Beauty industry falters in the pandemic, but the future, analysts say, could be promising

Even as consumer spending has dropped steeply during the coronavirus pandemic, millions have still perused makeup stores online — if not to buy, then to virtually try on hundreds of eye shadows, blushes, and lipsticks.

“We have seen 19 million shades tried on during this crisis, which was a massive acceleration,” Diane Randolph, chief information officer for Ulta Beauty (NASDAQ: ULTA), the largest retail beauty chain in the United States, said this week.

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High-end fragrance and cosmetic retailers such as Sephora and Ulta said in recent quarterly reports that while they had seen robust online sales, they still failed to measure up to last year’s profits, as the pandemic led to widespread job furloughs and subsequent strained household finances.

Beauty companies like Sephora and Ulta, which encouraged shopping in person by allowing customers to try products before buying them, reeled from losing its biggest draw to the brick-and-mortar shopping experience.

Around 60% of those born between 1996 and 1980 — the demographic most likely to shop online — shopped in person specifically at beauty stores, according to a recent report from the consulting firm McKinsey & Co.

In response to a major upset to Ulta, Rudolph said, the company sent employees into stores to study a flood of product samplings — assessing color, shimmer, opacity — that they then digitally replicated and uploaded to a virtual try-on system over seven weeks. Online, customers can scroll through an array of various brands’ makeup, tapping to apply anything from dusty brown eye shadow to bright pink lipstick. Another quick tap of a button wipes the face clean.

Despite the immediate attempt to enhance the company’s online shopping platform, “it was not enough to fully offset the impact of our store closings,” Ulta’s chief executive officer, Mary Dillon, said of digital sales when the company released its most recent financial results in late May.

Ulta, which closed all of its 1,264 stores March 19 and furloughed sales associates and salon workers a month later, reported net sales of $1.173 billion during the first quarter of fiscal 2020. The figure was 32.7% down from $1.743 billion at the same time last year — a decrease Dillon attributed to the pandemic.

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The Paris-based luxury goods multinational group LVMH Moët Hennessy Louis Vuitton, of which retail beauty giant Sephora is a subsidiary, also said it had similarly seen losses, with a 19% slump within its perfumes and cosmetics segment during the first quarter of this year.

The report from LVMH, which also owns specific fragrance and cosmetics brands that include Guerlain, Benefit Cosmetics, and Marc Jacobs Beauty, did not specify losses specific to Sephora, which has 430 stores in the United States and closed around the same time as Ulta.

“The major brands demonstrated their resilience as retailers reduced their inventory levels given the current crisis,” LVMH said in its April report.

Ulta’s per-share stock price has fallen by around $118 since June 12 last year, while LMVH’s rose per share, from $80.27 to $84.69 as of Friday afternoon. Ulta, with 45 locations in Pennsylvania, has seven stores in and immediately outside Philadelphia.

Sephora, which opened its first U.S. store in New York City’s SoHo neighborhood in 1998, has 10 locations in the Philadelphia region.

The companies did not publicly address the extent of damage and theft at their stores during nationwide protests spurred by the police killing of George Floyd in Minneapolis on May 25. Sephora and Ulta stores in Philadelphia were among those looted and remain closed in the Philadelphia area.

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Globally, revenue in the beauty industry could decrease from 20% to 30% this year, according to McKinsey, which noted that if a second wave of the coronavirus was to strike the U.S., the decrease could grow to 35%.

“While the beauty industry may be in a relatively stronger position than other consumer categories,” the report said, “2020 will be one of the worst years it has ever endured.”

The beauty industry still had the capacity to remain largely resilient despite a dire outlook, McKinsey said, referencing revenue for personal care products, makeup, fragrances, and skin care that had grown steadily each year since 2005. Global consumers spent $236 billion on personal care products, $140 billion on skin care, $72 billion on makeup, and $51 billion on fragrances in 2019 alone.

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Consumer data showed the high-end beauty industry had trended upward in growth, an average of around 6% week over week from April 5 to May 16, according to the NPD Group, an American market research firm based in Port Washington, N.Y.

Fragrances commanded the highest sales, particularly around Mother’s Day on May 9, NPD said, averaging around 22% week-over-week growth. Makeup, skin care, and hair care also showed growth week-over-week, about 2%, 3%, and 11%, respectively.

In makeup, analysts said, popular purchases included mascaras and false eyelashes — items that draw attention to the eyes, the most prominent feature visible under a mask.

Correction: This story has been changed to correct sales figures for Ulta.