The 21st-Century Drugstore: US Drugstores Fighting for Share in a Shifting Beauty Market

Drugstores: Fighting For Share In A Shifting Beauty Market

Beauty and personal care is one category that is seeing buoyant performance while most other retail categories are going through a difficult time. In this report, we examine how drugstores are positioned to be a leading channel in beauty and personal care sales.

This report is the first in our 21st-Century Drugstore series. Further reports will cover topics such as catering for senior shoppers and how pharmacy retailers can serve consumer demand for wellness products and services.

Americans will spend $89 billion on beauty and personal care products this year, some $3.9 billion (or 4.6%) more than they did last year, according to Euromonitor International data. And $13.2 billion of that total will flow through drugstores, we estimate, making the sector the second-biggest channel for beauty and personal care products after grocery stores. We think there are opportunities for drugstores to bolster their share in the category, despite already enjoying an impressive slice of sales.

While sales of some discretionary categories, such as apparel, have faltered, beauty and personal care has gone from strength to strength. As we chart below, growth in category sales have tended to outpace total retail sales in recent years—and certain beauty subcategories, such as color cosmetics and male grooming products, have performed much more strongly.

Drugstores Capturing 15% of Sales

Drugstores are already the second-most-popular channel for beauty and personal care purchasing, accounting for roughly 15% of category sales, behind grocery retailers’ 22%. In the fast-growing color cosmetics subcategory, drugstores enjoy an even higher share, of 18%. And drugstores capture 16% of sales in the high-growth men’s grooming category.

Given these existing strengths, where are the opportunities for drugstores to maintain or grow their share?

Capitalize on Department Store Difficulties

A slew of disappointing trading updates bear witness to the struggles that department stores are experiencing in the face of heightened competition. The sector’s difficulties have been reflected in negative underlying growth at a host of department store names and have spurred Macy’s, Sears and JCPenney to implement store closure programs—and closure programs will only dent the sector’s share in beauty.

Exciting shoppers with new brands, as Walgreens and other drugstore chains have done, is one way competing retailers can muscle in on the gifting and treating occasions on which department stores thrive.

Capture Share Online

It is almost superfluous to note that e-commerce is the fastest-growing channel in beauty sales. US consumers spent some $7.2 billion online on beauty and personal care products last year, according to Euromonitor; this equated to 8.5% of total category spending. In the face of aggressive competition from Internet-only players such as Amazon, Birchbox, Dollar Shave Club and Ipsy, brick-and-mortar retailers do have one competitive advantage: they can offer in-store pickup. Walgreens launched a pickup service late last year, while CVS Health rolled out its CVS Express collection service across 2016. Moreover, these major drugstore players are leveraging mobile apps to integrate shopping, loyalty programs and mobile payments.

Encourage Cross-Category Purchasing

Drugstores can also leverage the shopper traffic they enjoy from healthcare to boost beauty sales, and they can encourage customers looking for everyday toiletries to consider buying beauty products from them, too. Loyalty programs have a role to play here. In late 2016, Walgreens launched a new Beauty Enthusiast “club” within its existing Balance Rewards loyalty program. CVS has offered a beauty loyalty program since 2011.

Understand Millennial and Gen Z Beauty Shoppers

Millennials (those born between 1980 and 2000) and Gen Zers (born after 2000) will grow in importance as beauty consumers in the coming years—and retailers will need to stay attuned to their demands. Fung Global Retail & Technology has covered these demographics in depth, including in our reports The Millennials Series: Millennials and Beauty and Gen Z and Beauty—the Social Media Symbiosis. We identify a number of characteristics that typify these shoppers, including:

• Millennials are frugal, in part through necessity. Perhaps surprisingly, this age group spends less on beauty products than older age groups do. Millennials are more likely than older shoppers to both visit different stores in order to get the best deals and use coupon codes when buying beauty products. However, millennials are now aged 17–37, which means they are entering their peak earning years–so, this frugality may ease off. This generation is more likely than older generations to research beauty products online and to use social media more actively as part of the shopping experience. Accordingly, brands and retailers must consider how they can resonate with this demographic through online channels and perhaps through initiatives such as online couponing.
• Gen Z consumers are growing up alongside the development of social media. That means Gen Zers are the first generation to grow up documenting their lives online and seeing into the lives of celebrities and self-made social media stars. We think this makes Gen Z the most self-conscious generation ever, and the pressures regarding appearance and body image are prompting kids in their teens and even younger to use cosmetics and other beauty products. This generation is also leading the charge to social media and, especially, online video for research on beauty products. Brands and retailers will need to consider their online engagement strategies as this generation matures into fully fledged adult consumers.

The outlook: Opportunities to Seize Share

With beauty retail in a state of flux, there are pockets of opportunity for those drugstore retailers that are able to adapt. Retailers can capitalize on department stores’ woes and work to grab share in the e-commerce channel. At the same time, drugstores must keep an eye on future customer demands in order to sustain growth: as millennials’ spending power grows and Gen Zers emerge as consumers, retailers must appreciate their demands in order to fully serve them as beauty shoppers.