The Beauty Moat is Service

Multi-brand retail and/ or eCommerce in most verticals is toast. Amazon won. Store traffic declined. 4-wall margin got ugly. Even the verticalized brand approach has lots of holes in it these days – mainly cost of customer acquisition.

I do, however, still like the Beauty category for a bunch of reasons and it’s no secret why the Ultas and Sephoras of the world are still growing. There is no shortage of beauty startups, either.

Here is some texture on why I think this category is still attractive, even though Amazon will most likely emerge the winner, if they are not the largest by volume already.

  • Beauty is big. Like $50bn+ big. Start with half the population and even if you remove the utility or “I just need one of those” type purchases which land at a CVS or Amazon etc, the remaining volume of more highly considered purchases is still a very large number.
  • Beauty products are not cheap. Many beauty purchases should produce order unit economics that can provide a decent CAC/LTV and payback period.
  • Beauty brands matter. If the brands matter, then they will probably protect their brand equity, reputation and sales channels, which could allow retailers to maintain decent margins for non-generic beauty goods.
  • Beauty products run out. I used to sell motorcycle helmets that lasted 5 years. It would be awesome for business if they needed to be replaced every 3-6 months. It’s always way cheaper to retain and remarket to a previous purchaser and it’s easier to create brand affinity and loyalty if customers need to replenish more regularly. Blending that retention efficiency against full-throttle new customer acquisition at scale will certainly help maintain marketing cost structure over time. I will say with the Facebook / Google ad duopoly, good luck finding leverage there. The rent’s only increasing.
  • Beauty is emotional and personal. If customers are driven by the fear of getting it wrong, the retail layer can provide great value via guidance, service and content to help them get it right. Becoming an indispensable part of the customer’s regular purchase cycle and building customer trust are powerful assets of loyalty.
  • Beauty product knowledge matters. In the vast sea of products, hair types, complexions and desired looks, the most knowledgeable online or retail staff can be true customer sherpas, saving time, money, effort and the risk. The store layer can offer solutions, further enhancing themselves as a value-added layer in the repeat purchase cycle by people, tools and real-time testing.
  • Beauty has a trend, lifestyle, entertainment element. What started with Michelle Phan on YouTube now encompasses a staggering number of macro, micro and celebrity influencers providing inspiration and support to the latest trends. Those trends typically involve necessary products new and old, and by their nature will be replaced, which creates a need for the conversation to continue indefinitely. Oh the content that can be built…
  • Beauty can be vertical more easily. In the pyramid of product development complexity, many products can be more easily white labeled or manufactured. It’s actually a blessing and a curse. Once a retailer or brand has earned a customer base and a bit of authority, it should be easier to introduce new Beauty products than in other categories with higher R&D thresholds.
  • Innovation is still in play. With such a large and fragmented market driven by people in need of solutions, there is great room for innovation at the point of sale or during the research phase of the sales cycles. Tech is getting faster and the cameras are getting better.

I have to believe that there are few purchases as personal as product choices that affect appearance. Because of that there can be a significant value add via the intermediary (retail layer). Authority and loyalty can be built around this necessary service layer and it’s what Amazon and the mass market will struggle with after they have gobbled up the lion’s share of less considered beauty categories.

Necessary service is the early moat for new entrants and stores before the addition of more exclusive beauty brands (owned or 3rd party) with distribution that avoids mass channels and Amazon.

As a dude who buys deodorant and soap, wears no cologne and abandoned razors in 2014, I can appreciate the category, but I’m not sure you’ll see me launch RougeZilla any time soon.


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