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Beauty and the Biz
Bluemercury Boutiques Plan Expansion Despite Economic Slump

By Ylan Q. Mui
Washington Post Staff Writer
Monday, August 4, 2008

At Bluemercury's luxurious beauty boutiques, founder and chief executive Marla Malcolm Beck regularly dispenses tips on choosing the right sunscreen and the perfect summer bronzer. But the most valuable advice that she has ever received is a much less glamorous five-letter acronym: DROOM. Or, don't run out of money.

The advice came courtesy her mentor, Washington entrepreneur and dealmaker Jonathan Ledecky. Beck took it to heart when she started Bluemercury nearly a decade ago. Since then, she has slowly built a profitable, multimillion-dollar chain with 28 stores across the country and plans for aggressive growth.

"It was literally one store at a time," Beck said over coffee during a recent interview. "I just wanted to build a great company."

Though Beck won't disclose exact figures, each 2,000-square-foot store averages about $3 million in sales a year, putting the company's total revenue at roughly $84 million. She plans to open as many as 20 new stores annually.

Expansion in a downturn is a potentially risky move. Concerns about consumer spending have led stocks of luxury-goods retailers lower, with shares of both Saks and Nordstrom hitting a 52-week low last month. An analyst recently cut her rating on Tiffany to "sell" from "neutral." And while luxury handbag maker Coach last week reported 20 percent growth in fourth-quarter earnings per share, it cautioned that "consumer malaise" would probably last through 2009, significantly affecting its business.

Beck said she hopes to take advantage of increased vacancies and slipping rents in many of the chain's target markets as other companies shutter stores and slow expansion plans. She believes that her affluent customers -- the average shopper is a 38-year-old woman with $130,000 in annual income-- are less vulnerable to the downturn than most. And, adhering to DROOM, she shored up capital before the current credit crunch, allowing Bluemercury to continue to grow.

"DROOM taught me to raise capital when we don't need it and to always be frugal in everything we do," Beck said.

While specialty beauty retailers ring up just half of the $8 billion in sales at department store cosmetic counters and one-fifth the $21 billion in sales at mass-market outlets, they've been driving the growth in the beauty industry in recent years, according to consumer research firm NPD.

The niche began in the 1990s, when several retailers -- namely, Bath & Body Works, Sephora and Ulta -- allowed women to experiment freely with a wide array of products in an inviting atmosphere. Women no longer had to wait in line for service at a department store or surreptitiously test lipstick at CVS or Wal-Mart.

"They democratized the experience in the sense that they allowed consumers to say, 'I can choose. . . . I can experience them,' " said Karen Grant, senior analyst for beauty at NPD.

Bluemercury is an edited version of its larger rivals, selling the Cadillacs of the cosmetics world. Think $50 sunscreen by Darphin, $84 candles by Molton Brown and $90 eye creams by MD Skincare. Bluemercury is also famous for its ample product samples.

Though the early explosive growth among specialty beauty retailers has slowed -- and the sluggish economy has not helped -- Grant said many chains are still doing well. But the industry can no longer simply ride the tide of strong consumer demand.

"It is not just a given," Grant said. "While we're still seeing growth, it's because they're actively making sure growth happens."

According to research cited by the Small Business Administration, only about two-thirds of start-ups last two years and fewer than half live to see four. Scott Shane, a professor at Case Western Reserve University and author of "Illusions of Entrepreneurship," said a business that grows is even more rare. Of more than 102,000 retail companies established in 1996, only 68 had at least $50 million in sales six years later.

Beck dispensed with several retailing traditions in founding Bluemercury. While many retailers rely on part-timers, 90 percent of her staff works full time. She had personally interviewed each of the 300 employees until December, when she scaled back her involvement in hiring because the company has grown so large. Beck has set up a training center at the Bluemercury in Princeton, N.J., for store managers and assistant managers, and a group of diehard staffers travels the country to make sure employees are knowledgeable about products and keep with the company culture.

Instead of using traditional loyalty programs, Beck said she mailed products gratis to her top clients in May, each of whom had spent $3,000 to $10,000 at the store since the beginning of the year.

"It's hard to find friendliness in beauty," Beck said. "We try to teach people how to use beauty in real life."

Beck's career in Washington began far from the beauty counter. She started working under Ledecky at his company at the time, U.S. Office Products.

She landed an internship after cold-calling his company as a student at Harvard Business School. They met in person in 1997 after a speech he gave on campus. Ledecky said he was impressed by her gumption and her credentials. He's a Harvard alum and Beck had already worked as a consultant at McKinsey.

"She was completely focused on ultimately running her own business," Ledecky said. "She had a game plan to do that for someone who was that young."

Beck landed the internship and, after a few months on the job, created a new inventory management system that saved U.S. Office Products $10 million. She went back to work for him after graduation.

By that time, Ledecky had launched a private-equity firm, Consolidation Capital. Beck, who met her husband while unsuccessfully trying to purchase his business, said she loved the fast-paced environment but soon realized that she was ready to be on the other side of the table as the entrepreneur. All she needed was an idea.

Blonde, petite and impeccably stylish, Beck recalled driving half an hour across Boston during business school to the one store that carried her favorite but hard-to-find lipstick by MAC Cosmetics. She special-ordered skin care products by Dermalogica. The effort to find the products she wanted drove her crazy, but it also became the source of her inspiration.

In May 1999, during the height of the Internet bubble, Beck left Ledecky and founded Bluemercury.com to bring her favorite beauty products online. The space quickly became crowded. While most companies expanded from brick-and-mortar shops to the Web, Beck went the other way, buying cosmetics retailer EFX's two stores in Georgetown and Dupont Circle a few months later and renaming them Bluemercury.

Carlyle Group Managing Director Ed Mathias, an early investor in the company, recalled introducing Beck to investors unaccustomed to analyzing the profit potential of lip gloss. But Beck's extensive research and sharp focus helped her raise the capital she needed, Mathias said.

"She wasn't thinking, 'Let's have one store and I'll enjoy life.' From the outset she had huge plans and saw the vision of what she could create," he said.

Now, the chain is preparing to introduce the high-end Bobbi Brown cosmetics line in stores. A location in Bethesda, the third in the Washington region, opened in June just a few miles from Beck's home. Sales at stores open at least a year, a key measure of a retailer's health, were up at least 10 percent as of June, Beck said.

Ten years ago, Beck had to beg some prestigious brands to let her sell their product. Now, she often assists in product development and scores exclusive items. She still can get excited about a new candle scent or lipstick color. Her old favorite, Dermalogica, has a prominent place on the shelves.

"At heart," she said, "I'm just a beauty junkie."

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