Date February 2021
- Standalone retailers Ulta and Sephora continue to dominate the retail cosmetics industry with 29% combined market share in 2020; however, competitors including drugstores and mass merchants, which remained open during pandemic-related shutdowns, took a bite out of their sales in 2020.
- As consumers continue to isolate because of the ongoing surge in COVID-19 infections, focus has shifted toward self-care products over makeup and salon services.
- Major discount department store partnerships for Ulta and Sephora promise to expand the unique beauty landscape in 2021 and beyond.
- Due to increased competition from online retailers, U.S. store revenue is projected to decline slightly at an annualized rate of 0.1% through 2025.
Approximate net recovery on cost
Industry Giants Strong but Competition Is Steep: It’s no secret 2020 was a tough year for brick-and-mortar retailers. While some in the “essential retailer” category fared better than others, specialty beauty retailers were forced to close as shutdowns began across the country in mid-March.
While Ulta and Sephora continue to hold a big share of the beauty, cosmetics and fragrance retail space, generating a combined 29% of industry market share in 2020/21, that figure has declined from almost 36% in 2019. Ulta continues to drive traffic to its stores as a one-stop beauty retailer, offering a range of branded products from value priced to luxury across every category. Given the rising competition from mass merchants and drug stores in the beauty space over the past year, Ulta recently announced a game-changing partnership with Target. Ulta Beauty at Target will debut at more than 100 stores nationwide and online at Target.com beginning sometime in 2021. The “shop-in-shop” concept will offer established and emerging prestige brands online and in select stores across the country.
In terms of performance, 2020 started off rough for Ulta but steadily improved through the third quarter as stores reopened in mid-May and the company added what came to be essential customer conveniences like curbside pick-up. The retailer’s third-quarter comparable store sales decreased 8.9% over 2019. However, this represented a significant improvement over sales for the first and second quarter of 2020, which were heavily affected by store closures at negative 35.3% and negative 26.7%, respectively. The consistent bright spot has been Ulta’s e-commerce sales trends, which increased 200% and 90%, respectively, in the second and third quarters of 2020.
Looking ahead, Ulta expects its fourth-quarter 2020 comp sales to have decreased between 12% and 14%, which is weaker than the company’s third quarter performance. However, this range is better than the forecast of a mid-teen comp decline shared earlier in the year. In fiscal years 2020 and 2021, Ulta expects to open 30 stores, a deceleration from historical store openings and its original plans; however, the company remains committed to operating approximately 1,500 to 1,700 stores in the United States.
French luxury goods conglomerate LVMH, which owns Sephora, reported the organic revenue trend for its Selective Retailing division, which includes Sephora, DFS and Le Bon Marche, came in at negative 30% for 2020 over 2019. Despite the negative sales trend, online sales for Sephora were a bright spot, with the company reporting record levels of online sales that grew sharply in 2020.
In 2019 Sephora opened 110 new stores globally, according to financial documents from LVMH, and was preparing for further expansion across North America throughout 2020. Adding to its more than 2500 stores in over 32 countries, Sephora has announced a market-changing partnership with Kohl’s launching in 2021. As the company phases out its contract with JCPenney, it plans to open shops in 200 Kohl’s locations across the U.S. by the fall of 2021, with a target of 850 locations by 2023. Like Ulta’s newly launched partnership with Target, the Kohl’s partnership will allow Sephora to reach a new, aspirational customer base for its prestige brands while addressing the continued strengthening of mass merchant competition for its standalone stores. The plan includes an omnichannel partnership with the launch of Sephora on Kohls.com, in conjunction with the store openings.
Sephora and Ulta are expected to continue to expand their national presence and capture a growing share of the market; however, due to increased competition from online retailers, industry revenue is projected to decline slightly at an annualized rate of 0.1% through 2025 based on IBISWorld research.
Skin Care and Personal Wellness Is the Focus During the COVID-19 Pandemic: As lockdowns began in March 2020, and non-essential retailers, hair and nail salons, and restaurants and entertainment venues around the globe closed, consumers faced predominately casual, home-based lives for the foreseeable future.
