Why Ulta's Winning In Retail's Increasingly Crowded Beauty Sector

Barbara Thau

Contributor

Everybody and their mother seem to be jumping into the high-margin cosmetics business these days, including unlikely merchants such as H&M  which will launch a makeup line this fall, and the Gap GPS -0.29%,tiptoeing into the market with subscription service Birchbox.

Macy's M 0% is also taking a deeper dive into beauty with its recent acquisition of specialty retailer Bluemercury.

But Ulta Beauty, the highly successful, $3.24 billion chain — sales surged 21.4% in 2014, as comp-store sales climbed 9.9% — has hit upon a winning store concept that mirrors how consumers increasingly shop.

The freestanding retailer sells both discount brands like Maybelline and prestige department store lines such as Clinique, side by side, in an open-sell environment.

Photo by Astrid Stawiarz/Getty Images for ULTA Beauty

It’s also creating a destination for all things beauty with in-store salons. Offering a service in addition to merchandise is just what retailers need to be doing these days: It’s about creating experiences for shoppers to woo them into stores in an era when they can buy most anything online.

Ulta’s “Mass-tige” Edge

Ulta’s “mass-and-class” product range is integral to its appeal.

Although direct competitor Sephora also let’s shoppers test cosmetics themselves sans the mediation of salesperson manning the goods behind a glossy counter, a la department stores, it exclusively carries upscale brands.

Meanwhile, prestige brands are gaining appeal with consumers across income levels. Analytics firm TABS Group surveyed 1,000 women ages 18 to 75 for a cosmetics study, which revealed that customers are buying across “all different types of price points these days,” Kurt Jetta, TABS Group’s founder, told STORES magazine.

And stores like Ulta and Sephora are gaining more of that market share.

Indeed, sales of mass cosmetics brands sold at drugstores and discount chains have been anemic: Last year, beauty sales at mass chains inched up 0.4% from 2013, according to Nielsen data.

By contrast, the U.S. prestige beauty industry grew 3% in dollar sales in 2014, compared to 2013, according to global data firm The NPD Group; Millennials and multicultural shoppers are helping to drive what’s been called beauty’s “premiumization” trend.

The TABS survey also revealed that shoppers want to explore beauty products on their own, relying less on beauty sales associates, STORES reported.

These trends are all playing into Ulta’s sweet spot, and analysts are bullish on the retailer’s growth.

At Ulta, “We believe 20%-plus earnings potential remains over the next five years as the company … benefits from a secular shift towards prestige beauty products,” enters new markets, and leverages infrastructure enhancements, said Dana Telsey, CEO of Telsey Advisory Group.

“Ulta is well positioned to gain share and sustainably grow EPS at 20%+ on a pipeline of unique brands, a leading loyalty program, and shifting customer preference for specialty beauty,” said retail analyst Oliver Chen, in a Cowen & Co. research note. “Competitive moats include: proprietary vendors, supply chain scale, and a convenient, flexible brick-and-mortar presence.”

The 800-unit chain has now set its sights on reaching 1,200 stores by 2019, and growing its 3% share of the U.S. beauty market. It’s part of CEO Mary Dillon’s five-year plan to take the business to the next level.

That plan includes more merchandise exclusives and raising Ulta’s profile with marketing messages that strike an emotional chord rather than just cut-and-dry, product/price promotions, according to a profile in Women’s Wear Daily this month.

“Ulta has done a whole lot of things well, but it hadn’t invested enough in building the Ulta Beauty brand,” David Kimbell, chief marketing officer, told WWD. “We have a great story to tell, but we hadn’t been telling that story in a big enough way.”

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