Walgreens takes minority stake in digital makeup company Birchbox, hopes to lure customers with expanded, upgraded beauty aisles

Key Points
  • Walgreens will partner with Birchbox and take a minority stake in the digital beauty subscription company.
  • The pilot program will start in 11 Walgreens stores in Chicago, Dallas, Los Angeles, Miami, Minneapolis and New York.
Source: Walgreens

Walgreens is stepping up its emphasis on beauty products and trying to appeal to millennials in a new partnership with digital beauty subscription company Birchbox.

Birchbox is among a new breed of retailers that tend to appeal more to younger shoppers by sending members monthly, six-month or yearly packages of sample makeup, hair and skin products. Walgreens will experiment with adapting the concept to some of its stores, stocking shelves with more "prestige" makeup brands, dedicating 400 to 1,000 square feet of space to Birchbox and allowing customers to "build your own Birchbox" at Walgreens.

"Beauty is a very important category for Walgreens, and we've been doing a huge amount of work to get ourselves ready for a partnership like this to take us to the next step," said Lauren Brindley, Walgreens' group vice president of beauty and personal care.

The pilot program will start in 11 Walgreens stores in Chicago, Dallas, Los Angeles, Miami, Minneapolis and New York. The partnership will expand online, too, with Walgreens adding a Birchbox section to its website, Walgreens said Wednesday. It will also take a minority stake in Birchbox for an undisclosed amount.

Walgreens will partner with Birchbox to bring the digital makeup company into physical stores. 
Source: Walgreens

Allowing customers to fill a box with beauty products adds a somewhat experiential element to Walgreens stores that could lure more shoppers. Drugstores have seen their so-called front-of-store sales threatened as shoppers increasingly buy consumer products and household staples online or from convenience stores.

Walgreens sees an opportunity to become a specialist in the beauty category and protect its business from competitors like Amazon. To do this, Walgreens has spent the past few years trying to transform its beauty aisles — and how consumers think of drugstore makeup.

Building a beauty destination

When Walgreens acquired Alliance Boots in late 2014, it gained Boots, a British drugstore chain that's also a beauty destination. The stores sell brands including L'Oreal and Chanel.

Sensing an opportunity in the U.S., co-chief operating officer of the newly combined Walgreens Boots Alliance, Alex Gourlay, asked Boots' Brindley to transform Walgreens' beauty business. Brindley moved her husband and two boys to the Chicago area from London to lead the effort.

During a recent interview at Walgreens headquarters in Deerfield, Illinois, Brindley said she has developed a strategy called beauty differentiation. It focuses on three key areas: new and differentiated brands, enhanced care for beauty customers and improving the shopping experience.

"We felt the customer was demanding more in what products she wanted and how she was shopping. She's interested in new brands in addition to legacy brands. We felt we needed to modernize," said Brindley.

Some of her first steps included importing popular Boots-owned brands Soap & Glory and No7. Walgreens has remodeled more than 3,000 stores so far and added 3,500 beauty consultants trained to help shoppers.

The retailer has built a "Beauty Enthusiast" membership program. It has also dropped some brands and added more luxurious names like NYX makeup, OPI nail polish and La Roche-Posay skin care products.

Partnering with Birchbox is Walgreens' next step in its evolution, Brindley said.

"The time is really right now because we've done the groundwork. … It feels like we're now ready to work with a partner like Birchbox to continue to build our beauty offerings and now build into prestige and indie brands, which up until this point we weren't ready for them. Whereas I think now we're ready for it," she said.

The initial talks

Birchbox and Walgreens started talking last year. The two teams felt they were both trying to cater to a consumer that had been historically underserved.

This shopper is someone who wants to feel beautiful but doesn't necessarily spend all day watching makeup tutorials on YouTube, executives said. With the Birchbox displays, Walgreens wants them to be inspirational with the latest and greatest in beauty products but still accessible.

The partnership will expose consumers to higher-end and indie brands they typically can't find in drugstores. The move mirrors other retailers refining their beauty assortments based on younger shoppers' shifting preferences and bringing online brands into their stores.

Target, for example, is now selling Casper mattresses, Harry's razors and Quip toothbrushes — all brands that were originally sold only online. Walmart is also selling Harry's razors in its stores, and just this week announced its acquisition of online plus-size brand Eloquii. Nordstrom has done pop-up shops within its stores with brands like Allbirds and Casper. And Ulta later this year will be selling Kylie Jenner beauty products for the first time outside of Jenner's website.

Some of these retailers have also been investing in their beauty departments, further pressuring convenience store operators Walgreens and CVS as they try to do the same.

Beauty competition

Most notably, Target is in the midst of remodeling hundreds of existing stores, which includes a major overhaul to the beauty aisles: fewer shelves, more open fixtures, a counter for a beauty specialist who can help a shopper try on products, and an overall sleeker black and white design that mimics the inside of a Sephora.

"The new beauty redesigns Target is doing are going in very good, and Target has the right audience already for beauty," Neil Saunders, Target's managing director for GlobalData retail, told CNBC. "I really think the drugstores are behind the curve in terms of what they actually offer, also in terms of perception."

Names like Walgreens and CVS still struggle with being considered a "destination" for make-up, Saunders said. But these companies are "very conscious" they need to do more because they see the growth from Ulta and Sephora, he added.

Walgreens' efforts are starting to pay off. Executives have said on recent quarterly earnings calls that beauty sales have increased and beauty differentiation stores are outperforming traditional stores, declining to provide more details.

In these stores, same-store sales have been positive, compared with the company average of a 2 percent decline, according to Jefferies analyst Brian Tanquilut. Gross margin has increased to the mid-30 percent range from the 20-percent range, he said. This has helped offset pressure on the pharmacy side, he said.

Not everything that has worked for Boots has worked for Walgreens. Boots is known for its "3 for 2" program. When Walgreens introduced it here with the same language, consumers didn't get it.

They tweaked the language to "Buy 2 Get 3rd Free." Once consumers understood it, they started buying it.

"We're using the Boots model, but we need to localize it," Brindley said. "The companies are different and the geographies are different."

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