How two Melbourne entrepreneurs stole the beauty market

http://www.afr.com/rich-list/how-two-melbourne-entrepreneurs-stole-the-beauty-market-20210603-p57xuf

To put that into context, research from Investors Mutual estimates Myer generates about $500 million of its $2.1 billion in revenue from the critical beauty segment.

Such is Mecca’s success that Horgan and her husband, Peter Wetenhall, debuted on the 2021 Financial Review Rich List with an estimated wealth of $658 million.

The beauty market is estimated to be worth $11 billion and growing. Much of that growth is coming from online: Adore Beauty’s sales jumped 84 per cent in calendar 2020. Even Myer is getting some eye-popping online growth – more than 30 per cent of its sales are now online and the beauty segment grew 150 per cent in the year to January 2021 as consumers swapped the shops for keyboards, in part due to lockdowns.

One brand owner, who declined to be named, said their research showed Myer remained a big player in beauty, as was Sephora and discount chain Priceline. But they cut a deal with Mecca, despite its demands for exclusivity, because it was a beauty destination at the premium end of the market with “staff who educate the customer, which is what you want in a retail partner”.

Veteran beauty entrepreneur Poppy King, who sold her popular line of lipsticks to Estee Lauder in 1998, says Australia does not have the consumers to support so many players.

“Australia is an anomaly. It’s a sophisticated market but with a smaller population. It simply can’t hold as many concepts in retail as a bigger population can,” King says.

When Poppy King launched her new lipstick brand she chose to sell it through Mecca over Myer.  

King launched her first range of Poppy lipsticks into what was then Grace Bros and David Jones in 1992. But when she launched her next business, Lipstick Queen, in 2006, she decided to sell them exclusively with Mecca.

King says Mecca offered “a much more level playing field in terms of expenses”.

Department stores provide scale but it comes at a cost. “It’s a very expensive, time-consuming model – you compete in your real estate, you compete for advertising space,” she says.

“It’s counter selling, and that’s a very expensive model you can’t support unless you have a great deal of financing. You’re selling to the department store as well as to the customer.”

Morris, a former Young Rich Lister who, alongside husband James Height, collected $92 million when Adore floated last year, worked at the Clarins counter at Myer while studying at university. She noticed the department store was not particularly customer friendly; it was difficult for customers to shop across brands and access information.

“Counters, for example, make the customer come and ask permission to take things off the shelf,” she argues.

“The staff were not trained across multiple brands. The business model was that the counter staff are paid for or subsidised by the brands. The whole idea is to put barriers up and limit the amount of information a customer can access.”

While she has enjoyed enormous success taking a start-up from a Melbourne garage to the ASX, the business is now under pressure.

Adore, being purely online, never had to close stores during lockdowns. Sales boomed, delivering it its first $100 million year as more consumers splurged on at-home self-care. But its shares are now trading about 40 per cent below their $6.75 issue price as investors question its ability to continue its fast-paced growth in the face of growing competition.

Department stores spend big

Conn says that under new chief executive John King, Myer is starting to better execute its beauty proposition. There are fewer brands and Myer attracts quality global brands that like the scale a department store brings, along with the protection from heavy discounting that can occur in discount pharmacies.

Adore Beauty’s Kate Morris: “Beauty is not about unattainable standards.” Arsineh Houspian

“Myer is having a lot of success with their loyalty program too – the MYER one card is a big drawcard,” Conn says.

And just as many consumers can find department stores intimidating, Conn argues many older women feel similarly about Mecca. “They like to spend on beauty too and don’t feel as comfortable in Mecca.”

David Jones and Myer are pouring millions into reviving their beauty floors. David Jones spent more than $420 million (a cost shared with luxury suppliers such as Gucci, Chanel and Dior) refurbishing its flagship Sydney beauty and accessories hall, only to have a global pandemic interrupt its plans for reopening. Myer has been pushing a more brand-agnostic approach, with in-store “beauty emporiums” that have greater emphasis on young, social media-oriented companies such as Alpha-H and Vida Glow.

Mecca follows the model of European stores such as Space NK – it takes care of not just the sales but also the marketing and distribution for its brands. Those brands are largely locked in exclusively, with a few exceptions such as Estee Lauder and Clinique.

Part of the success of Mecca and Adore is making the segment more accessible and fun. Adore Beauty produces two podcasts: Beauty IQ and Skincare School.

“Beauty is not about unattainable standards,” Morris says.

“It can involve some funny, embarrassing things. The first podcast was about laser hair removal and one of the hosts mentioned you could get an anus add-on. I remember thinking, ‘Oh god, are people ready for this?’ But then I thought, ‘This whole industry has been so airbrushed, why shouldn’t we talk about this?’”

The pandemic has yet again forced Mecca to shut some of its physical stores. But it has been able to keep up its “experience”. Lockdowns triggered fresh innovation. It started to offer virtual skincare appointments, make-up classes and tutorials.

COVID-19 has delivered other challenges. It hit just as Mecca ramped up bricks and mortar expansions and it was forced to secure additional finance to ride it out.

Horgan had to open her flagship Sydney store while locked down in Melbourne. Nevertheless, it opened and across its whopping 1800 square metres are service offerings such as ear-piercing, facials, injectables, brow shaping and blow dries.

And while the department stores mount a fightback, they face their own challenges.

“Department stores have an inventory problem and a real estate problem,” King says.

“The idea used to be that you had to have these enormous stores to capture foot traffic, but the weight of carrying that real estate when you can sell online doesn’t work out any more – they topple under their own weight.

“Personally, I’d love to see a revival of the big department stores. I truly love them, and when they’re done well, they have a very distinctive feeling. It’s a wonderful experience.”

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