In general, 2016 was a bad year for America’s retailers. Even with employment on the rise and a slight increase in wages, consumers turned their backs on many brick and mortar locations, causing some of the industry’s biggest names to announce store closings.  A long list of brands have decided to cut costs by closing underperforming locations like Macy’s, Kohls, Walmart, Aeropostale, Sears and Ralph Lauren.  Others have opted to file bankruptcy, like the The Limited which was one of the strongest chains in malls at one point, and Sports Authority.  The trend has even spread to shopping malls as property managers continue to close locations or sell structures for pennies on the dollar.

Customer habits have shifted—people prefer buying clothes online at Amazon rather than brick and mortar stores at the mall. But despite this change that has been so detrimental to many traditional US retailers, the cosmetics industry has been a rare bright spot for an otherwise disastrous 2016.  According to market researchers Mintel, the beauty business is forecasted to grow 12% in the US by 2020.

Makeup has been an especially strong retail product line in the last few years. Top industry names like Ulta, e.l.f., and Sephora have proven that brick and mortar locations can succeed in this modern market.  Ulta and e.l.f have a history of double-digit sales growth.  Sephora, owned by luxury brand parent Moet Hennessy Louis Vuitton, experienced double-digit growth in both sales and profits in 2016.

So why aren’t online retailers sucking up the business of physical makeup stores like they’ve done to others? Some of it can be attributed to the shift in culture: we are now in a selfie generation, and social media (especially Instagram) has made looking good on camera more important than ever. But retailers like Sephora and ULTA also have rewards programs that accounts for much of their sales. Why would someone buy makeup from Amazon when they can’t get the benefit of points? Points and rewards help create a loyal customer base, so every time a tube of mascara runs out, they’ll keep going back to the same place with hopes of getting some freebies with those racked-up points.

Another reason: makeup retailers offer a better experience now than ever. It used to be that beauty shoppers only had the choice between a no-frills drugstore or a fancy department store. New retailers have found the happy medium, offering a wide variety of brands, trendy store design, and products for all price points.  And then there is the accessibility. Shoppers can test out the products for themselves, offering a compelling reason for the consumer to actually go into those stores. So while a customer waits in line to try on clothes at the Gap, a customer at Sephora can walk in, try on a few shades of lipstick, and send a selfie to their friends asking which is the most flattering as quickly as they would like.

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Source: Bloomberg

An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

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