cosmetics

Cosmetics Retailers

Industry Insight

Date February 2020

cosmetics-projected-values

Current Trends

  • Standalone retailers Ulta and Sephora continue to dominate the retail cosmetics industry with over 44% combined market share in 2019
  • Focus is shifting toward skin care and personal wellness
  • Clean, cruelty-free, and inclusive beauty products continue to increase in popularity
  • Many companies are focusing on developing sustainable alternatives to plastic packaging

 

Approximate net recovery on cost

Synopsis

Working toward a sustainable future: The clean beauty movement, which focuses on sustainability and environmentally friendly practices in the cosmetics industry, continues to grow. Online statistics portal, Statista, projects that the market, worth $11 billion 2016, will reach $22 billion by 2024. Conscious consumption is the goal, as beauty giants strive to offer vegan, organic, and ethical products and packaging.
 

In 2019, L’Oréal publically committed to using 100 percent eco-friendly packaging by 2025 and has become as a member of the paper bottle community, which focuses on developing sustainable alternatives to plastic packaging. Lush Cosmetics has become a trailblazer in the zero packaging movement; 35 percent of its products are sold “naked” with no packaging.
 

Brands are not just going green; they are also going blue. Under the pressure of increasing environmental concerns, cosmetics brands are embracing “blue beauty,” with products devoted to protecting the world’s oceans and water supplies. Founded in 2018, One Ocean Beauty contributes to the preservation and restoration of the oceans through a partnership with Oceana, the largest international advocacy organization focused on ocean conservation. High-profile industry brands L’Oréal, Unilever, and Procter & Gamble are also working to decrease their products’ water consumption. L’Oréal pledged to cut 60 percent of water consumption per finished product by 2020, while Unilever is working to cut 50 percent. Proctor & Gamble released a new line of dry shampoo and related products designed to encourage water conservation called Waterless in January 2020.
 

Focus on skincare aided by social media: Social media has become key in popularizing the skincare phenomenon. An increasing infatuation with beauty bloggers and social influencers has created a cult following among various brands, especially those involved in advertisement and endorsement deals. Among influencers, beauty mogul Kylie Jenner launched her skin care line, Kylie Skin, in May 2019, complementing her flourishing Kylie Cosmetics brand.
 

Cosmetics and skincare brand, Glossier, has been challenging the idea of traditional beauty standards since its inception in 2014. The brand, which grew out of founder Emily Weiss’s beauty blog “Into the Gloss,” had 2.6 million Instagram followers as of February 2020. The company, which focuses on inner beauty and a minimalistic approach to makeup, had a big year in 2019, announcing its value at $1.2 billion in March, reaching the unicorn status reserved for privately held startup companies valued at over $1 billion.
 

Personal wellness: Skin care has become a form of self-care and personal wellness. Sales of skincare products in the United States grew by 13 percent in 2018, hitting $5.6 billion, while makeup sales increased just 1 percent, according to data from The NPD Group. Industry leader Sephora began offering luxury CBD skincare products from Lord Jones in 2018 and Saint Jane in January 2020 and plans to launch BeautyBio , best known for its micro-needling tools, in 50 stores in March 2020.
 

Korean skincare, nicknamed “K-Beauty,” is also gaining traction in the United States, focusing on clarifying, toning, and hydrating skin, as opposed to covering it with foundation. Cult Beauty, Net-a-Porter, and Selfridges each offer a growing selection of Korean lines. Soko Glam, founded in 2012, has become one of the largest K-Beauty websites in the United States and is credited with pioneering the K-Beauty trend, placing it on the scene in North America. In 2012, Korean beauty exports to the United States totaled $59 million, according to the U.S. Census Bureau; in 2019, that number reached $511 million.
 

Continued push for inclusivity: Now more than ever beauty brands are catering to niche customer bases in an effort to be more inclusive, with retailers and startups taking steps to counter the lack of diversity seen in the industry. In 2017, Rihanna debuted her Fenty Beauty line that included a completely diverse range of foundation in 40 skin tones, which grew to 50 shades in 2019. Fenty’s dramatic impact jumpstarted the conversation on more-inclusive cosmetics and forced competitors to follow suit. As Glamour described it, the “Fenty Effect” caused a chain reaction: CoverGirl, Maybelline, Dior, Make Up For Ever, Clinique, Morphe, and MAC are just a few big-name brands that now offer a selection of over 40 foundation shades.
 

