April 24, 2000 7:10 PM PDT

Online cosmetics showing consolidation signs

The online cosmetics industry is showing early signs of aging after less than a year of torrid growth by such sites as Eve.com, Beauty.com and Gloss.com, a sign of increasing pressure on niche market players.

Idealab, an early investor in San Francisco-based Eve.com, is taking a controlling interest in the start-up to foster expansion into new areas. The latest move into luxury goods may offer a sign that online cosmetics sales may be too competitive and limited in the long run.

Other online sellers of high-end cosmetics have also recently partnered with manufacturers or major retailers. Earlier this year, Drugstore.com, funded partly by Amazon.com, bought Beauty.com in a stock deal worth $42 million. Estee Lauder, one of four major high-end manufacturers, earlier this month bought Gloss.com and announced plans to open a multibrand site next year to sell company-owned product lines such as Clinique, Origins and Tommy Hilfiger.

The combined moves mirror greater consolidation pressures across all e-commerce industries, analysts say. Many of the smaller players in the Internet retail sector, recently hit by a steep downturn in the market, are struggling to stand out amid a saturation of similar companies.

For example, furniture e-tailers GoodHome.com and Furniturefind.com merged earlier this year, and direct marketing company MyPoints.com agreed to buy Cybergold for about $157 million in stock last week.

"We're seeing this type of consolidation because there's entirely too many players that come out of the gate at the same time," said Heather Dougherty, retail analyst with Jupiter Communications.

For Eve.com founders Mariam Naficy and Varsha Rao the consolidation among its rivals "is a signal that we have survived." Eve.com, which launched in June 1999 and sells such big name beauty products as Calvin Klein and Versace, will start selling select luxury items later this week and jewelry this summer.

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Other companies selling upscale, stylish wares include such well-funded companies as Ashford.com, Miadora.com and Louis Vuitton Moet Hennessey's upcoming eLuxury.com.

But as manufacturers such as Estee Lauder expand online--seeking to control the consumer's experience--selling luxury goods may be an apt move for Eve.com.

"This is a preventative move to avoid getting pigeonholed in one market," Dougherty said.

Because big name manufacturers such as Chanel and Estee Lauder want to control the way their brands and products are presented, they've been conservative in their plans to sell online. Estee Lauder is the first to announce plans for a site that sells multiple brands including those from other manufacturers.

"If you're an e-tailer trying to sell beauty products on the Web and you don't have the major brands and your competitor does, you have a major problem," said Jim Williamson, senior research analyst at IDC.

But whether rival manufacturers such as Chanel or Lancome would want to sell their products through a competitor's site such as Lauder's remains to be seen.

This is where sites such as Eve.com and Beauty.com hope to gain traction in the estimated $6 billion high-end cosmetics industry.

"We're trying to be the Switzerland of the online beauty industry," Naficy said. By maintaining autonomy, the company hopes to be an objective source for recommending the best brands online, thus attracting a larger audience.

Some industry analysts doubt whether they'll succeed.

"The major manufacturers in this market are starting to sell directly, and they're not supporting non-brick-and-mortar partners in their online efforts, so these start-ups have no where to go and nothing to sell," said Evie Black Dykema, a retail analyst with Forrester Research.

To reach new customers, however, manufacturers will have to sell through other online stores, industry executives say.

"Ultimately all the major brands are going to want to be in a multibrand environment," said Roger Barnett, chief executive of Beauty.com. "Because if all they're doing is talking to their own customers then they'll have limited future growth."

Idealab said it hired three former executives from Barneys New York, one of the most exclusive luxury retailers in the United States, to help Eve.com with their retail efforts. Bill Gross, founder and chairman of Idealab, has become Eve.com's chairman.

 

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