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Inside the Battle to Be the Next Sephora

Specialty beauty boutiques are proliferating at a dizzying rate. Can they all last and who will win?
(L-R, T-B) Cosbar, Credo, SpaceNK and Bluemercury | Source: Courtesy, Getty Images
By
  • Sarah Brown

NEW YORK, United States—In an era where retail is in a state of flux, to say the least, with flagship stores closing left and right, and luxury malls remaking themselves into amusement parks (and residential complexes), beauty appears to be the one constant. It's the thing people still shop for in stores. (Even if they have done their pre-purchase recon on-line).

As a result, a subtle showdown is taking place amongst one cohort of ankle-biting adversaries in affluent enclaves, hipster neighbourhoods and bustling street corners across the country. Specialty beauty boutiques are popping up one after another, selling curated assortments of prestige products and buzzy new brands. They’re gaining the patronage and loyalty of not only the millennial and Gen Z customer, but more mature shoppers (with real money to spend) to whom the emphasis on in-depth one-on-one service appeals.
Many of these niche indies are backed by substantial private equity. Some operate shop-in-shops and concessions in the very department stores they are helping to displace. All understand the omni-channel symbiosis between brick-and-mortar and digital. They get “experience.”
But do they stand a chance against the increasingly dominant Sephora and Ulta? And, perhaps even more importantly: When so many of these specialty retailers offer such strikingly similar propositions—a thoughtful edit of coveted brands presented by knowledgeable staff in a welcoming neighbourhood space—do they stand a chance against each other?

There is this move away from these big faceless retailers toward something more local that has a neighbourhood feel.

First, in a landscape where most of the players are madly trying, regardless of size, to be specialty—or, at the very least, special—what does the term even mean today?
Consumer insights research firm Mintel defines specialty as “the smaller independents,” though natural and organic stores are categorised in a separate bucket, according to senior global analyst for beauty and personal care, Sarah Jindal. Sephora and Ulta, once the novel alternatives to department stores, have both grown so large that the firm recently pulled them out of “specialty” and created separate line items for each.
Indeed, Sephora—which operates approximately 2,500 stores in 33 countries worldwide—will open 38 new locations across the United States this year, bringing its total footprint stateside to around 430 stores by the end of 2019. (Not to mention its over 600 shop-in-shops within J.C. Penney department stores.) Ulta has 80 new stores in the works this year, which will bring its US tally to 1,254. Stack that against a retailer like The Detox Market, with 13 stores, or even Macy’s-owned Bluemercury, which will have around 200 freestanding boutiques by this December.
If Sephora and Ulta can be considered today’s beauty department stores, the specialty boutiques—even when part of growing chains and backed by considerable cash—are the neighbourhood shops. It has opened a convenient gap for these small fish to explore.
Retailers like Cosbar and Credo are taking advantage of their ability to dig their heels in deep with their customers, showcasing their knowledge and expertise, and making personal connections.

It's not just about walking into a store and picking something off the shelf; I can do that on an app or on Amazon.

