Beauty & Wellness Briefing: Why physical retail is bouncing back

After nearly two years of exceptionally strong e-commerce sales, beauty and wellness companies bring their focus back to stores.

When Shopify cut 10% of its staff last week, CEO Tobias Lütke shared that the company took a risk in betting on a permanent shift of sales to e-commerce, and failed.

“Before the pandemic, e-commerce growth had been steady and predictable. Was this surge to be a temporary effect or a new normal? And so, given what we saw, we placed another bet: We bet that the channel mix — the share of dollars that travel through e-commerce rather than physical retail — would permanently leap ahead by five or even 10 years. We couldn’t know for sure at the time, but we knew that if there was a chance that this was true, we would have to expand the company to match. It’s now clear that bet didn’t pay off,” he said in a Shopify statement.

Lütke said the company’s growth is still meaningful, but it doesn’t measure up to the chunk of sales he had hoped would come from brick-and-mortar. And the pains that Shopify is going through are indicative of the larger landscape’s flight to physical retail.

E-commerce sales flatline
“E-commerce sales are beginning to stall out. One of the things that we’ve been saying now for several months to our clients is that we are definitely seeing the rate of growth slow,” said Polly Wong, president of Belardi Wong, a direct marketing and creative services agency that works with DTC brands.

Wong continued, “The thing to remember is that, before the pandemic, 88% of all retail sales were in stores and 12% were online. Now even coming out of the pandemic with a huge surge in online sales, we’re still seeing that retail sales are about 80% stores and 20% online. We’ve seen a shift, but [sales are] still significantly in the stores.”

Long DTC stalwarts aren’t ignoring those signs any longer; see Glossier’s permanent partnership with Sephora. And as physical store sales remain strong, beauty and wellness companies are working to improve those experiences. 

Experiential retail is back
Ulta Beauty, for instance, has been retooling its front-of-store experience to better reflect changing customer behavior. “We are in the process of rolling out a refreshed front-of-store experience rooted in newness, curated stories and campaigns to improve the overall store navigation,” said an Ulta Beauty spokesperson. “The evolved physical brand touchpoint delivers a new ‘wow’ experience that thoughtfully unlocks greater opportunities for discovery and storytelling throughout the entire store … creating an even more cohesive experience from the visual components to intuitive merchandising of adjacent categories. Guests will now find exciting, new navigation with a consistent approach to showcasing categories, products, themes and promotional moments.”

Reportedly, a mix of legacy and indie brands will be found in the front-of-store designation, which will be especially helpful to new indie brands looking for greater awareness. Typically, those brands are reserved for the retailer’s Sparked section, home to its emerging brands.

“Experience” seems to be the keyword that companies are flaunting when it pertains to physical locations. 

“We always say that we’re not really selling nails, but we’re selling the experience and how someone feels when they’re [at our salon],” said Lauren Dunne, co-founder and CEO of Varnish Lane, a natural, waterless nail salon company that also sells products. ” I wanted to create something that was clean, safe, beautiful and a really relaxing environment. The goal is for it to feel more like a home and less like a nail salon.”

Varnish Lane, which has a foothold in the D.C. area with four locations recently expanded in the Southeast to Charleston, South Carolina; Charlotte, North Carolina; and Atlanta, Georgia. More locations are in Varnish Lane’s pipeline in new developments, where its nail salon can be an anchor to a building. “We’ve looked at projects that are underway, that we can get into and sign leases fairly early on,” said Dunne.

Leaning into landlord flexibility
Though residential renters face opposition in finding affordable housing, retail businesses are finding more favorable opportunities especially if there is an “experience” attached.

“We want to have the opportunity to have a real footprint and interact with people. And the other goal is to be able to have a physical expression of all the very exciting things that [customers] want to do on our website,” said Lena Korres, co-founder of Korres. The brand opened its first store in New York City in May. Korres called the store a “Greek party.”

Korres found its space on Elizabeth Street after five years of looking for a location for its flagship; it began renting in the summer of 2021. “We always wanted to be on that specific strip. We feel it has the right vibe for our brand, but you could never find a location there,” she said. ”With a pandemic, it was possible to find a location, and we went for it.”

While there may be no such thing as “post-pandemic” anymore, Dunne said New York landlords are still more willing to flex on lease terms, such as a percentage of monthly revenue instead of a fixed rate. However, the Southeast is another story.

“New York is a different beast than the other markets that we’re looking at. There are a lot more empty spaces sitting in New York than there are in Washington, D.C. and some of these cities in the South,” said Dunne. “ In Atlanta, Charleston and Charlotte, there are more strip mall centers, as opposed to city block buildings or high rises, so you are running into more exclusivity agreements that landlords have with previous tenants. If the right space opens up, you’ve got to try to jump on it.”

For its part, Varnish Lane, which is in the middle of fundraising for its Series A, is looking at spaces in Florida and Texas. Dunne is not concerned that the current recession will have damaging effects on fundraising efforts or the company’s greater store rollout.

“Consumers are shifting spend from buying products online at an unprecedented level to [investing in] experiences. This has driven two trends in the past three to six months: Service retailers that survived Covid are now starting to scale significantly and attract a lot of interest from investors, while product businesses’ growth is slowing due to the slowdown in DTC. That has created a higher bar for investment activity in those product businesses,” said Jeremy Triefenbach, co-founder at Stage 1 Financial. Varnish Lane is a Stage 1 client.

Marrying product with experience
Still, some companies are toying the line between both experiential and product models. Facile, a dermatology and skin-care boutique that has two locations in L.A., has been looking at real estate in New York while also growing its product business. Because dermatologists are at the core of Facile’s DNA — clients only see physicians when getting a treatment — it’s not just about finding the right space at the right price, but it’s [also about having] the right physicians that buttress a location, said co-founder and CEO Danielle Nadick Levy. “We’re not trying to have hundreds of locations like Dry Bar,” she said.

The Facile product line, meanwhile, launched in September 2021 and sells at Revolve and Anthropologie. It accounts for about 30% of total revenue; eventually, Nadick Levy said, it could account for 70%. Facile is also in talks with larger brick-and-mortar locations.

“Our CPG side has potential to be even larger than retail, but it’s an outgrowth of what we do well at retail,” said Nadick Levy. “There is an advantage of having your own retail experience because you can touch, feel, see and be educated about the product. And because it’s happening alongside our treatments, it becomes very intuitive.” With additional reporting from Liz Flora

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