The Issue: CVS Goes Upmarket

The drugstore chain is defying the recession and opening adjacent high-end shops for luxury cosmetics brands that shun its own mass-retail shelves

For more than a decade, executives at CVS (CVS) have tried to convince the makers of pricey cosmetics, skin care, and fragrances to offer their products to the drugstore giant. But the gilded brands, traditionally found only in department stores or specialty stores like Sephora, were reluctant to tread into the mass market.

So Mike Bloom, senior vice-president of merchandising at CVS, and his team decided to create a brand new retail environment that would be adjacent to its core pharmacies yet offer a totally different shopping experience. "We could not make this work inside our current four walls," he says. "The only way to make this a reality was to accept the fact that these brands need to be merchandised differently."

Dubbed Beauty 360, the concept launched late last year with outlets in Washington, D.C., and Mission Viejo, Calif. CVS hopes to roll out 50 locations this year, and 500 over the next several years. Launching a new retail concept in the midst of today's gloomy economic environment is certainly risky. But Bloom, citing a concept called the "lipstick index," believes beauty products are more recession-resistant than, say, clothing or shoes. Companies such as Estée Lauder (EL) and Elizabeth Arden (RDEN), though, cut their sales and earnings forecasts in January, as consumers have begun to scrimp on their beauty regimens.

While the Beauty 360 stores are just a few months old, Bloom says they represent the evolution of the company's increased commitment to this profitable category. Over the past six years CVS has outfitted its stores with "Healthy Skincare Centers" stocked with European brands, signed distribution deals with outfits including the Finnish beauty line Lumene, and developed its own higher-end beauty brands such as Cristophe Beverly Hills Hair Care and Skin Effects by Dr. Jeffrey Dover. Those moves set the stage for Beauty 360, Bloom says.

CVS was also inspired by Canadian pharmacy chain Shoppers Drug Mart, whose Beauty Boutique stores stock prestige brands such as Clinique and Lancôme, and the British pharmacy chain Boots.

According to Bloom, CVS shoppers had for years expressed a desire to purchase high-end cosmetics and skin-care products in a convenient location with great service. CVS certainly had enough convenient locations—60% of the female population in the U.S. lives within five miles of one of its 6,800 stores. The key was convincing the top brands to work with CVS. "Health and beauty is important to us, but suppliers have refused to sell us whole classes of products," says CVS CFO David Rickard.

Bloom enticed vendors with a retail environment that looks nothing like a CVS drugstore—white tiled floors, brushed-metal walls, and sea-foam color accents. (The stores measure between 2,500 and 4,000 square feet and are connected to adjacent CVS stores via a breezeway.) CVS worked with lighting designers to replicate natural outdoor light so customers can get a sense of how products will look when applied in a "real" setting.

Beauty 360 is also designed to be interactive, with opportunities for customers to learn about and try products prior to purchasing. Trained, well-coiffed sales associates offer a high level of customer service, and the stores will also offer pampering services such as manicures, facials, hand massages, and make-up application. So far, the portfolio of brands appearing in the first two stores include Laura Geller, Paula Dorf, and Coty Fragrance.

CVS has high hopes for Beauty 360. Rickard says that it has "significant potential" and could eventually be a billion dollar business.

Just when Macy's and its ilk are struggling amid the downturn, CVS is moving to lure away their customers

With department stores struggling mightily in the current recession, the decision by drugstore CVS to invade their once-exclusive turf and launch a high-end beauty format comes at a very interesting time, says retail expert Wendy Liebmann, CEO of WSL Strategic Retail in New York. The concept, Beauty 360, bridges the mass beauty items that CVS currently sells in its 6,800 pharmacies with the more exclusive, pricey department store environment.

This has been done before, of course—specialty beauty retailer Sephora has spent the past decade building its presence in the U.S. and just announced plans for a massive, three-story store in Manhattan. Sephora opened the doors for other similar concepts, such as Ulta and Bluemercury. But never before has a massive drugstore chain tried something like this, at least in the U.S. (Canada's Shoppers Drug Mart launched a format called Beauty Boutique eight years ago, which CVS executives admit was an inspiration to them.)

The result, Liebmann says, offers consumers yet another option for shopping for high-end skin- hair-care products and fragrances conveniently located right next door to where they might already get their prescriptions. Having been to both Beauty 360 locations, Liebmann came away impressed by the decor, the customer service, and the overall vibe. "They reflect a European style parfumerie," she says. "It's a very contemporary feeling."

The challenge, Liebmann says, is enticing those so-called prestige brands onto the shelves. Although Beauty 360 boasts brands such as Laura Geller and Paula Dorf, other high-end beauty vendors including Estée Lauder have thus far stayed away. Persuading those brands to sell their wares in Beauty 360 will be instrumental to its future success, according to Liebmann. "Those brands need to feel comfortable coming into a mid-level space," she says.

Still, Liebmann is impressed that CVS has thrown down the gauntlet to department stores such as Macy's (M). (Macy's same-store sales, a key retail metric, declined 4% in December, and analysts expect an even bigger decline for the company's full quarter.) "This is quite a push against department stores at a time when they are the most vulnerable," says Liebmann. "It's very timely."

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