The rise of Sephora gives a new gloss to the lipstick effect

The “lipstick effect” did much for Estée Lauder during the pandemic. This was the term coined by Leonard Lauder, the skincare and beauty group’s chairman emeritus, for the notion that people spend more on affordable luxuries such as lipstick when economic times are tough.
On Monday, the gloss appeared to have come off. Estée Lauder said that it expected its annual sales to fall by as much as 1 per cent or to rise by only 2 per cent, well below analysts’ estimates of a 6.4 per cent increase. The demand for lipsticks and perfumes, widely considered to be recession-proof, has taken a hit, with the group expecting further woes in China.
Yet the picture is not universally gloomy. In Britain, the third largest cosmetics market in Europe after France and Germany, shoppers continue to splash out on cosmetics and skincare. The beauty industry was worth an estimated £26.7 billion in 2022 to the UK economy and this looks set to grow.
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“In 2024, we’ve seen that the European beauty market has continued to outperform other consumer segments and so you’re still seeing double-digit growth across the industry overall,” Ashley Wallace, an analyst at Bank of America, said. “To be able to get small joy out of purchasing some sort of beauty product has allowed the industry to remain relatively resilient.”
There is a notable difference, too, from the environment during Covid, when people turned to digital platforms to seek out beauty products to perk up periods in lockdown. Physical retail is coming back into fashion and some of the companies making the biggest gains have focused on their in-store customers as shoppers go in search of a more personalised experience.
Among them is Sephora, which closed its six British stores in 2005. Last year the beauty retailer returned to the UK and today it operates three stores in Manchester and London, with plans to open a fourth in Newcastle in September.
“We’ve seen the closure of many department store doors and those are the doors that traditionally people would go to to buy a lot of their premium beauty,” Sarah Boyd, the managing director of Sephora UK, said. “So, with Sephora entering the market, the whole shape of the market has changed quite a lot.”
Founded in Limoges, France, in 1970, Sephora sells a range of beauty and cosmetics brands, including its own products. Owned by LVMH, the luxury goods conglomerate, the company has about 3,000 stores in 35 countries and employs 46,000 or so people.
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With its limited number of stores in the UK, more than 80 per cent of its sales in the country are made online, but it is intent on expanding its network of stores. “You can have access to our products online and, yes, we’re going to do a fantastic job of getting products to you very quickly,” Boyd said. “You can come and have that physical experience, which is why we’re seeing demand before the stores open.”
Space NK is another beauty retailer that has had success in the British market. Founded in 1991, it has more than 100 stores in the UK, the Republic of Ireland and the United States. It reported sales of £146 million for the year to March 25, 2023, and a pre-tax profit of £2.3 million.
Boyd puts the success of the British beauty industry down to the desire of brands and retailers to create consumer demand. “I think that idea of constant evolution and constantly pushing the boundaries is something that you see in the beauty industry perhaps more than some others,” she said.
Sephora and Space NK aren’t the only companies making strides, Wallace noted. L’Oréal has reported strong half-year results, particularly in its European division. The company, which owns the Maybelline and NYX make-up brands, achieved a 7.3 per cent increase in sales during the first six months of this year to €22.1 billion, with an 11.1 per cent growth in revenues in Europe.
“For L’Oréal, it’s a similar dynamic, where in Europe this continues to be one of the markets that has held up well and is delivering double-digit growth, well above the longer-term history of the beauty industry in Europe,” she said.
Of course, personal beauty budgets are finite and while some companies are thriving, others have struggled to persuade customers to open their wallets.
In February The Body Shop announced it had been put into administration only months after it had been bought by Aurelius, a private equity firm, for £207 million. The make-up and skincare brand made famous by Dame Anita Roddick for its focus on ethically sourced products had undergone restructuring as it sought to stay open after its sales slowed following the pandemic.
“I think there’s an interesting question about the retail experience and it always struck me that The Body Shop was always a brand that was best experienced in person,” Becky Willan, the chief executive of Given, a consultancy business, and a former environmental manager at The Body Shop, said. “At a time when direct-to-consumer is really booming and you have a whole new generation of people who are way more knowledgeable about ingredients than ever before, what does that mean for the in-person experience?”
Wallace argued that brands such as Space NK and Sephora, which place high importance on a customer’s in-store visit, had proved themselves in recent years. “I think compared with some other retailers that have pushed more the offline-to-online shift, there is a much bigger emphasis from Sephora to bring those customers back in store. Obviously during Covid there was a big increase in online penetration, which has almost completely unwound across the broader consumer landscape.”
In its half-year results LVMH singled out Sephora as one of its highest-growth brands, with “double-digit growth in revenue and profit”.
In contrast, some brands that have focused heavily on their online sales model and have moved away from innovations and a focus on customers have struggled. This month Morphe, an American beauty label, said that it had closed all its UK stores with immediate effect.
“You’ve had quite a number of retailers in the UK launch beauty as part of their online offering — you saw that happen at players like Farfetch and Asos — to see if the consumer was willing to put an extra lipstick or nail polish into their basket, as that was supposed to be a driver of incremental revenues for those players, “ Wallace said. “Actually, we’ve seen that those companies ultimately de-emphasise this strategy.”
Willan concluded: “Of the beauty brands that really thrive in this next chapter, some of them will be direct-to-consumer and totally digital, but I think recapturing the experience that you can only get through in-person interaction will be really important.”