Department stores have lost ground in beauty to specialty stores, and Macy’s Inc. wants to put an end to that slide.
In an unusual move for the department store giant that’s seldom acquisitive, Macy’s is buying 60-unit specialty retailer Bluemercury for $210 million in cash, signaling the importance of beauty customers to its business and expanding its presence beyond malls to Main Street across the country.
A surprise to many industry observers, the deal has been met with widespread praise.
“Macy’s is out front,” said Candace Corlett, President of WSL Strategic Retail. “Department store beauty is a staple in the industry, but the new approach to beauty is what we see at some place like Bluemercury. You have a preconceived set of expectations walking into a department store beauty department. Those expectations change when you walk into a Bluemercury, Sephora or SpaceNK.”
Oliver Chen, an analyst at Cowen & Co., wrote in a research note that the purchase of Bluemercury allows Macy’s to broaden its customer reach to a higher-end customer through a high-touch service and spa model, while gaining access to a portfolio of premium, luxury beauty brands. “We like the acquisition given the stable revenue growth and limited markdown risk of the beauty category.”
In the face of department store beauty growth limping along at roughly 1% annually over the past few years, Macy’s has reworked its beauty departments to broaden its customer reach before, notably addressing Millennials with the introduction of the open-sell Impulse Beauty format.
Bluemercury doesn’t compete directly with Impulse Beauty. It attracts an older customer – the average customer age is 44-years-old – with disposable income who is dedicated out of need or passion to unearthing effective beauty products rather than flitting from one product to another with the trends.
“Getting access to those customers is really what is going to drive sales and profitability,” said Hana Ben-Shabat, a partner in the retail practice at A.T. Kearney. “They can’t go head to head with Sephora because Sephora really has the young market. It has been trying over the last few years to tackle the older market that will buy more high-end brands and anti-aging products, but they are not there yet. In a way, in owning that space, you are actually creating a Sephora for adults.”
The creation of that concept will take several forms, like through in-store shops with the Bluemercury banner.
“Macy’s has had a lot of success with in-store concessions in other categories where it doesn’t have quite the level of expertise that its shoppers might be looking for,” said Kelly Tackett, Research Director for Planet Retail. “While not exactly the same in beauty, because Macy’s does have a really strong beauty business, the Bluemercury acquisition does give them a new level of authority and access to a lot of new brands that many of their customers would be interested in.”
Updating the beauty assortment has additional advantages for Macy’s. Kelly pointed out beauty is a point of entry drawing customers both in terms of what they spend their money on and where they literally do it as Macy’s entrances are often at the beauty floor.
There’s also something of a multiplier effect to successfully wooing prestige beauty shoppers into Macy’s. Not only do their luxury beauty purchases net lofty profits, but Terry Lundgren, Macy’s CEO, suggested in 2011 that they end up shopping outside of the beauty category when they patronize stores. And beauty is a category underpenetrated online: A.T. Kearney estimates e-commerce accounts for 11% of prestige beauty sales, compared to 17% for apparel and around 40% for electronics, meaning beauty shoppers get out of their houses and go into stores to check out cosmetics and skin care items.
“It’s a very experiential category, where that in-store, sensory experience is very, very important,” said Kelly. “So, it is definitely a driver of in-store traffic, but once the shopper is familiar and used to the different brands, it is also a way to drive online sales.”
Covetable brands are crucial to propelling traffic, but services could play an increased role, too. At its locations, Bluemercury offers facials, massages, waxing and more. Those service options could be rolled out to Macy’s stores. Hana Ben-Shabat said, “People are struggling with the question, how much service can be brought into department stores? I don’t see the services as an area that is going to impact Macy’s revenue in a very big way, but it is something that can certainly help their customer experience.”
In the case of Bluemercury, foot traffic, whether thrust by services or brands, won’t just head to malls. Bluemercury had aggressive expansion plans prior to the Macy’s deal – Co-Founder and Chief Executive Officer, Marla Malcolm Beck, has said she was out to grow Bluemercury locations – and Macy’s has the wherewithal to step up those efforts.
“What they are going to be doing is really focusing on expanding Bluemercury. It is going to be getting a deeper penetration across the United States,” forecasts Maria Corbiscello, President of Studio MC². “They are going to have more stores, and it will touch the consumer in a bigger and better way.”
As Bluemercury enlarges, it poses a greater challenge to beauty retail rivals Sephora and Ulta. In his note, Cowen & Co.’s Oliver Chen suggested Macy’s Bluemercury acquisition is a “longer-term risk” for Ulta “given competition for beauty traffic share.” Maria, however, doesn’t view Bluemercury as particularly threatening to Ulta or Sephora. She argues the shopping experiences at the various beauty chains are distinct enough to warrant separate trips and customers.
“There’s a different feel when you walk into a Bluemercury store. It feels more like an intimate, relaxed respite, whereas at Sephora, the music is playing, and there is hustle and bustle, and Ulta’s selection of brands is very different,” she said.
One wild card in Macy’s acquisition of Bluemercury is the fate of Bluemercury’s own skin care brand M-61 and further development of its proprietary brands. Unlike mass retailers, department stores have limited private-label beauty programs. WSL’s Candace believes Bluemercury gives Macy’s an opportunity to develop that kind of program. She said, “Every retailer has tried to make their own beauty brand, and they haven’t been as successful as they have been in other categories. There is something about beauty that takes years of advertising, promotion and attention to detail to develop a loyal following. Bluemercury has done that and that’s what Macy’s is buying with Bluemercury.”
Gail Gordon, president of gg Global Consulting, is less convinced that Bluemercury’s proprietary brands hold promise for Macy’s.
“I don’t know if they have big brand recognition for their private label brand,” she said. “In my experience, it is difficult to develop private label. The consumer is very brand conscious and status conscious, and they love the brands that they know about and to get a brand to have a following and recognition takes some time. It means a heck of a lot of marketing.”
Even without exploiting Bluemercury’s proprietary brands, there’s plenty of room for Bluemercury to impact Macy’s business. Macy’s projected Bluemercury will be accretive to its earnings in fiscal year 2016. After that is when experts deem Bluemercury will truly demonstrate its influence.
“It is really small in the grand scheme of things if you consider Macy’s total revenue, but I think this is a really strategic investment that is going to give Macy’s access to certain consumers, and expertise online and in services and, then, you can basically plug in and play with the different components of Bluemercury wherever,” said Hana. “Over time, I think it will be proven to be a very good investment.”
Gail concluded, “I’m sure this one will be a long marriage.”