Credit: Shutterstock photoT he practice of shopping for high-end makeup has not yet gone the way of book-buying and succumbed to the weight ofAmazon's ( AMZN ) can't-beat-'em discounts and free shipping -- contrary to the hand-wringing over the 2013 launch of the e-tailer's luxury beauty portal.
In fact, specialty beauty retail leadersUlta ( ULTA ) and Sephora are doing just fine. More than fine, if anything.
Ulta shares hit a new intraday high of 188.48 on Dec. 17, and Sephora continues to shine for luxury parentLVMH Moet Hennessy Louis Vuitton ( LVMUY ).
So what elusive "It" qualities does the specialty beauty industry have that make customers immune to the charms of Amazon?
For one thing, it offers something that the pure-play e-commerce giant, by definition, can't offer: a satisfying in-store experience.
"It's like a good glass of wine," said Piper Jaffray analyst Stephanie Wissink. "You can find yourself in your own space for a period of time. That 15 minutes is glorious."
Vanity Fair
Walking into a Sephora is a bit like wandering backstage at a Victoria's Secret runway show -- it's all flattering vanity lighting and glossy makeup kits and the tacit promise of looking like Gisele Bundchen upon exit. Ulta comes equipped with full-service salons and Benefit Brow Bars in-store for those seeking the full makeover-montage experience.
"Ulta and Sephora provide a place to play," said Wissink, adding that there's an "intangible benefit" of being in the store.
A Beautiful Education
Plus, the "test-and-trial" nature of beauty products prompts first-time buyers to head to a brick-and-mortar shop instead of ordering online, she said.
Testers and samples abound at beauty stores. Buying items like lipstick and eye shadow on the Internet is a tricky business -- what appears to be one shade in one's browser can be very different from what appears in one's mailbox.
There is, however, potential for Amazon to steal share when it comes to replenishing products.
"In theory, (cosmetics) should be the perfect online business," Nomura analyst Simeon Siegel told IBD. "On the other hand, even repeat customers will walk into these stores and find new products all the time. There will always be an element of discovery with cosmetics."
YouTube and beauty bloggers offer a fairly well-rounded education online, for those willing to dedicate the time to it. But deciphering the latest makeup application techniques -- think contouring or strobing -- can be a little overwhelming.
Ulta, which sells both mass brands like Revlon and L'Oreal, in addition to luxury brands like Urban Decay and Smashbox, offers makeup consultations at no charge. Sephora holds free makeup classes that conveniently allow shoppers some time to buy newfound products before the store officially opens for the day.
No Seasons -- Or Discounts
Beauty has the added buffer of not being a seasonal industry, say analysts, which keeps prices in check. Makeup colors keep changing, but the products generally remain the same. A facial cleanser knows no season. An acne cream is a year-round need.
Contrast this to the season-dependent world of apparel, where fast-fashion retailers are pressuring traditional department stores and clothing boutiques.
"There aren't four seasons; there are 52," said Siegel of the apparel space. When a product doesn't work, it goes on sale, and retailers have to hurry to push out inventory, creating what he calls a "circular promotional death spiral."
Plus, prestige beauty brands have managed to keep pricing and distribution on a fairly short leash as they keep product availability exclusive to certain merchants.
Still, there's nothing technically stopping Amazon from offering deals onEstee Lauder ( EL ) and other higher-end names.
"My understanding is that luxury brands that are hesitant to partner with Amazon are concerned that this pricing consistency may be at risk," said NPD Group analyst Karen Grant.
But even brands that don't have an official presence on Amazon are often sold via third-party sellers on the site. And counterfeit beauty products are a documented problem on Amazon,Alibaba ( BABA ), eBay (EBAY) and elsewhere.
"(Brands) are deluding themselves into thinking Amazon doesn't have a large impact on their business because they're not officially distributed" on the platform, said Scott Galloway, founder of research firm L2 and a professor of marketing at NYU Stern School of Business.
Amazon's luxury beauty portal has been a "disappointment" for the company so far, he said, but it "shows no signs of giving up" -- outspending Sephora andMacy's (M) on beauty-related search-engine keywords on Alphabet 's (GOOGL) Google.
And as the online retailer continues its assertive march toward retail domination, it holds a bargaining chip or two. Brands that choose to distribute via the platform can enlist its cooperation in erasing third-party listings, according to Galloway, who said once Burberry and Calvin Klein gave Amazon the go-ahead to sell a "small number" of their fragrance products, "unofficial SKUs (stock-keeping units)dropped dramatically."
"The implicit message from Amazon is: Work with us, or we will (mess) with you," he said.
No Specifics On Relationships
Amazon would not provide specifics on its relationships with brands, but a spokeswoman told IBD that Amazon's luxury beauty segment is one its "fastest-growing categories," and its online storefront offerings have resulted in "more brands want(ing) to join Amazon's Luxury Beauty store."
For now, however, specialty beauty retailers are holding their own, especially as they build out their e-commerce reach.
Ulta's online sales soared 56.3% in Q3 as it crushed estimates and boosted guidance. Sephora's e-commerce sales are "rapidly increasing in all regions," according to LVMH's latest earnings report. Cowen & Co. analyst Oliver Chen wrote that "Sephora is best-in-class with regard to their mobile/online execution." Plus, it has been gaining share "in all its markets," with same-store revenue growth "particularly strong," said LVMH.
And never discount the appeal of being part of an exclusive backstage club.
Ulta's loyalty-program membership has been accelerating, quarter over quarter, reaching 17 million active members. By comparison, Starbucks' (SBUX) much-lauded rewards program has over 20 million members globally.
Amenities Provided
The things that Amazon does so well -- offering a wide variety and free shipping -- are amenities Ulta and Sephora already provide. Members of both Ultamate Rewards and Beauty Insider (Sephora's loyalty program) have the added benefit of redeeming points for products.
Over the summer, Sephora shoppers had the chance to redeem "Epic Rewards," ranging from a foursome of full-size Givenchy lipsticks for 1,000 points to a trip to Paris to visit Lancome for 10,000 points. (Notably, the rewards promotion faced scrutiny for selling out items too quickly, prompting a social media backlash.)
Perks like that have so far been enough to steer beauty buyers away from the less lavish space of an online megamart. Cowen analysts wrote Thursday that beauty is one area with an "un-Amazon-able" retail proposition, and that offering a differentiated shopping experience and/or selling a product with an "emotional component" offers a viable path to compete against Amazon.
"Loyalty programs are extremely compelling," said NPD's Grant. "It's like candy."
"(They) incentivize you to shop and to shop with them, and they do an excellent job of it," she said. "Price isn't everything. But they also offer a good price and good service and all of the rest."
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
