Desperate to get shoppers in the door, department stores are discounting the one item they had long been able to sell at full price: cosmetics.
Last month, Lord & Taylor offered 15% off almost all cosmetics and fragrances. Bloomingdale's gave members of its loyalty program a $25 reward card for every $100 beauty purchase. The moves followed a decision by Macy's Inc. to offer 15% off cosmetics, which it touted in nationally televised advertisements this spring.
"We've seen our competitors start to discount items like cosmetics, and I'm sure they're saying we're doing it," said Jerry Storch, the chief executive of Saks Fifth Avenue and Lord & Taylor parent Hudson's Bay Co., on a conference call last month. "Once you get into that kind of a situation, everyone is fighting for every inch."
A decade ago, shoppers would have been hard-pressed to find any Estée Lauder lipsticks, Bobbi Brown mascara or Shiseido blush on sale. These "prestige" brands are sold mainly at department and specialty stores and tend to be pricier than the so-called mass cosmetics sold at drugstores.
Department stores have long given prestige cosmetics prime space on the ground floors of their stores, and the brands confined their distribution to these emporiums.
But the retail landscape has shifted. Shoppers are increasingly skipping the mall to buy online. Specialty chains like Sephora and Ulta Beauty Inc. are siphoning away customers. Brands such as Estée Lauder, Clarins and Dior now sell to such chains as well as through their own websites.
Sales of prestige makeup in the U.S. are growing, totaling $8 billion in the 12 months to May, an 11% increase over the same period a year ago, according to market-research firm NPD Group Inc.
But department stores' share of the market fell to 19% in North America last year from 23% a decade ago, according to Euromonitor International data analyzed by Bernstein Research. Over the same period, specialty beauty retailers increased their share to 20% from 14%.
Katie Fitzgerald usually buys her cosmetics at Sephora, but was recently at Macy's near her home in Haymarket, Va., when she happened upon a departmentwide sale.
"I thought, 'Oh, look, cheap makeup,'" the 17-year-old said. She bought a Smashbox contour palette. "I figured I might as well since I was there anyway."
Some department-store industry executives say discounting is a short-term fix. While promotions initially encourage shoppers to buy, they can damage brands over the long term. And because shoppers soon become numb to the deals, retailers are forced to offer ever-deeper price cuts.
"Department stores shoot themselves in the foot when they do this," said Michael Gould, a former CEO of Bloomingdale's, who ran the upscale department store chain for 23 years until his retirement in 2014. "It's like they're putting themselves on drugs."
Estée Lauder Cos., L'Oréal SA and other major cosmetics makers declined to comment on the recent pricing moves. A Macy's spokeswoman said the retailer is using discounts but also looking at other ways to bolster beauty sales, including a loyalty program it will introduce this fall and by reconfiguring its departments to make them easier to shop.
Sephora -- a unit of LVMH Moët Hennessy Louis Vuitton SE -- and Ulta have done a better job of appealing to younger shoppers with open-sell formats that allow customers to try products without the help of sales associates and to mix and match different brands, analysts say.
The shift has upended the pricing dynamics since stores like Sephora and Ulta tend to display prestige brands alongside more mass labels. "The pricing halo around prestige gets eroded because it gets muddled with the rest of the category," said UBS analyst Stephen Powers.
Sephora and Ulta offer discounts, too, but they are less frequent and tend to be restricted to their loyalty programs, according to spokeswomen for both chains. Sephora, for instance, holds two sales a year for its "Beauty Insiders" members.
Apparel manufacturers bear the brunt of any discounts by agreeing to guarantee department-store margins. Beauty brands have no such agreements, meaning that any price reductions come out of the retailers' pockets.
Macy's -- which also owns Bloomingdale's -- blamed a decline in first-quarter gross margins partly on increased promotional activity in its beauty business. To combat the problem, Macy's is borrowing a page from Sephora. It now has open-sell areas in its cosmetics departments in roughly half of its 670 stores.
"It's a disease that retailers have to discount more to make the sales numbers," said Barbara Zinn Moore, who was Lord & Taylor's vice president of cosmetics and fragrance from 2001 until last month. "But how else do you get the sales growth?"
Write to Suzanne Kapner at Suzanne.Kapner@wsj.com and Sharon Terlep at firstname.lastname@example.org
(END) Dow Jones Newswires
July 10, 2017 05:44 ET (09:44 GMT)