Looks Can Be Deceiving

Estee Lauder gives the online beauty market a glossy makeover--but the wrinkles aren't all gone

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Log on to the Beauty Bazaar at eve.com and you'll find more than 11,000 ways to look and feel divine. From cantaloupe-infused bath gel to honey-colored body glitter to chocolate-brownie-scented nail polish, there's enough to sate even a modern-day Cleopatra--or a Marilyn Manson, for that matter. But try stocking up on your favorite moisturizer by Clinique or black eyeliner from Estee Lauder and you're out of luck.

That's because Estee Lauder Inc., which controls some 50% of the $7 billion prestige beauty market and owns top brands such as Clinique, Origins and M.A.C., refuses to sell to independent sites. At the height of the e-tail start-up boom last fall, such niggling details didn't matter. Like most other e-commerce ventures, the beauty sites were thinking only about getting big, fast. Sooner or later, they thought, the big brands like Lauder, Lancome and Chanel would come on board. "The start-ups' lack of knowledge was painful," says Allan Mottus, an analyst who consulted for several beauty sites. "They should have taken their $50 million and thrown a big party rather than invest in a market where they couldn't sell 70% of the products."

It hurts even more now. As overall forecasts for e-tailing turn bleak, beauty sites in particular are struggling. According to NPD BeautyTrends, out of some 300 cosmetics, fragrance and bath-and-body sites that were on the Web last fall, only 100 remain. Among the consolidations and casualties: Beauty.com which sold to Drugstore.com just two months after its launch; fragrance site Jasmin.com which was inhaled by luxury site Ashford.com and Beautyscene.com which sold to private investors in a fire sale after its finances got ugly.

But now Estee Lauder CEO Fred Langhammer, who has been mulling his Net strategy since last year, is smelling like a rose as he snaps up premium Web real estate at a bargain price. His reported $20 million purchase of gloss.com cost half what it would have to build a similar site from scratch. As many as 13 Lauder brands will be available on the revamped site early next year. Additionally, department stores such as Macy's and Neiman Marcus can play host to "micro-sites" for those brands on their own Web premises. But why didn't Lauder buy Eve.com currently the top beauty site, with four times the traffic of gloss? "I wanted a cohesive team, not a retailer whose primary goal is to be our biggest competitor," says Langhammer. "[Eve.com's] objective is to cannibalize our business."

They may have little chance. "An independent site that focuses on beauty alone cannot survive," argues Jupiter Communications' Mike May, who notes that the cost of luring new customers to even a vast array of little-known brands will probably put Web-only players out of business. According to a study by Shop.org it costs Web-only ventures more than twice as much as clicks-and-bricks firms to win a new customer.

While some independents scramble for alternatives, like selling handbags and jewelry, others are sticking to being beautiful. "Retail stores are dominated by the big names, but that doesn't mean we're doomed," says Ibeauty.com vice president Shirley Lord. Smaller brands sold on her site are in more demand than people realize, she says, because they are the same hard-to-find lipsticks and mascaras recommended by fashion magazines.

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