Coty warns of softer US beauty demand as drugstores’ challenges hit sales

The news: US beauty demand is weakening, Coty warned, as retailers cut back on wholesale orders in the face of uncertain demand.

• That drove the CoverGirl manufacturer to miss growth expectations for the quarter ended September 30: Like-for-like sales grew 4% to 5% year over year (YoY), the company said, falling short of the 6% consensus estimate.
• Coty now expects like-for-like sales to grow “moderately” in the next quarter, due to retailer caution and an “incrementally slower US market.”

The problem: As Coty sees it, its biggest headwind in the US is not consumer demand but the challenges that retailers—particularly drugstores—are facing as they try to manage costs and keep inventories lean. Per Coty CEO Sue Nabi and L’Oréal CEO Nicolas Hieronimus, the broader mass beauty slowdown can be linked to wholesale pressure from drugstore chains, which are struggling to navigate growing competition from mass merchants, ecommerce marketplaces, and specialty retailers, as well as mitigate the fallout from their heavy-handed loss-prevention tactics.

• Roughly 3,000 fewer drugstores were open for business at the start of this year compared with the same period in pre-pandemic 2019, per RetailStat data cited in The Wall Street Journal.
• That number is set to spike given that Walgreens announced plans to close 1,200 stores over the next year, and CVS Health is in the midst of its own cost-cutting push.

Seizing the opportunity: As drugstores’ influence wanes, ecommerce and specialty retailers are picking up the slack. Amazon in particular emerged as a heavyweight, with the company expected to overtake Walmart as the US’ top beauty retailer by 2025, per Morgan Stanley.

• We expect online cosmetics and beauty sales to grow more than twice as fast as in-store sales this year, in part due to efforts by Amazon and Walmart to broaden the selection of brands—particularly premium ones—offered on their marketplaces, as well as sales events like Amazon’s upcoming Holiday Beauty Haul.
• Meanwhile, specialty retailers are thriving: Sephora gained share across all of its markets in Q3, parent LVMH said. The retailer benefited strongly from the rise of “Sephora tweens,” who prefer shopping and testing products in-store, as well as the strength of its loyalty program—not to mention the wide array of products it offers across categories and price points.

Our take: Beauty demand is normalizing after years of outsize growth, but consumers of all ages continue to display considerable willingness to splurge on the category.

• Demand for prestige beauty in particular remains robust: Dollar sales rose 8% YoY in the first half of 2024, per Circana, as shoppers invest in high-quality, effective products.
• And despite the headwinds facing the mass beauty category, there are plenty of opportunities for growth, particularly in channels outside of drugstores: For example, e.l.f. Beauty built a thriving business in part by capitalizing on consumers’ desire for dupes of their favorite premium products, but also by embracing platforms like TikTok Shop, and moving aggressively to grow its presence in mass retailers like Walmart and Target.