emporiums.
But the retail landscape has shifted. Shoppers are increasingly
skipping the mall to buy online. Specialty chains like Sephora and
Ulta Beauty Inc. are siphoning away customers. Brands such as Estée
Lauder, Clarins and Dior now sell to such chains as well as through
their own websites.
Sales of prestige makeup in the U.S. are growing, totaling $8
billion in the 12 months to May, an 11% increase over the same
period a year ago, according to market-research firm NPD Group
Inc.
But department stores' share of the market fell to 19% in North
America last year from 23% a decade ago, according to Euromonitor
International data analyzed by Bernstein Research. Over the same
period, specialty beauty retailers increased their share to 20%
from 14%.
Katie Fitzgerald usually buys her cosmetics at Sephora, but was
recently at Macy's near her home in Haymarket, Va., when she
happened upon a departmentwide sale.
"I thought, 'Oh, look, cheap makeup,'" the 17-year-old said. She
bought a Smashbox contour palette. "I figured I might as well since
I was there anyway."
Some department-store industry executives say discounting is a
short-term fix. While promotions initially encourage shoppers to
buy, they can damage brands over the long term. And because
shoppers soon become numb to the deals, retailers are forced to
offer ever-deeper price cuts.
"Department stores shoot themselves in the foot when they do
this," said Michael Gould, a former CEO of Bloomingdale's, who ran
the upscale department store chain for 23 years until his
retirement in 2014. "It's like they're putting themselves on
drugs."
Estée Lauder Cos., L'Oréal SA and other major cosmetics makers
declined to comment on the recent pricing moves. A Macy's
spokeswoman said the retailer is using discounts but also looking
at other ways to bolster beauty sales, including a loyalty program
it will introduce this fall and by reconfiguring its departments to
make them easier to shop.
Sephora -- a unit of LVMH Moët Hennessy Louis Vuitton SE -- and
Ulta have done a better job of appealing to younger shoppers with
open-sell formats that allow customers to try products without the
help of sales associates and to mix and match different brands,
analysts say.
The shift has upended the pricing dynamics since stores like
Sephora and Ulta tend to display prestige brands alongside more
mass labels. "The pricing halo around prestige gets eroded because
it gets muddled with the rest of the category," said UBS analyst
Stephen Powers.
Sephora and Ulta offer discounts, too, but they are less
frequent and tend to be restricted to their loyalty programs,
according to spokeswomen for both chains. Sephora, for instance,
holds two sales a year for its "Beauty Insiders" members.
Apparel manufacturers bear the brunt of any discounts by
agreeing to guarantee department-store margins. Beauty brands have
no such agreements, meaning that any price reductions come out of
the retailers' pockets.
Macy's -- which also owns Bloomingdale's -- blamed a decline in
first-quarter gross margins partly on increased promotional
activity in its beauty business. To combat the problem, Macy's is
borrowing a page from Sephora. It now has open-sell areas in its
cosmetics departments in roughly half of its 670 stores.
"It's a disease that retailers have to discount more to make the
sales numbers," said Barbara Zinn Moore, who was Lord &
Taylor's vice president of cosmetics and fragrance from 2001 until
last month. "But how else do you get the sales growth?"
Write to Suzanne Kapner at Suzanne.Kapner@wsj.com and Sharon
Terlep at sharon.terlep@wsj.com
(END) Dow Jones Newswires
July 10, 2017 05:44 ET (09:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.