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The shakeout is coming in e-tailing. Anyone can see it. How many online furniture dealers can survive on the Net? How many electronic drugstores, or sporting-goods merchants, or pet-supply companies? In each of these categories, and dozens of others, the field is crowded with aspiring Amazon.coms, all hoping to secure the magical first-mover advantage. By definition, most of them will fail to make the grade.
If you want to see what consolidation looks like in an overcrowded Internet market segment, check out beauty products and cosmetics sold online. All the signs are there. The marketspace is clogged with hundreds of sites sharing similar names and selling nearly identical goods. There's Beauty.com, iBeauty.com, Beautyjungle.com, Beautyscene.com, Sephora.com, and Gloss.com, and those are just the companies that have launched in the last six months.
Already, Net merchants higher up the e-tailing food chain have begun to feed on some of the beauty sites. Drugstore.com paid $42 million in stock for Beauty.com on Jan. 12, less than two months after the cosmetics e-tailer was launched. Luxury goods purveyor Ashford.com picked up the online fragrance site Jasmin.com on Jan. 17. In another sign that the category is tilting toward consolidation, Chicago-based Beautyjungle.com announced plans on Jan. 27 to expand into an online business-to-business hub for cosmetics manufacturers and resellers, as well as build and maintain E-commerce sites for other beauty-related businesses.
LIPSTICK TRACES.
Darwin would be right at home. According to Net marketing firm Forrester Research, online sales of health-and-beauty products topped $509 million last year and are expected to grow to $10.4 billion in 2004. Add to this the growing percentage of women who shop online -- currently about 25% of the Net's female population -- and many beauty retailers are convinced the market is lucrative enough for several successful players. Not everyone is so sanguine. "With the plethora of beauty sites out there, it's all come down to which few are going to survive," says Forrester analyst Lisa Allen. "Only those with strong brand presence, a solid customer base, and a bricks-and-mortar presence will be around in the long term."
One problem, apart from the clutter of competition, is deciding what to
sell. Most e-tailers shy away from selling cheaper brands, in part because they're already sold by online drugstores and mass-market retailers such as Drugstore.com, CVS, and Wal-Mart. Lower profit margins also mean these low-price brands aren't a reliable source of income, especially since shipping charges can often equal the cost of the goods themselves unless bought in large quantities (see BW Online, 9/20/99, "Why Maybelline Is Tiptoeing Onto the Web").
On the other hand, online sellers of prestige products are limited to
more obscure goods because the three top-selling brands -- Lancôme, Estée Lauder, and Lauder-owned Clinique -- allow their cosmetics to be sold online only through their own Web sites. And those three brands account for nearly 70% of all prestige cosmetics sales in a U.S. market estimated at around $6 billion, the vast majority through stores. "The Lauders and the Lancômes have been gingerly testing the waters of selling online, but they could have the world at their doorstep if they wanted," says Forrester's Allen.
FLAWED FROM THE START?
In fact, the exclusive online strategies of the leading cosmetics companies may hasten the shakeout in the market segment. With the top brands off-limits, beauty products e-tailers are left to battle over less prestigious products. "It's absolutely critical to have the quality brands and products people want," says Sephora.com CEO Jim Kenney, "but this has been and will continue to be a challenge for those sites without a bricks-and-mortar store presence." Developing relationships with cosmetics manufacturers is difficult for some online beauty resellers, Kenney says, because manufacturers worry about tarnishing the cachet of their brand image. "Lauder's [refusal to let other sites sell their products] is an appropriate part of their strategy," Kenney allows. "They probably feel they wouldn't have as much control with online retailers."
For now, Estée Lauder is content to continue to develop sites for its individual brands -- which currently include Clinique, Bobbi Brown, and Origins -- and has no plans to sell its products through other retailers' sites, says Angela Kapp, vice-president and general manager of the online division for Estée Lauder Cos. "We have to be concerned that we do not commoditize our products," Kapp says. "We're about brand equity and enhancing brands. We don't have the same sense of urgency when it comes to the Net as some other companies."
Some analysts believe the business models for the online cosmetics retailers may have been flawed from the start. There's scant evidence that the online beauty business will generate more than replenishment sales, items women have used before and don't need to try on. Indeed, the cosmetics industry relies heavily on shoppers trying on products to get a feel for textures and colors, aspects of customer experience that are difficult to translate online.
BLAND BLEND.
So far, most beauty sites have tried to differentiate themselves with online magazines and interactive features, such as Gloss.com's virtual makeover that will eventually let users upload their own picture onto the site. But the look and feel of most sites is so similar they could blend into one big advertisement for lipstick and mascara. "There is no real differentiation among [beauty sites] no matter how hard they try to position themselves," Allen says. "That's why having an existing brand you can translate online is so important."
Even more important, perhaps, are cross-marketing deals that drive traffic. "It's all about the relationships and partnerships," says Gloss.com President and co-founder Sarah Kugelman. She credits many of Gloss.com's exclusive arrangements with sites such as wedding registry TheKnot.com, alternative teen site ChickClick.com, and women's portal iVillage -- which is Gloss's No. 1 traffic generator -- as the reason for her company's early success. "The industry is only big enough for two to three players, and we intend to be one of them," she says. One way or another, the beauty e-biz is already ripe for a makeover.
Copyright 2000 , by The McGraw-Hill Companies Inc. All rights reserved.
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