Ulta Beauty Will Place In-Store Shops At Target Locations. Is The Move A Good Idea?
The traditional demarcations in the beauty industry separating mass from class have been fading for years. Now a marquee high-low retail partnership between Ulta Beauty and Target will test whether any of the remaining boundaries hold.
In the fall of next year, Ulta Beauty at Target in-store shops will enter more than 100 Target locations with a selection of over 40 indie and established prestige makeup, skincare, fragrance and haircare brands that will be available on Target’s website as well. Occupying 1,000 square feet each, the in-store shops are expected to eventually push into hundreds of Target’s nearly 1,900 doors in the United States and will be manned by Target staff members trained by Ulta. Ulta’s virtual try-on tool GlamLab, and Target’s click-and-collect and Shipt same-day delivery programs will be accessible to Ulta Beauty at Target shoppers.
At a moment in which there hasn’t been much positive news for physical retail writ large, Wall Street welcomed the development. Ulta’s shares advanced 7% on Tuesday to close at $265.49, their loftiest price since the pandemic disrupted business in the U.S. Target’s shares jumped 2% to $158.07. Most analysts hailed the bilateral retail deal as a win-win.
“Ulta will benefit from increased exposure due to Target store traffic and an expanded store footprint without having to open new standalone locations,” says Kenya Watson, an intelligence analyst at business analytics platform CB Insights. “For Ulta, Target may be a place where it can not only reach new demographics, but also where customers can do more discovery shopping, particularly as the pandemic wears on.”
The combined retail initiative could be a gen Z juggernaut by elevating Target as a beauty destination in the minds of young shoppers, and keeping them coming as they age and their beauty budgets swell. In investment bank and securities firm Piper Sandler’s latest survey of teen consumers, Ulta surpassed Sephora as the preferred destination for beauty shopping, and Target improved in teen consumers’ beauty shopping preferences, too. Piper Sandler’s survey revealed 86% of teens want to buy products in stores despite the coronavirus.
Together, Ulta and Target have 100 million loyalty program members—Ulta is responsible for about a third—and shoppers will obtain Target Circle and Ultamate rewards from Ulta Beauty at Target purchases. Ulta will have the chance to attract a portion of the 30 million consumers that flock to Target weekly to its rewards program and, once it attracts consumers to its rewards program, they tend to stay within its universe. Around 95% of its transactions include the rewards program.
Based on sales per square feet figures for Target and Ulta, Stephanie Wissink, an equity analyst at financial services company Jefferies, estimates that an individual Ulta Beauty at Target in-store shop could generate $400,000 in yearly revenues, putting the annual turnover for 100 in-store shops at $40 million. To John Zolidis, president and founder of investment advisory Quo Vadis Capital, the numbers aren’t impressive. For their initial year in operation, he projects the in-store shops could contribute $10 million in EBIT (earnings before interest and taxes) to Ulta or a tad more than 1% of its $901 million EBIT last fiscal year.
“The bottom-line is that this deal is not material to Ulta in FY21 but does give it another growth channel. A bigger question is why do this? Clearly, it reflects the lack of store opportunity for Ulta in the U.S.,” writes Zolidis in note on Target’s deal with Ulta. “And it also, we believe, reflects pressure on margins from the permanent shift of sales online.”
Ulta, a darling of beauty retail that’s been battered by the pandemic, is betting visibility at Target stores and on the chain’s e-commerce website will pay off and potentially offset sales forgone from a store growth slowdown. Piper Sandler spells out Ulta won’t own the inventory heading to Ulta Beauty at Target, but will own the brand relationships. Further financial details of Ulta’s and Target’s arrangement weren’t disclosed, although the parties indicated their partnership will be long-term.
In the second quarter ended Aug. 1, Ulta’s comparable-store sales slid 26.7% and revenues decreased 26.3% to $1.2 billion. Prestige beauty sales for the same period fared even worse. They dove 36% to $2.8 billion, according to The NPD Group. In the third quarter, they rallied a touch and shrunk 17% to $3.7 billion. This year, Ulta plans to add about 30 units to its store network, down from a pre-pandemic plan of 75. As of the second quarter, the retailer had 1,264 units. Ulta has announced a goal is to grow to 1,500 to 1,700 stores, and the Target tie-in doesn’t interfere with that growth. A typical Ulta store is 10,000 square foot and has approximately 25,000 products from 500 brands.
In light of current retail realities characterized by pandemic precautions, economic uncertainty and the rise of e-commerce, especially Amazon, Margarita Arriagada, founder of lipstick brand Valdé and former chief merchant at Sephora, says, “This is a formidable move for both retailers. It signals an evolution in the industry of thinking disruptively about the future of beauty retail and keeping customers top of mind as we navigate a new normal. We are in a time in which risk needs to be exercised for the sake of evolution.”
“We are in a time in which risk needs to be exercised for the sake of evolution.”
Early issues for Ulta Beauty at Target will involve the real estate inside Target and within the broader Target store network. Ulta and Target announced the in-store shops will be prominently situated next to existing beauty sections. It’s anticipated they won’t be planted at Target stores in shopping centers where Ulta is a co-tenant to build awareness for the retailer in geographic areas without an extensive Ulta presence.
“The strategy here is making sure you pick the right stores with the right demographics so the customers of those particular stores are excited about being able to trade up and find Ulta instead of mass or lower-price products,” says Jonathan Greenway, managing director at management consultancy AlixPartners. “If Target pushes the envelope a little bit too much, they could actually hurt their overall foot traffic and basket size if customers that are looking for the mass or lower-price products that have been displaced go elsewhere.”
