Costco’s E-Commerce Business Pushes Into Prestige Beauty And Major Trends

As traditional beauty retail distribution divisions break down, Costco is picking up emerging prestige players online such as Adsorb as it extends into trendy beauty territory.

The brand is part of a J-beauty initiative at the warehouse club concept that’s launching on its website with products from the likes of Shiseido, SK-II, Boscia and Lena & Lina San Francisco. It follows Costco’s digital push into blazing beauty categories such as K-beauty, natural beauty and ingestibles, and demonstrates the moves the retailer is making to grow its e-commerce with high-end merchandise.

“Everything is blending and changing,” says Tom Winarick, president and CEO of BioBoutique Beauty Lab, U.S. distributor for Japanese brand Adsorb, which sells at Neiman Marcus and Dermstore as well as costco.com. “I look at brands like NYX, for example, and how it’s crossed over into different channels of distribution. It’s in mass like Walmart, and also in Urban Outfitters and Macy’s. It really comes down to sales. No one used to think about a department store or specialty retailer carrying a $5 lipstick. They had to do it otherwise they were losing sales to other people.”

Costco was losing online sales to competitors and upped its digital efforts to gain ground against them in e-commerce. For the month of October, its online sales increased 20% to land at roughly $500 million or slightly more than 4% of its $11.7 billion sales turnover for the four-week stretch, a smaller increase than the 32.2% online sales jump notched last fiscal year. Costco’s e-commerce selection can be shopped by both its members and non-members, but members are privy to offers non-members can’t obtain.

Health and beauty e-commerce buyer Charlene Foronda told The Costco Connection magazine in June 2017 that Costco has become a digital force in the category by providing a wider selection online than in stores. She mentioned fresh product is uploaded to Costco’s e-tail assortment weekly. Foronda asserted, “You are sure to find gems to fit any budget.”

“It really comes down to sales. No one used to think about a department store or specialty retailer carrying a $5 lipstick. They had to do it otherwise they were losing sales to other people.”

Asked about e-commerce on a recent earnings conference call, Richard Galanti, executive vice president and CFO at Costco, said, “We’re focusing on it, but we’re focusing in our way. We don’t need to go buy a company, and we’re finding out there is a lot of opportunity for us doing some of the things that we want to do.” He noted, “There are brands that are willing to sell us that historically haven’t.”

Doing e-commerce Costco’s way means featuring product prices that are lower than elsewhere and cherry-picking from brands’ product lineups. On the retailer’s site, Winarick estimates Adsorb’s items – a trio of products that broke into the U.S. earlier this year, AntiBody Cleansing Wash, Moist Essence and Gel Cream, and a new set of three, Brightening Clay Mask, Gel Mask Moist and AntiBody Moist Lotion – are being priced at a 10% discount. Another brand Winarick is involved in, masstige beauty specialist Doll Face, sells a two-pack of its Little Black Mask product at a 30% markdown on Costco’s site.

Lena & Lina San Francisco’s Trio Benediction Crème Rejuv+ is $42.99 on costco.com. It’s regularly priced at $60. Although Paulina Kapoor, founder and CEO of Lena & Lina San Francisco, admits Costco’s price cutting gave her pause when she initially evaluated the retailer as a distribution opportunity, she concluded its strategy of making prestige products more affordable suited her brand’s approachable luxury positioning. She says, “Their mantra is quality at a reasonable price. So, I see myself having a good connection with them.”

Lena & Lina San Francisco handles the costco.com inventory itself, and Kapoor shares the retailer generally takes on one or two stockkeeping units at a time for its site. While sales aren’t piling up exponentially from the brand’s e-commerce presence at Costco, she says Lena & Lina San Francisco “hasn’t lost money” on costco.com, and it’s being exposed to a huge audience. Costco has roughly 94 million members, a total that’s been surpassed by Amazon and its over 100 million Prime members. Kapoor says, “Because you have customers that already trust Costco, they’re willing to try a brand there.”

“Like all retailers today, they want to capture the millennial. That millennial may or may not be shopping for themselves there. It might be mom shopping, and they’re really looking to open their range. They’re getting quite aggressive.”

Although Costco’s revenues remain robust – for the most recent quarter, its same-store sales rose 7.2 percent, and sales surged 9.7% last fiscal year to $138.4 billion – there’s concern spreading that Costco isn’t winning millennial shoppers. Its customers tend to have families and own homes, placing their household incomes at above $100,000 and making them an older lot. Costco.com’s advancement into trending beauty categories could be a bid for younger consumers.

“Like all retailers today, they want to capture the millennial. That millennial may or may not be shopping for themselves there. It might be mom shopping, and they’re really looking to open their range. They’re getting quite aggressive,” says Winarick. Referencing the online J-beauty initiative, he comments, “There’s a lot of traditional luxury prestige retailers that haven’t gotten there yet, and here you have Costco doing it.”

For Adsorb and Doll Face, Winarick views costco.com as akin to a sampling platform to get the brands’ merchandise to a large customer base during a limited period. “At Costco, they’re not set up on replenishment programs. They buy and, then, when they get to a certain sell-through percentage, you sit down and decide with them what you’re going to do next,” he details. “When the time comes, we will evaluate whether it was successful to put our products in people’s hands, and do we want to keep it going.”

Adsorb isn’t sold on Amazon, and Winarick says the distinction between Amazon’s site and Costco’s site is that it’s easier to control pricing on Costco’s site. As a result, he continues, other retailers seem to care more about products being sold on Amazon, where discounting could potentially undercut their prices, than on costco.com.

“When you look at the Costco website, you see Estée Lauder, GlamGlow, Shiseido and Lancôme products. They are not being sold to them by a third party. They couldn’t be because a third party couldn’t support the quantities. They’re treating it the same way we are. As long as you control the pricing, we don’t think it’s an issue,” says Winarick, adding, “They are just a very powerful conduit to the consumer.”