* Pharmacies winning cosmetics market share
* Low-price Italian chain Kiko another threat
* Sephora estimated to make 15 percent of LVMH revenue
By Astrid Wendlandt
PARIS, July 23 Sephora, the top seller of Dior lip gloss and Lancome face creams, is under attack in continental Europe from far less glamorous competitors: pharmacies.
New data shows specialist beauty retailers such as Sephora, one of the fastest growing companies at world No. 1 luxury group LVMH, are losing market share to pharmacies offering cheaper products.
Ubiquitous in big European cities, they have been elbowing their way into what used to be the preserve of big beauty retail chains such as Sephora in France and Germany's Douglas, controlled by U.S. private equity group Advent.
More and more pharmacy shelf space is dedicated to organic, natural cosmetics brands such as Weleda, Caudalie and Garancia in France, Dr. Hauschka in Germany and Louis Widmer in Switzerland, which cost 30-50 percent less than brands such as Clarins or Lancome sold at the specialist beauty retailers.
Pharmacies' buoyant beauty business appears to be both the result of their efforts at energetically promoting these cosmetics products as well as consumers'cautious spending against the backdrop of a still very fragile and uncertain economic recovery in the euro zone.
"Pharmacies are a place where people go regularly, where the pharmacist's advice is well regarded and the value for money proposition of the brands they sell is appreciated by consumers," Jean-Paul Agon, head of L'Oreal, the world's biggest cosmetics group, told Reuters last month.
"The pharmacy, when it comes to skin care, is the most dynamic retail network in Europe."
L'Oreal's Vichy and La Roche Posay skin care products, and Roger & Gallet perfumes, which are mainly sold in pharmacies, generate the fastest growing sales, Agon said, and they are likely to remain the main growth engine in the years ahead.
The price difference is clear. A day cream from Vichy costs 15-17 euros, one from Caudalie or Garancia costs 20 to 30 euros, while Clarins and L'Oreal's Lancome are priced at 55 euros.
Specialist beauty retailers such as Sephora and Marionnaud in France have seen their share of the cosmetics retail market drop to 35 percent from 40 percent over the past three years, according to consumer research company Kantar Worldpanel.
In contrast, pharmacies' market share has gained 3 percentage points to 18 percent.
"Pharmacies are the number-one retail network attacking specialist beauty retailers and taking revenue away from them, particularly in skin care," said Stephanie Poupineau, account manager at Kantar Worldpanel.
Pharmacies have been pushing beauty products in recent years attracted by higher margins: 30-32 percent against 21 percent in their core prescription drug business, which has been hit by cash-strapped governments pruning the number of treatments covered by national insurance and the rise of cheaper generics.
CLOUDS FOR SEPHORA
The trend is a concern for LVMH as Sephora's success has been helping ease investors' worries about slowing growth at the luxury group's flagship Louis Vuitton brand.
Sephora is estimated to generate about 15 percent of LVMH's total revenue - with a quarter of that in western Europe - and roughly 7-8 percent of group operating profit.
"Pharmacies gaining market share in western Europe is a worrying trend," said BNP Paribas luxury goods analyst Luca Solca.
Beauty product manufacturers are all too aware of the shift away from specialist retailers to cheaper outlets and believe the stores should find ways to reverse the flow.
Clarins Chairman Christian Courtin-Clarins, whose family took the beauty brand private in 2008, does not hide his concern about specialist retailers' dwindling market share in Europe as he relies heavily on them.
"Instead of losing our time fighting on margins, we should focus on how we can convince clients to come back to the beauty specialist network," Courtin-Clarins told Reuters by telephone.
Whereas 10 years ago Sephora paid 50 euros for a beauty product from a manufacturer and sold it for 100 euros, today it makes more profit by paying only 40 euros but still sells it at the same price, according to industry executives.
Sephora could also have a reversal in fortunes in France and other Western European countries if economic recovery takes hold and consumers veer back to more expensive products sold at specialist beauty retailers.
Analysts also said that even if Sephora faced headwinds in western Europe, it would still continue to enjoy strong growth in the United States and emerging markets, as well as through its push online.
Sephora generates half of revenue at LVMH's selective retailing unit, which includes Paris department store Le Bon Marche and the DFS duty-free shops. The division has more than doubled in size between 2007 and 2013 and now generates more than 31 percent of LVMH sales.
In three years, broker Bernstein sees that unit overtaking LVMH's fashion and leather goods division - which includes Louis Vuitton and now makes up 36 percent of total sales - as its No.1 business in terms of revenue.
Looking ahead, another battleground in Europe for Sephora is the rapid expansion of low-priced Italian chain Kiko, regarded as the "H&M of make-up" with its fashionable colours a fraction of the price of luxury brands Chanel and Dior.
Kiko, offering nail polish at 2.50 euros, competes head on with Sephora's low-priced private make-up label, which analysts believe is one of the fastest growing categories for Sephora.
In terms of volume, Kiko already features as much in the make-up basket of 15- to 24-year-olds as Sephora in France, according to Kantar Worldpanel.
Kiko declined to comment, while Sephora said it continued to gain market share against rival selective distributors.
Data shows specialist distributors such as Sephora are also suffering in Italy. Market data compiled by NPD, IMS and IRI shows that in 2013 their sales fell 3 percent while revenue from various forms of generalist drugstores and pharmacies rose by mid-single to high single-digit percentages.
Europe-wide, sales from beauty and personal care products at retailers such as Sephora and Nocibe, which just merged with Douglas, fell to 18 billion euros in 2013 from 18.9 billion in 2008, while at pharmacies and drugstores they rose to 14.6 billion from 13.6 billion. (Additional reporting by Pascale Denis; editing by David Clarke)
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