“There is this move away from these big faceless retailers toward something more local that has a neighbourhood feel,” said Jindal. “You go in and they know your name and remember what product you bought last time and ask, ‘How is it working for you?’ It’s not just about walking into a store and picking something off the shelf; I can do that on an app or on Amazon. It’s the experience, the one-on-one consultation I might get, and going into an outlet that specialises in a niche portion of that market.”
Indie retailers are working hard to become part of not only the neighbourhoods in which they are located, but the communities. Credo, the four-year-old clean beauty retailer financed by the Nextworld Evergreen fund, recently held a local female founders event at their Williamsburg shop in Brooklyn, and co-hosted a run in San Francisco from the Outdoor Voices store to their Fillmore Street location.
“We’re doing events constantly that reach out into the community and partnering with other local retailers,” said chief executive Dawn Dobras. “There’s a fair amount of education to our brand, so being in a neighbourhood where you’re part of it has been a really great success for us.”
Cosbar’s intimate events with brand founders and beauty world luminaries are closer to cocktail hours than “store appearances,” which chief executive David Olsen remarks can sometimes feel like “pep rallies around a brand.” Of the recent Bastide event at the Montecito store, where co-founder Frédéric Fekkai mingled with clients from 3 PM until the store closed, “it felt like a nice little gathering in someone’s home,” said Olsen. “These experiences are critical,” he continued. “They really help customers connect with us. The stores get excited, too. I don’t think you’ll find a lot of our customers at a department store event, but you will find them at a Cosbar event. We’re in all of these great locations. Our clients would rather stay in their own town.”
It’s the same line of thinking that has informed Bluemercury’s aggressive expansion strategy.
“We find that clients won’t go all that far to get their beauty,” said co-founder and chief executive Marla Malcolm Beck. In New York City, where Bluemercury has nine stores, “Eighty-percent of our clients come from a five-block radius. People want to live their lives close to home. We’ll locate near a Whole Foods sometimes because we know our clients are there.” In an effort to be exactly where her customer lives, works, gets her coffee and goes to the gym, “we’ve been able to dot the landscape with stores,” said Beck.

There's a fair amount of education to our brand, so being in a neighbourhood where you're part of it has been a really great success for us.

Though the spectre of Sephora looms, the smaller luxury retailers still feel they are different enough that there is room to flourish. Credo’s Dobras considers it “a benefit” for brands within her portfolio—“many of which are small and unknown”—to gain exposure and recognition by being carried by Sephora. She also feels that while the “Clean at Sephora” initiative has certainly been a hit, clients looking for more education and deeper conversation around non-toxic beauty—and clearer guidelines, she points out—will still come to Credo.
Noah Rosenblatt, president of SpaceNK’s North America business, feels that his store’s micro-edited assortment—featuring brands like Oribe, Diptyque, By Terry and Clark’s Botanicals, none of which are carried by Sephora—not to mention his knowledgeable salespeople, are the true differentiators.
“We opened a store in Williamsburg two years ago, and a little less than a year ago, Sephora came in three doors down. Our business has not seen any impact,” he said. “In fact, we’re seeing growth come out of that store in double digits.”
Though the current spate of specialty retailers exist now in a sort of fragile, if competitive, harmony—clustered in the same neighbourhoods and on the same blocks, popping up like daffodils to create beauty shopping districts that are destinations in themselves—will they all succeed? How can they when so many offer kind of the same kind, in kind of the same environment (sleek white box, backlit shelves)?
According to the experts—and the merchants themselves—there are four keys to winning the neighbourhood retailing game:

#1: POV

“There will be short-term winners and long-term winners,” posited one retail executive. “A lot will come and go, and fads won’t last.” To be a long-term winner, “It’s critical to have a point of view.”
It’s worth noting that quite literally everyone interviewed for this story vigorously maintained that his or her business is “the authority in skin care;” that they have “the best-trained people,” and “the best selection of products,” and that their stores are incomparably “warm and welcoming.” So, what are the differences that really set them apart?
“Ours is luxury,” said Olsen. Founded in Aspen nearly 44 years ago by Lily Garfield, who wanted to bring the intimacy of a European-style parfumerie to the affluent alpine town where she lived, Cosbar was the first specialty store to sell brands like La Prairie, Lancôme, Orlane and Bobbi Brown. They had La Mer even before Lauder acquired the brand in 1991.

It's critical to have a point of view.