Correlations between economic downturns and increased purchases of small luxury items have been seen for decades. During every economic recession from 1973 to 2001, spikes in unemployment in the U.S. coincided with increased cosmetic sales according to information published by marketing company, Digital Media Solutions. The difference in 2020 was the global health crisis sparked the economic crisis, meaning consumers faced two major anxiety-producing situations at once.
Recent sales trends across key cosmetic and wellness categories show the once-in-a-century economic downturn and health crisis combination sparked consumers to purchase items that made them feel more soothed and comfortable at home. However, sales trends show all beauty categories did not benefit across the board, as consumers stayed home and focused less on improving physical appearance and more on simply feeling better. In the early days of the pandemic, Google searches for face masks spiked almost 83% according to information published by digital beauty publication, Beauty Independent. Sales of body oils, home fragrance products, nail care and hair color increased in late March, as prestige beauty sales overall dropped 58%, according to data from market research firm NPD Group. Similarly, marketing research firm Nielsen’s product sales tracking showed lip cosmetics sales decreased 62.4% for the week ending April 4, 2020, from the same week in 2019.
Even as stores and salons began to reopen in May, Ulta’s third-quarter category sales told the same story. Makeup sales decreased 18.6%, salon service revenue dropped 38.5% and other product sales fell 7.8%. Alternatively, skincare, bath and fragrance sales, representing 26% of period sales, increased 14.2% while haircare sales increased 7.6%, as customers continued their self-care routines at home.
For Sephora, the launch of its Fenty Skin product line was a 2020 highlight, along with the development of its digital communication and online sales for the Fresh brand line of skin and body care and fragrance. Additionally, the company noted the outstanding performance of its Guerlain skincare line, especially in China.
As vaccine rollouts proceed slowly and consumers across the globe remain in various states of travel restriction, self-care products should remain in demand throughout the balance of 2021. Although, as noted, there have been winners and losers based on category demand. Categories maintaining growth include skin care, nail and hair care, body care and lip balm, fragrance and bath products; weaker categories include makeup and other color cosmetics and lipstick.
Special Liquidation Considerations For Cosmetics And Fragrances: For asset-based lenders considering cosmetics and fragrance inventory as collateral, it is important to understand how these products would recover in a liquidation event and what additional considerations may be required. Fragrance inventory can achieve strong gross recoveries in a liquidation depending on brand name and customer demand; however, this inventory may be consigned and therefore potentially not eligible on the borrowing base. Similarly, branded, high-end cosmetics are typically a high gross recovery category in a liquidation, as there is generally not a significant amount of normal-course discounting extended on these products.
Gordon Brothers typically considers branded cosmetics inventory from industry leaders such as Estée Lauder, Lancôme and Clinique within its appraisal net recovery analysis. It is important to note, in a going-out-of-business (GOB) event, select vendors may elect to re-purchase their inventory from the retailer at 70% to 100% of cost to protect their products from being heavily discounted, which could potentially result in the erosion of brand perception in the marketplace. In some cases, branded cosmetics have been retained and sold in liquidation sales at discount-protected rates.
For the purposes of an appraisal analysis, Gordon Brothers typically assumes all cosmetics would be included in a GOB sale; so gross and net recovery rates include the proceeds and related expenses to liquidate the total inventory. It is important for lenders to partner with appraisers to understand the implications of situations in which a retailer, agent or liquidator may negotiate an agreement whereby the vendors re-purchase inventory or limit discounting levels on premium products and to understand what the net outcome of such an agreement may yield.
Note: This publication is provided for informational marketing purposes only. The material contained herein should not be regarded as advice, nor relied upon to make financial, operational or other decisions; nor should it be used as a substitute for an asset appraisal. Actual recovery values may vary from transaction to transaction and the recovery values referenced herein are for representative transactions without regard to specific key factors. This material may be redistributed only in its entirety, including notice of copyright. All rights reserved. ©2021 Gordon Brothers, LLC.
Reference sources: LVMH, ULTA BEAUTY, INC., IBISWORLD, CREDITNTELL, THE DALLAS MORNING NEWS, TARGET, INC., BEAUTY INDEPENDENT, DIGITAL MEDIA SOLUTIONS