This is why specialist beauty retailers might be your next investment

  • The shifting trend poses another threat to department stores

  • The UBS research noted that L'Oreal outperformed all other tracked multinationals, but it warned that its year-on-year momentum seems "mixed"
Fabrice Dimier | Bloomberg | Getty Images

Consumers in U.S., Europe and the U.K. are increasingly favoring specialist retailers when purchasing their beauty products, a UBS report showed Monday.

The shifting trend in consumer habits poses another threat to department stores at a time when they're already being impacted by a growing preference for online shopping.

"We see scope for a channel shift in favor of specialist retailers. 23 percent of consumers surveyed are planning to purchase more items at specialist stores, the highest rate among all the channels covered in our survey," UBS analysts said in its "Who's winning with specialist retailers" report, which covered data from eight million records.

Specialist beauty retailers include L'Oreal, Sephora, Boots and Estee Lauder. They offer make-up, perfumes and skin care products with a more hands-on experience than traditional department stores. According to UBS, they make up between 15 and 20 percent of the $440 billion global beauty market.

Studies show that millennials are increasingly more interested in experiences.

This preference for specialist stores is set to hurt some retailers. "This shift is likely to come at the expense of department stores, supermarkets, and pharmacies, where 12 percent of consumers are planning to spend less going forward," UBS analysts added in their report.

Growing online retail sales are already hurting key department stores as fewer people opt to go these facilities when purchasing goods. Shares of the U.S. department story Macy's dropped as much as 17 percent last May after reporting lower-than-expected earnings and sales. The famous U.S. retailer has struggled to keep up with growing off-price brands and e-commerce giants, including Amazon.

In the U.K., department store John Lewis announced slashed its staff bonus pool in January to invest in its online operations after 40 percent of its Christmas sales were made online.

Moreover, according to Credit Suisse, nearly 9,000 stores in the U.S. with 147m square feet of retailing space could close down in 2017.

Which specialist retailers?

The UBS research noted that L'Oreal outperformed all other tracked multinationals and it grades it with a buy. However, it warned that its year-on-year momentum seems "mixed."

"Its availability has improved significantly in the U.K. and Europe, but this has not always translated into share gains in the top-10 bestseller lists. In the U.S., it has seen mixed momentum across categories, with performance deteriorating in hair in June," UBS said.

Estee Lauder is apparently a "strong challenger" to L'Oreal. It's popularity among U.S. consumer for skin care products and UBS believes its year-on-year momentum has been improving in most markets. "The company is performing increasingly well in makeup across multiple markets," UBS said, "but the decline in department stores is likely to partially offset it."

According to Business of Fashion, an online publication, only one third of Estee Lauder's total growth depends on its own stores. The brand has opened its own retail stores in many department stores and tourist areas. By contrast, L'Oreal has opted for boosting its own makeup brands.

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