Zolidis predicts Target’s revenues will dip in square footage allotted to Ulta Beauty at Target. Arriagada concurs that productivity could be a problem. She says, “[The] fact is you cannot fit much in 1,000 square feet and have it look like something meaningful, let alone exciting unless the merchandising is dense. If the productivity is not there, neither will be the financial targets both retailers will need to hit to make this a sustainable model.”
Bullish on the possibilities over the potential problems, some analysts highlighted the sales traction Target has experienced from bringing in direct-to-consumer brands such as Hims, Winky Lux, Harry’s, Quip, Art of Sport and Native. If Ulta Beauty at Target curates an on-trend mix, it could outpace the performance of its preceding conventional assortment, and bolster Target’s beauty and personal care sales generally by enticing people to its beauty sections.
In 2019, beauty and household essentials, a category spanning beauty, personal care, baby gear, cleaning, paper products and pet supplies, accounted for 27% of Target’s $77.13 billion in total sales or nearly $20.62 billion. The prior year, the category accounted for 25% of Target’s $74.43 billion in total sales or almost $19.3 billion.
Jani Hali, founder of investment research firm Jane Hali & Associates, points out a key challenge that Target and Ulta will face is securing high-end brands for the Ulta Beauty at Target selection. For high-end brands, concerns linger that being a part of a commodity environment will degrade their positioning. At its founding three decades ago, prestige beauty was principally an aspiration for Ulta, and management’s tenacity and the chain’s progression ultimately convinced the likes of Estée Lauder and L’Oréal to sell their prestige brands at Ulta stores.
Success with a premium to big-box strategy is unusual in beauty. Target edged in the upscale direction with the acquisition of online skincare authority Dermstore in 2013, and Walgreens and Birchbox initiated a collaboration two years ago in an effort to draw coveted prestige brands to drugstore aisles. Walgreens and Duane Reade experimented with Look Boutique in-store concepts and weren’t able to nab leading premium players.
The Sephora and J.C. Penney partnership is a relevant precursor, and Sephora has been a traffic help to the struggling J.C. Penney. Lately, though, the beauty retailer hasn’t been as enthralled with the union. Earlier this year, Sephora threatened to vacate its roughly 600 shops at J.C. Penney. A legal tussle ensued, and Sephora decided to continue at J.C. Penney, but it’s unclear how long the two retailers will work together.
Out of the gate, Target and Ulta have a compelling argument to make to prestige brands eyeing a weak department store sector. “Target is taking care of all your needs whether it be beauty, fashion, home or toys. It’s really the new version of the department store,” says Hali. Lauren Cenzano, chief partnerships and experience officer at distributor EC Scott, suggests the old divisions that ruled the beauty industry aren’t as applicable today. “Beauty brands should be open to exploring nontraditional retail alliances,” she says. “COVID has forced dramatic shifts in how consumers shop. Brands that can crystallize their unique position in a way that also appeals to a broader consumer have an opportunity to gain share of mind as well as share of wallet in the evolving retail landscape.”
The quality of the customer service provided by the employees attending to the Ulta Beauty at Target in-store shops will be important in wooing prestige beauty brands. “Target has been asking high-end brands to come in, and the high-end brands have frequently said no because they need to protect their brand equity and be found in prestige places with the right advisors,” says Greenway. “That just hasn’t been found in the mass market.”
The ripple effects of the Ulta-Target partnership will be felt by mass beauty brands dislodged by Ulta Beauty at Target and the retailers’ competitors. For example, Walmart, which has been upgrading its beauty offering and presentation, might look to emphasize its value proposition while enhancing its exclusive brands to distinguish itself. Imagining what executives at a legacy mass beauty brand carried by Target might be thinking, Greenway says, “I would be very, very concerned about having a relatively lower share of the beauty purchases with attention going elsewhere. I’m going to be selling much less through Target, and I would hope to make it up through other channels. I might invest more in the grocery and drug channels.”
Indie beauty brands, however, are salivating at the idea that they might have a better shot to break into Target stores and get in front of its huge audience. “Indie and emerging beauty brands must creatively pivot to meet customers wherever they want to shop,” says Cenzano. “I think we’re all watching to see if this could be the next masstige beauty brand incubator model of the future.”
- In the fall of next year, Ulta Beauty at Target in-store shops will enter more than 100 Target locations. They will feature over 40 indie and established prestige makeup, skincare, fragrance and haircare brands in 1,000-square-foot spaces.
- The stock market reacted warmly to the deal, and most analysts hailed it as a win-win for Ulta and Target.
- Both Target and Ulta index highly for gen Z beauty shoppers, and their combined effort could turn Target into leading beauty destination for those shoppers for years to come.
- Based on sales per square feet figures for Target and Ulta, Stephanie Wissink, an equity analyst at Jefferies, estimates that an individual Ulta Beauty at Target in-store shop could generate $400,000 in yearly revenues, putting the annual turnover for 100 in-store shops at $40 million.
- John Zolidis, president and founder of Quo Vadis Capital, projects sales will go down in square footage dedicated to Ulta Beauty at Target.
- Piper Sandler spells out Ulta won’t own the inventory heading to Ulta Beauty at Target, but will own the brand relationships. Ulta and Target indicate they will have a long-term relationship.
- In light of the rise of e-commerce, pandemic precautions and the demise of department stores, Target and Ulta have a stronger argument to make to prestige beauty brands to join the Ulta Beauty at Target assortment than mass-market retailers had in the past.
- The quality of the customer service provided by the employees attending to the Ulta Beauty at Target in-store shops will be important in wooing prestige beauty brands.
- The ripple effects of the Ulta-Target partnership will be felt by mass beauty brands dislodged by Ulta Beauty at Target and the retailers’ competitors.
- Indie beauty brands are salivating at the idea that they might have a better shot to break into Target stores and get in front of its huge audience.