Think Tank: Could Amazon Be the New Sephora for Brands Trying to Get Noticed?

There was a time when, in order to buy new lipstick or moisturizer, consumers had to approach a beauty counter at a department store and talk to a consultant. Luxury was the name of the game — all posh and a bit intimidating. If you were a small skin-care or makeup line trying to build a name for your brand, it was an expensive market to break into, fueled by a “you can’t sit with us” mentality and the cost of hiring your own personnel and paying for expensive fixtures.

Then came Sephora, opening its first U.S. store in 1998. If you were a brand that wanted to retain luxury status, Sephora didn’t exactly match your target demographic. The retailer didn’t scream high-end like walking into a Bergdorf Goodman. In addition, for beauty brands, looking beyond the department store models to Sephora’s shelves meant sacrificing space in luxury stores that had been coveted for so long.

While luxury brands hesitated about expanding into Sephora, new brands entered the market. Sephora became the open door for aspiring beauty entrepreneurs, and when it took off, department stores started to lose that beauty traffic. Many of the new brands that pursued Sephora — such as Benefit Cosmetics and Urban Decay — became the household names we know today.

Not only did Sephora give new independent beauty brands an opportunity to sell their products, but consumers also loved this new way to purchase beauty goods. So much so that department store beauty counters haven’t quite recovered. It was clear that Sephora’s no-fuss, open-format approach of letting consumers touch, feel, and test makeup — without needing to consult with anyone at the store — was wanted and needed. And if you actually wanted to talk to someone, it would be an individual who was knowledgeable across the brands the store carried.

Beauty History Repeating Itself

There was another retailer getting started in the Nineties that would go on to change the consumer industry. You may have heard of it — a little company called Amazon. Back then, it only focused on books and movies, but fast-forward two decades, and now nearly half of all U.S. e-commerce takes place on Amazon.

Just as Sephora’s shake-up resonated with consumers, the Amazon model drew in millions of customers — 54 million, to be exact. To boot, as of 2016, nearly half of all American households are Prime members. Impressively, three out of every four Americans say they do the bulk of their online shopping on Amazon, and the site is credited with one in every five online beauty purchases. In addition, Amazon reported 40 percent year-over-year growth in beauty sales in quarter two of 2017. Mass cosmetics is Amazon’s fastest-growing beauty category with a 60 percent year-over-year increase.

While it may not be a brand’s dream to be listed on a mass marketplace that sells everything under the sun, one thing is for sure: Amazon’s low barrier to entry for emerging beauty brands is not one to overlook. Be it Saks Fifth Avenue or Sephora, getting your products onto a retailer’s web site and shelves is expensive. And when you’re an early stage brand, it doesn’t always make sense for your bottom line right away. Now, Amazon appears to have taken a page from Sephora’s playbook, allowing little-known beauty brands a new platform to enter the industry.

None of this is to say that up-and-coming beauty companies should never distribute at Sephora if given the opportunity. Unlike department stores, the company is still thriving in a confusing retail landscape, even with top competitors on its tail like Ulta. Also, according to several indie beauty brands, the Sephora team offers quite a bit of support. But as Sephora has grown in its own right, it has become more difficult for independent brands to access those coveted shelves.

Even if direct-to-consumer e-commerce is the ultimate goal, taking that route right away usually means spending a significant amount of money to build a website, market your brand, attract consumers, and then convert them into purchases. Likewise, one-click checkout, quick and free shipping, product recommendations, and review capabilities are all features that — without the right kind of guidance — take hours, months, and years to develop as an e-commerce brand. And there’s no guarantee people will use them. Without question, all this work comes with high costs and risks.

Meanwhile, Amazon offers built-in audience and traffic. Sure, you’ll have to give up some of your margins, but it’s worth the comparison to your direct customer acquisition cost. Amazon, of course, will never have the full brand experience your consumers receive on your app or web site, but it’s still important to be in the right place at the right time — as seen in Amazon’s customer-driven searches.

Taking the E-commerce Plunge

If you sell your products on Amazon first, you’re doing business within a proven system. As that machine does its job and helps you earn cash, you can simultaneously devote time and money toward building and testing your own direct-to-consumer platform, as well as extending your capabilities to improve customer service processes for the next phase of your business. Simply put, Amazon buys you more time to get it right.

While Amazon might not be the right answer for every product, it can be a smart choice for young companies that don’t have the means to raise enough capital to build a direct-to-consumer brand. A shining example is PCA Skin, one of our company’s investment brands. Once a clinical skin care line that could only be purchased after seeing a certified PCA Skin aesthetician, the brand’s products are now accessible via its own website and through Amazon. By partnering with Amazon, PCA Skin saw an opportunity to control its online presence, all while avoiding price markdowns by unauthorized third-party resellers.

Many household names in beauty haven’t made the switch to Amazon yet, but it’s only a matter of time. This is the window of opportunity for startups to take advantage of a platform that can set them up for success. Think about it this way: Where would Benefit Cosmetics or Urban Decay be now if they hadn’t capitalized their promising chances at Sephora? If you want to follow the money and the e-commerce foot traffic, Amazon is the place to start.

When will you take the plunge?

Sonya Brown is a partner at Norwest Venture Partners, with more than a decade of investment experience. She focuses on investing in consumer products, e-commerce, consumer and business services, retail, restaurants and franchise concepts. Brown is also a major advocate for female entrepreneurs, and she has a track record of investing in several female-founded companies. Her current investments include Bailey 44, Kendra Scott Design and The Learning Experience. Brown is responsible for Norwest’s investment in PCA Skin (acquired by Colgate-Palmolive), and she is a board observer at Madison Reed.

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