The Analysis: Department Stores, Beware

Just when Macy's and its ilk are struggling amid the downturn, CVS is moving to lure away their customers

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With department stores struggling mightily in the current recession, the decision by drugstore CVS to invade their once-exclusive turf and launch a high-end beauty format comes at a very interesting time, says retail expert Wendy Liebmann, CEO of WSL Strategic Retail in New York. The concept, Beauty 360, bridges the mass beauty items that CVS currently sells in its 6,800 pharmacies with the more exclusive, pricey department store environment.

This has been done before, of course—specialty beauty retailer Sephora has spent the past decade building its presence in the U.S. and just announced plans for a massive, three-story store in Manhattan. Sephora opened the doors for other similar concepts, such as Ulta and Bluemercury. But never before has a massive drugstore chain tried something like this, at least in the U.S. (Canada's Shoppers Drug Mart launched a format called Beauty Boutique eight years ago, which CVS executives admit was an inspiration to them.)

The result, Liebmann says, offers consumers yet another option for shopping for high-end skin- hair-care products and fragrances conveniently located right next door to where they might already get their prescriptions. Having been to both Beauty 360 locations, Liebmann came away impressed by the decor, the customer service, and the overall vibe. "They reflect a European style parfumerie," she says. "It's a very contemporary feeling."

The challenge, Liebmann says, is enticing those so-called prestige brands onto the shelves. Although Beauty 360 boasts brands such as Laura Geller and Paula Dorf, other high-end beauty vendors including Estée Lauder have thus far stayed away. Persuading those brands to sell their wares in Beauty 360 will be instrumental to its future success, according to Liebmann. "Those brands need to feel comfortable coming into a mid-level space," she says.

Still, Liebmann is impressed that CVS has thrown down the gauntlet to department stores such as Macy's (M). (Macy's same-store sales, a key retail metric, declined 4% in December, and analysts expect an even bigger decline for the company's full quarter.) "This is quite a push against department stores at a time when they are the most vulnerable," says Liebmann. "It's very timely."

Boyle is deputy Corporations editor for BusinessWeek.