Marketers Scratch Their Heads as Nail-Product Category Goes Bust

Entire Beauty Industry Suffers Even as Hot Retailers Thrive

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Nail products were the big hit of beauty in recent years, with stunning growth of more than 20% in both 2011 and 2012. But the surge has suddenly come to a halt, hurting results for the whole beauty business.

"The overall nail category can't sustain the accelerated growth it enjoyed in the recent past," said Coty CEO Michele Scannavini on an October earnings call. He cited a 4% decline in the category in the third quarter compared with a 21% increase in the same quarter last year.

Coty, the biggest nail-cosmetics player, wasn't alone. L'Oréal and Revlon got chipped in the crash, which appears to have intensified in October and November, when nail-polish sales fell 10% and 13% for the four weeks ended Oct. 26 and Nov. 23, respectively, according to Nielsen data from Deutsche Bank. Category sales were $814 million for the 52 weeks ended Nov. 23.

Consumer Edge Research analyst Javier Escalante offers a simple explanation. "It was a fad," he said. He noted that the biggest drop has been in "special effects" products such as crackle-top coats rather than basic nail polish.

Google Trends shows search volume worldwide and in the U.S. for "nail polish" peaked in July 2012. This year's July seasonal bump ran 16% below last year's levels in the U.S.

Last year's sales gains pushed nail polish past lip products for the first time in annual sales, according to IRI data. But that could be a short-lived victory if Google search results are any indicator. In November, searches on "lipstick" surpassed those for "nail polish" in the U.S. for the first time since May 2009.

Overall, Consumer Edge reports that the U.S. beauty market has slowed from 2% growth in the first quarter to 0.9% each of the past two quarters and down 0.5% in October. Nail products and beauty appliances, such as curling irons, are primarily responsible for the slowdown, Mr. Escalante said.

The question is: Why? Third-quarter U.S. gross domestic product and November unemployment data came in better than expected, as did comparable-store sales results from several leading retailers for October.

L'Oréal Chairman-CEO Jean-Paul Agon in reporting sales results last month blamed the U.S. beauty-sales slowdown on people shifting spending to cars. But Consumer Edge Research data show L'Oréal unduly hit by retailer inventory cuts in the wake of disappointing beauty results, as its shipments significantly lagged behind its U.S. mass retail sales the past two quarters.

Sephora and Ulta, the two hottest U.S. beauty retailers, are still scorching. Both reported strong double-digit U.S. growth on sales estimated at more than $2 billion each. Ulta, whose sales are harder to track by analysts, saw sales rise 22% to $618 million for the quarter ended in November. Industry executives say both retailers favor newer and niche brands, so their share gains may be weighing on established players.

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