“If you look at our assortment, you’ll never find a Clé de Peau or a Sisley in a specialty store, so from a brand perspective, we do differentiate ourselves,” he said. “The gap is changing with the way brands are moving around, but a lot of the products we carry are only available in department stores. With that changing of the guard, we are benefitting greatly from having these brands.”
Since 1993, when founder Nicky Kinnaird first opened shop in Covent Garden—being the first to introduce the UK to brands like Kiehl’s and Nars—SpaceNK (now backed by Manzanita Capital) has prided itself on being a place of genuine discovery for hunters of the new, the cool and the niche.
“The brands we go after, especially in the US, are typically not well known or widely distributed,” said Rosenblatt, making special mention of Miriam Quevedo and Windle & Moodie hair care lines, Aurelia probiotic skin care and Mara, maker of the Instagram-famous face oil.
Not only does Rosenblatt feel that SpaceNK offers its customers something special; it offers brands something valuable, too: global exposure. The retailer currently has eight stores in China, 67 in the UK (where Sephora does not currently have a presence) and 41 locations throughout the US and Canada (including 19 Bloomingdales shop-in-shops and 14 Nordstrom concessions).
Though SpaceNK owned the boutique specialty space when they opened their first US store back in 2007, they have been working hard, in the face of stiff competition, to regain their former footing. Their North American business has experienced 20 percent annual growth over the last four years, and they continue to open new stores in “small niche neighbourhoods”—next up: Pasadena, California and Cobble Hill, Brooklyn—which Rosenblatt said are a natural complement to their selection of “small niche brands.”

We do things that I think benefit the whole market, Sephora, included.

While it’s not enough for Credo to simply be “the clean beauty specialty store” (see: Beautycounter, The Detox Market, Follain, Onda, CAP and Goop), Dobras believes it can be an incubator of sorts, helping to foster the non-toxic super-brands of tomorrow.
“We are here to grow clean beauty in a much bigger way,” she said. “We do monthly calls with our brands around trademarks, what you can say in claims, sourcing and ingredients. We do things that I think benefit the whole market, Sephora, included.”
As the industry at large inches toward new universal formulation standards, clean beauty continues to be a source of significant growth: Non-toxic skin care grew 44 percent in 2018, “about three times faster than total skin care,” reported NPD Group’s beauty industry analyst Larissa Jensen. While Credo does not share financials, Dobras reports that this year, the retailer has seen double-digit comp growth in-store and triple-digit growth overall, including online sales.
Though Credo only operates eight stores currently, “we aspire to be a big beauty retailer,” said Dobras. “And when I think about the channels of big beauty retailing, I think Amazon and Sephora. Full stop.”

#2: BE THE EXPERT IN YOUR CATEGORY

The key to dominating your category is establishing primacy, anchored in trust, over a particular space.

It's not enough to have great products (all luxury specialty stores have great products). If you and your competitors all sell the same top brand—take Dr. Barbara Sturm, whose products are available at Net à Porter, SpaceNK, Bluemercury, Violet Grey, Cosbar, Goop, Neiman Marcus, Barneys, Nordstrom, and the list goes on—how do you get someone to buy that $350 Anti-Aging Serum from you?

By giving better advice and a better experience than your rivals.
For Cosbar, whose sweet spot is prestige skin care, it’s about catering to a serious, sophisticated customer—one who comes into the store willing to spend the time, and the money.

We're seeing a big move of going back to the experts and trusting them.

“We are crazy about making sure we have the best possible service,” said Olsen, who notes that their in-store average order value is a fairly steep (for beauty) $165. “Trust is huge for us. We’re not selling you on anything you don’t want. We’re listening and recommending the products we think are best.” The retailer’s guided sell model revolves around salespeople rigorously trained on all brands taking the client on a “journey” through the store to better understand her needs and preferences. “Sitting someone down and doing their makeup is pretty easy,” said Olsen. “Sitting someone down and explaining the benefits of a $500 one-ounce cream is pretty different. They don’t do that on a whim.”
It all points to the fact that whatever you are shopping for in beauty and wellbeing, chances are there are a billion alluring options. “It’s so hard for the average consumer to wade through everything,” said Jindal. “We’re seeing a big move of going back to the experts and trusting them. If you’ve got those experts at retail, what better way to serve the consumer?”
In their quest to brand themselves as the ultimate authority in their (complicated, ever-evolving, sometimes confusing) category, Credo has developed navigational tools to help clients take a deeper dive and learn the ropes of Clean.
This month, via a partnership with NYC startup Clear For Me, a database featuring more than 70,000 ingredients (and their many synonyms), Credo launched the Product Finder, a filter which customers can use on both the website and in-store, via salespeople armed with iPads.

