How Will Big-Box Retailers and Beauty Incumbents Navigate the Shifting Beauty Landscape?

The beauty industry is growing, with a current value of about $532 billion worldwide — the U.S. accounting for 20% of it. According to Casey Carl, former Chief Strategy and Innovation Officer at Target, the segment is fairly recession-proof.

“People will always buy these products, especially in a world where social media becomes more and more important,” he told GLG’s Hannah Beaver on July 23. “From a retailer perspective, even though it is a frequency-driven category, it’s also highly profitable relative to other CPG categories.”

Carl shared more of his thoughts on the industry and its biggest players, including his former employer Target, in the Q&A below.

There’s been an overall shift as traditional beauty retailers compete with mass-market players such as Walmart, Amazon, and Target. What are some of the major headwinds that we’ve seen for these beauty retail stores over the past few years?

For traditional beauty retailers, it’s been a couple of things. One is the entrance and growing formidability of big-box retailers, such as Walmart and Target. Amazon has been vocal about its growing share. There’s a much greater threat of competition. From a real estate perspective, a lot of traditional beauty retailers are either mall-based or mall-adjacent, which has created headwinds over the past several years and will continue to.

Are any traditional beauty retailers better positioned than others when it comes to competing with these mass-market players?

Sephora and Ulta are best positioned relative to others. Sephora has more challenges now in terms of where the macroeconomy and consumers potentially might go and how much they’re willing to spend. But both brands can present different parts of the experience with services, through a more concierge approach. That is a great way to differentiate themselves from a lot of the mass retailers and certainly from the digital channels. Obviously, in the short term, when we’re trying to mitigate human-to-human interaction, those services don’t carry a lot of weight, but I believe that is a momentary thing.

Can you provide an overview of both Target’s and Walmart’s beauty offerings and their approaches to the beauty market?

Both Walmart and Target carry all the primary and secondary brands from every major kind of cosmetics and beauty supplier, and both have been growing beauty in a big way. Target overamplifies the beauty and skin care side, which is a faster-growing and more profitable segment. It also attracts a more affluent and educated consumer, which probably more aligns with its demographic consumer base.

Where they differ — and this has been going on for really the past decade — is that Target has overindexed in beauty. It punches well above its weight class in that category. Target’s grown a lot of differentiated brands and partnerships, whether that be Sonia Kashuk or others over the years, that have not always driven a lot of top line but provide a lot of differentiation from its assortments. Target has certainly gone after more skin care and the higher end of things over the past few years. It can go into higher price points than Walmart does. For a retailer whose brand is identified with the style categories of apparel and home, it makes sense that Target already has the customer that is concerned about style. Beauty is just another manifestation of that.

Where does Amazon fit into the mix? How does its offerings and strategy compare with Target and Walmart as well as Ulta and Sephora?

Amazon has strength in the digital channel in all categories, so it can grab more than a fair share of the market. Amazon now wants to be known more as a destination for style, so it’s going after some of the same higher-end stuff as Sephora and Ulta, much like it’s going after some of the department store business. But Amazon lacks services, the experiential side of things. That’s always going to be its biggest hindrance. Unless it can bring that to life in Amazon Go or Whole Foods, which is very unlikely, there is a ceiling on how high its market share can go, because experience and service is still such a big part of the overall beauty industry.

The company is trying to position itself between Target and Ulta and Sephora. It’s going to do that in terms of grabbing a lot of what’s available in digital, but also through subscriptions.

Retailers like Ulta offer in-store beauty bars, hair services, and aesthetician services. Obviously, this aspect of the business has paused given COVID, but longer term, do you envision Target or Walmart offering these services as a means to win business?

In the world beyond COVID, I think we’ll see them dabble in expanding to those services. Target will continue to overinvest in beauty. I see the company taking a much more aggressive stance than Walmart will on this. It has already had beauty concierges in hundreds of stores. Programs like that will continue to accelerate where Target brings in beauty experts who are not necessarily Target team members, likely at the top 400 to 600 beauty stores. I don’t see it rolling out across 1,800 stores.

The greatest parallel is the partnership that Target did years ago with Baby Center, where expecting parents go for information. That allowed Target access to expert content, and also the trust and credibility that comes with aligning with that. That would work really well in the beauty space.

There’s also innovation in telemedicine and teledermatology that’s taking place and will continue to get stronger over the next five years. That’s another way for retailers to start to offer more of those services through digital mediums, and still deliver some of the service and personal tailoring of beauty regimens that an aesthetician could provide in-store.

Do you see any other innovation across the store within the beauty section, particularly in the era of COVID-19?

I’d be remiss if I didn’t highlight some of the innovations that have been taking place in the past year, such as the growth of direct-to-consumer brands. This will be one of the biggest trends and important factors in the next several years — brands working directly with consumers and squeezing out retailers as the middleman, which is obviously a significant headwind. There’s also a formula where through partnership, whether it be launches of exclusives at mass or specifically designed differentiated products or offerings. Direct-to-consumer brands can get a much broader audience through a mass retailer.

There is also significant opportunity in a greater cohort of customers. A lot of skin types are just woefully underrepresented and are ripe for innovation, both on the beauty side as well as on the personal care side of things. Retailers typically still servicing the middle of the bell curve have an opportunity to do much greater analysis of their customer portfolio and tailor the segments and offerings accordingly.

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About Casey Carl

Casey Carl is the founder and Chief Executive Officer of North Coast Ventures. He was most recently the Chief Strategy and Innovation Officer at Target from 2014 to 2017, where he led Target’s Enterprise Strategy, Corporate Development, Innovation and Data, Analysis, and Engineering teams. In this role he was responsible for creating Target’s long-term vision for sustainable growth, including defining enterprise strategies and long-range financial plan on multiyear horizons, aligning CAPEX and OPEX investments accordingly.

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This article is adapted from the July 23, 2020 GLG teleconference “The Shifting Beauty Landscape: Big Box vs. Beauty Incumbents.” If you would like access to this teleconference or would like to speak with Casey Carl, or any of our more than 700,000 experts, contact us.