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Beauty Retailers Face New Challenges Post-COVID

The major beauty chains used to drive customers into stores with promises of free product testing and salon services. How will they adapt to a new world?

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Like many retailers deemed non-essential, beauty chains were forced to temporarily close their stores and move sales online due to the COVID-19 pandemic. Now, as the $49.2 billion cosmetic/beauty sector reopens stores, cosmetic retail giants Ulta Beauty Inc. and Sephora are finding that they are facing a whole new way of doing business. Prior to the pandemic, consumers shopped in-store at these big cosmetics retailers specifically to test products. It was all about the experience as beauty is a high-touch sector.

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However, now that these retailers are reopening stores amidst the pandemic and working to get consumers to feel comfortable coming back, they must follow new hygiene rules. That means they’ve had to ban in-store make-up testing.

“The biggest challenge that beauty retailers face is helping to transition consumers to a new way of experiencing how to try on beauty products,” says Erin Schmidt, beauty industry analyst at global marketing research firm Coresight Research. “It will take time for consumers to become educated and comfortable with a new way of discovering and trying on beauty in the stores. Under the new sanitary requirements and standards, consumers are no longer allowed to test beauty products on themselves independently, as they were previously accustomed to doing.”

Temporary closings take a toll

Temporary store closures in response to COVID-19 significantly impacted sales and earnings for beauty retailers.

“For much of the first quarter, Ulta Beauty operated as a digital-only business, and while e-commerce sales exceeded our expectations, it was not enough to fully offset the impact of our store closings,” said Ulta CEO Mary Dillon, in a statement.

Same-store sales for Ulta, the largest beauty retailer in the U.S., dropped by 35.3 percent in the first quarter of fiscal year 2020.

As a result of the unprecedented disruptions caused by COVID-19, LVMH, which owns Sephora, had to close many of its physical stores and manufacturing sites around the world. Sephora stores were closed in the U.S. and Europe, starting in mid-March.

Reopening strategies

As states have lifted lockdowns, Ulta began reopening stores on May 11 and has now reopened more than 900 of its stores for curbside pick-up and more than 650 for in-store sales. Ulta also offers in-store salons.

Sephora started reopening stores on May 22. It began by opening more than 70 locations across 30 states and now has more than 100 stores reopened. Sephora doesn’t offer a curbside pick-up option.

“Sephora, however, does have a stronger digital business, so could benefit from some shoppers making a more permanent switch to shopping online for beauty products even after stores are reopened,” says Tiffany Hogan, a Kantar senior analyst, who tracks beauty retailers.

Both retailers have reopened stores under new safety guidelines, including virtual makeup trials, no testers, masked employees, social distancing and contactless checkout. Experts say these restrictions pose some challenges.

“Making stores compliant and clean without losing the charm and convenience of shopping is a struggle,” says Dean DeBiase, chairman at beauty technology company Revieve. “Retailers will have to make significant financial investments to make consumers comfortable with shopping in their stores.”

Schmidt adds that it’s very likely that the stricter standards will impact the space required for beauty stores, particularly because these retailers may have to reconfigure stores to allow for social distancing while still operating in-store salons and to allow for store associate demonstration areas.  

Will virtual testing save the sector?

Ulta and Sephora each started using virtual tester tools even before the pandemic, and now will likely drive shoppers to these new ways of trying products before buying them.

“Both Ulta and Sephora will lean heavily on their virtual try-on capabilities in lieu of testers being available in stores,” Hogan says.

In general, mobile will be a focus as it bridges the gap between stores and online shopping, allowing shoppers to explore products no matter where they are—in stores or out, Hogan notes.

“Both Ulta and Sephora were both actively using virtual try-on tools—Ulta GlamLab and Sephora Virtual Artist—mostly as an online option, prior to the coronavirus pandemic,” Schmidt adds. “However, consumer engagement for GlamLab increased fivefold since the coronavirus outbreak.”

While Ulta originally intended the tool to be an aid in online shopping, Schmidt says the pandemic boosted its role as a direct replacement for the in-store experience amid widespread store closures. More than 19 million people tried on different shades of make-up using GlamLab during the pandemic.

Going forward, the beauty retailers will likely push to shoppers to use the virtual testers, according to DeBiase. Some retailers may also offer more use your own device (UYOD) options in stores. He says these personalized in-store experiences can be both a self-service option or used in partnership with in-store beauty advisors.

“This allows some retailers to continue offering in-store consultations with live customer Q&A engagement, but removes the unsanitary aspect of trying on new products or interacting with high-touch in-store screens,” DeBiase adds.

Both Ulta, Sephora scaling back store expansions?

Pre-pandemic, Ulta and Sephora were both in big expansion modes. Sephora—which operates more than 1,100 locations (both freestanding and in J.C. Penney stores)—announced in February plans to open 100 new stores across North America in 2020. It was touted as the biggest store expansion in the retailer’s history. While most Sephora stores are in traditional malls, the focus of the expansion was on off-mall locations.

Now it’s unclear if that expansion will happen. Sephora did not respond to requests for comment.

Meanwhile, Ulta announced plans for 75 new stores in 2020, but according to a release, the company said it was “working on an adjusted plan for new store openings.”

Scott Settersten, Ulta’s CFO, told the Wall Street Journal that plans now call for 30 to 40 new stores this year. The Wall Street Journal also reported that Ulta is reviewing its existing fleet of stores. Settersten said the company is looking to renegotiate leases, move locations and close some underperforming locations. Ulta operates 1,264 stores, with more than 80 percent of its revenues coming from physical sales.

Real estate strategies

Ulta stores are typically located in suburban strip centers and open-air centers and experts say that could give the retailer an advantage as consumers change how they shop amidst and after the pandemic. Some may not be ready to shop in enclosed malls, which have already been grappling with a lack of foot traffic.

“The worst pain has been felt in the mall sector, with large-scale bankruptcies and closures in the department store anchors, as well as with larger mall-based shops,” notes Rachel Elias Wein, founder and CEO of WeinPlus, a St. Petersburg, Fla.-based enterprise strategy consultant for retailers and real estate owners. “That’s not to say the open-air sector is impervious to the shutdowns and challenges, but there is a much larger concentration of essential retail in the open-air space, which drives traffic.”

This, Elias Wein continues, will be impactful to all retail sectors as reopening continues.

“Pulling that forward to the beauty sector, Ulta is at a natural advantage over Sephora based on their existing footprint which is focused on open-air centers,” she says.

Locations near a grocer, pharmacy, bank or other essential retailer will be beneficial throughout the course of this pandemic, which may last for many more months, Elias Wein adds.

“Initially, strip/community/open-air centers will have traffic advantages over enclosed mall environments, as reluctant consumers will prefer to visit storefronts where they can quickly get in and out,” DeBiase agrees. “Early Ulta results are proving this out.”

He also expects consumers to adopt a stronger mix of in-store and online shopping following the pandemic.