In 2018, Tarte launched a highly anticipated foundation line in only 15 shades, of which only three catered to medium and darker skin tones, inciting a flood of backlash from consumers and social media influencers. Tarte scrapped the foundation line and in 2019 launched a new line with an inclusive shade range. Meanwhile, the definition of the color “nude” has also expanded, with brands NYX Cosmetics and BITE Beauty offering numerous shades of nude lipstick for a variety of skin tones.
 

A wave of gender-neutral brands, such as Ursa Major and Non Gender Specific, burst on the beauty scene in 2019, offering items marketed and packaged in a non-gendered way. Following suit, BIC released a line of gender-neutral razors on Amazon, Lululemon rolled out a collection of gender-neutral self-care products, and Unilever-owned Schmidt’s Naturals partnered with Justin Bieber to release gender-neutral deodorant. Age inclusivity is also evolving, as brands such as Pola Orbis, Shiseido Co, and Kosé Corp. are increasingly targeting older women with products tailored to them, and older brand ambassadors are becoming more prominent. Isabella Rosselini is the face for Lancôme, which welcomed her back after dropping her in 1996 in her forties. Others include Andie MacDowell, Jane Fonda, Dame Helen Mirren, Celine Dion, Ellen DeGeneres, and Queen Latifah.
 

Competition ramps up, industry giants still dominate: As a range of companies attempt to compete with industry giants Sephora and Ulta, department and drug store retailers have revamped cosmetics departments in order to capitalize on beauty, cosmetic, and fragrance stores’ industry growth, which IBISWorld reports has been positive for the past 10 years. CVS continues to modernize its beauty department following a partnership with Glamsquad in 2018. Walgreens began a mass-market approach in late 2019, selling beauty products, including its signature No. 7 brand, in select Kroger stores, America’s largest grocery chain. Meanwhile, apparel stores continue their immersion into the beauty industry, as retailers like H&M, Lululemon, Urban Outfitters, J.Crew, Topshop, and Anthropologie, further enhance their cosmetics and beauty offerings.
 

Nevertheless, Ulta and Sephora continue to dominate, generating a combined 44.2 percent of industry market share in 2019, up from 38 percent in 2018. Ulta has been able to drive increased traffic to stores as a one-stop shop for all things beauty, offering both drugstore and high-end brands. According to location analytics platform Placer.ai, Ulta was one of the top retailers in terms of foot traffic for the 2019 holiday period, with Black Friday traffic running 300% above baseline, a 9.0 percent increase from 2018. The beauty retailer’s third-quarter comparable sales increased 3.2% in 2019, while total sales increased 7.9 percent on top of 7.8 percent growth for the same period in 2018. French luxury goods conglomerate LVMH, which owns Sephora, reported a record-high fourth financial quarter in 2019, earning revenue of $59.12 billion. Its Selective Retailing division, which includes Sephora, generated 5.0 percent year-over-year organic revenue growth, much of which was from international and e-commerce sales.
 

Omni-channel retailers are aided by exclusive brand partnerships, such as that of Kylie Jenner's Kylie Cosmetics at Ulta, which had revenues of $177 million in the 12-month period that ended November 2019, and a skin care line from Gwyneth Paltrow’s wellness brand, goop, at Sephora. Both Ulta and Sephora have benefited from increased department store closures. Macy’s has been gradually closing stores since 2015, with 125 more slated to close in 2020. JCPenney closed 27 stores in 2019 and plans to close another six in 2020. Meanwhile, Sephora is set to open 100 new stores in 2020, more than doubling the number of store openings from previous years, boasting the largest expansion in the retailer’s history.
 

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 upon 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, however, that in a going-out-of-business (GOB) event, select vendors may elect to re-purchase their inventory from the retailer at 70 to 100 percent 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 discounted rates. For the purposes of an appraisal analysis, Gordon Brothers typically assumes all cosmetics would be included in a GOB sale; thus, 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 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. ©2020 Gordon Brothers, LLC.
 

Reference sources: LVMH.com, Ulta.com, IBISWorld, retail dive, forbes, creditntell, the good face project, harpers bazaar, loreal.com, lush.com, inc.com, likely.com, nylon.com, one ocean beauty.com, strategyonline.com, fashionista.com, the guardian, cnn.com, newsweek, elle.com, the business of fashion, fashionlaw.com, wwd, digitalbeauty.com, bloomberg, aarp.org, the los angeles times, fool.com, usa today, chicagobusiness.com, glossy.com, allure.com