These retailers are helping consumers do their homework—and by doing so are becoming the trusted confidant that has been missing in retail.

Since the way people shop for beauty has changed fundamentally in recent years—deeply researching products before making a purchase or even stepping foot in a store—these types of intuitive tools can be critical to making your business the destination for both answers, and shopping.
“You get a lot more really detailed, really valuable information from those smaller retailers than the big guys, which is the kind of stuff consumers are looking for,” said Jindal. “These retailers are helping consumers do their homework—and by doing so are becoming the trusted confidant that has been missing in retail,” adds Jensen.
To help break down barriers between the digital shopping experience and the physical stores, last September Credo partnered with Shop Hero, a startup out of the UK, which Dobras describes as “basically Uber for sales associates.” It’s a personal shopping tool that connects online shoppers to sales associates in the stores. “You can send videos so we can shade-match you; we can answer specific questions. It’s not machine learning; it’s not a bot,” said Dobras. “We’re seeing incredible back and forth now that we didn’t see before.”
One of Credo’s store managers had an $800 sale on her first try. The customer was so pleased, she called the store to say, "I want her to be my personal shopper going ahead." Dobras described it as “virtual clientelling,” creating personal, and hopefully lasting, relationships, “like the old days where you had a black book.”

#3 CREATE SIGNATURES TO HOOK YOUR CUSTOMER

Smart retailers must find ways to make a customer walk into their shop, instead of their competitor’s (which may be next door). The same goes for online, especially when, as one executive put it, “the alternative is Amazon.” In a crowded category, signature offerings are your lasso.  
Credo is well known for its Clean Swaps program, which Dobras describes as “the backbone of all of our services and the key part of our stores. You bring in your makeup bag, dump it out, and we match you up. If this is your lip-gloss, how about you try Kosas? People love that. It’s tricky, and if you don’t do your research, it’s a lot to take in. So, we’re here.”

We see the gaps, knowing our clients and what they are asking for

Bluemercury operates spas in 95 percent of its locations; its private label brands—the clinical skin care line M-61 and Lune + Aster, a collection of vegan, vitamin-infused makeup—are also draws. Beck develops the ranges herself and fills out the product offerings guided by insight from her customers: "We see the gaps, knowing our clients and what they are asking for," she said. (It's logical to presume that Amazon is employing similar thinking to create its new skincare brand Belei, which is no doubt influenced by the e-tailer's data goldmine: the all-powerful Search bar). Of the seven-year-old M-61 (popular with both men and women), Beck reports, "we launched with seven SKUs and now we're close to 70."

SpaceNK is in product development mode, too. Reinforcing the strength of their pro teams, who travel throughout the country to hold master classes, they’ve created a new line of vegan makeup brushes and travel cosmetics cases in collaboration with these international artists.
Their loyalty program, N.Dulge, which includes access to exclusive events and the opportunity to try new launches first, is regarded as one of the best in the business, too. “You can earn points by shopping, but it’s not only about spend; it’s about loyalty, focused on advocacy—leaving reviews, referring friends,” said Rosenblatt.

#4 GET THE EXCLUSIVE

You can’t blame Kendo’s Fenty for launching with Sephora (which is still, remarkably, the only place to buy Drunk Elephant in the US, besides the brand’s own website), or Kylie Cosmetics for choosing Ulta as its lone brick-and mortar-door. Look at the volume each can do for them, off-line and on. According to Jensen, what determines who will win today is who gets the exclusive. That’s the game-changer “that can drive consumers to the store.”

There's got to be a call to action for me to engage with a brand..because I'm one click away from buying that product someplace else

So, it falls to the indies to be the scouts to find, and nurture, rising stars, and in turn to establish themselves as master curators, and expert eyes who intimately understand their customer. The strength of the specialty store, said Beck, is that “we’ve edited the selection for you. We may not have hundreds of brands, but we have all you need.”
In the end (or rather, the beginning), all players must keep delivering something distinct. As a consumer, “there’s got to be a call to action for me to engage with a brand,” said Dobras. “Because I’m one click away from buying that product someplace else.”

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