Sephora 5th Avenue Store

Ulta, Sephora and Amazon: Where Is the $56.4b U.S. Beauty Retail Market Headed

LVMH just released its first-half 2018 financials, and by all accounts, its retail beauty brand Sephora is off to a good start this year. While the company doesn’t break out sales of Sephora in its Selective Retail reporting group, it revealed LVMH Selective Retail grew 9% over the same period the previous year and bragged: “Sephora achieved sustained growth across all areas of operation. With omni-channel at the heart of its strategy, online sales advanced rapidly.”

But that ~9% growth for Sephora/LVMH Selective Retail pales in comparison to that of U.S.-based Ulta, its major competitor in the estimated $56.4 billion U.S. beauty retail market. Ulta reported sales increased 17.4% in the first quarter 2018, reaching $1.5 billion, following a gangbuster performance in 2017 when 21.2% growth produced $5.9 billion in sales.

Its strong first-quarter performance led Ulta to raise its guidance for earnings per share in 2018. It expects growth full year in the low-teens percentage range, with a 40% increase in e-commerce sales predicted. While 100 new stores will contribute to that growth, Ulta also advised that comparable sales growth will be in the 6% to 8% range overall.

In the first quarter, Ulta opened 34 of the 100 new stores planned in 2018, ending the quarter with 1,107 locations. By comparison, Sephora operates some 500 stores in the Americas and has a further 600 shop-in-shop locations in J.C. Penney department stores, many of them located in the same malls where a free-standing Sephora store operates. Apparently neither Sephora location suffers cannibalization as a result.

Together, these two companies – Ulta and Sephora – dominate the specialty retail market for beauty and cosmetics. Into the fray comes Bluemercury, a Macy’s brand that it acquired in 2015.

Macy’s plans to open 55 new stores, including 25 freestanding stores and another 30 Bluemercury shops within Macy’s stores, to bring the total number of Bluemercury locations to about 220 in 2019, small in comparison to Ulta and Sephora. It is a strategy designed to shore up Macy’s lagging traditional beauty department, which has been losing favor with beauty customers drawn to the shopper-friendly experience and ease of shopping across brands that specialty beauty retailers offer.

But will more specialty beauty retailers – more Ultas, more Sephoras, more Bluemercurys – really be a boon for shoppers or the brands that fill their shelves? Amazon is the wildcard in all of this, sitting out there like a giant spider spinning its web – its 100 million loyal Prime members – ready to feast on burgeoning online beauty sales.

It’s easy pickings for Amazon since all competitors are after the same customers. Amazon is way out front of Sephora and Ulta as an online destination for online beauty shoppers. In an AT Kearney study called “Beauty and the E-Commerce Beast,” 69% of online beauty customers reported searching for and purchasing beauty and personal care products on Amazon in the past year, while only 41% reported the same for Sephora and 37% for Ulta. Walmart (36%), Macy’s and Target (both 33%) and Walgreens and CVS (both 25%) followed.

Ulta and Sephora are following increasingly convergent, rather than divergent paths

When Sephora landed on these shores 20 years ago, it offered a distinctly different alternative for beauty shoppers than Ulta, which was founded in 1990. At that time, beauty was a highly-structured business with prestige cosmetics primarily limited to department stores, drug and mass merchandisers for mass brands and salons and authorized retailers for professional hair care products.

Sephora initially went after the prestige segment, drawing higher-end customers to their stores with prestige brands previously only carried in department stores, while Ulta primarily focused on mass and professional hair care brands with a smattering of prestige brands thrown into the mix, mostly for high-end fragrance, not color or skin care. Sephora and Ulta operated in different spheres of beauty retail with little cross over.

But that was then, and this is now. Prestige brands that wouldn’t give Ulta the time of day 20 years ago now want on that gravy train. “Where once there was divergence in markets and strategies, today Sephora and Ulta are converging,” says Hana Ben-Shabat, a beauty expert, consultant to the industry for 20 years, and co-author, along with Wendy Tng, of the Kearney report.

“Today Ulta offers a much broader range of prestige and mass brands. Because it is among the fastest-growing retailer in the U.S. over the past several years, Ulta has become a very attractive proposition for prestige brands that want to grow,” Ben-Shabat says.

Sephora, for its part, still maintains its luxury look and feel in its store environment, but has also partnered with mass-market J.C. Penney since 2006, giving its customers access to a range of Sephora’s luxury-beauty brands.

Get Free White Paper:
Marketing Luxury Beauty in a Brand New Style

Sephora further has been developing its own house brand as a lower-cost alternative to the name brands it carries, following a strategy that Ulta has worked for years. “Sephora has been differentiating a lot with their own line. Ulta has been differentiating on customer service and their loyalty program,” says Ben-Shabat.

“Where they once appealed to different customers – Sephora, younger, urban affluents, and Ulta, an older, suburban shopper – Sephora is making a big effort to appeal to older customers with brands like Estée Lauder and Lancôme. And Ulta just opened a New York City store and now has more prestige and indie brands to appeal to younger consumers,” she continues.

Ulta has challenged Sephora in the luxury sector in a big way, Ben-Shabat believes. The result is they don’t look all that different to the consumer, once you dig below the surface. “There is really more convergence, than divergence between Sephora and Ulta today. It is like each one has been looking at what the other is doing and trying to fill the gaps,” she says.

“The question is how will they differentiate as they are moving towards each other and doing everything for everyone? Where does the differentiation come from?” she asks.

Can techno-power be the ticket?

At least for now Sephora is ahead of Ulta in the technology race. In its stores customers can access a computerized iQ system: Skincare iQ for customized skincare selections matching formulas with individual needs; Color iQ to identify and match color cosmetics; and Fragrance iQ that helps clients select scents to suit their preferences and moods.

In select stores it also offers Sephora Virtual Assistant and Sephora Virtual Artist for Sephora Collection, respectively, that allow clients to virtually try-on different makeup options through AR technology. In addition, in two stores in France Sephora is testing a Beauty Hub digital app that allows customers to test products, shop via connected terminals and get access to beauty tutorials.

And in two new smaller-footprint Sephora Studio stores, one in Boston and the other in Hoboken, NJ, the aim is to seamlessly integrate personalized services with technology, including an integrated Sephora Digital Makeover Guide. Besides offering a full range of beauty services, including a 75-minute fully custom makeover session, the “Sephora Studio integrates a variety of digital tools to optimize client experiences before, during and after their store visit,” the company said in a statement.

All this, plus recent enhancements to its mobile Sephora Virtual Assistant app, points to the company’s commitment to use technology combined with personal service as a key to its future.

But in these areas too, Ulta is not far behind. Salon services have long been a feature in Ulta stores and “technology enhancements” are on deck to elevate and enhance the in-store guest experience.

In regards to the two brand’s online strategies, SimilarWeb’s Ethan Chernofsky, director of marketing, says both brands are following a similar trajectory with Sephora marginally ahead with a reported 45 million more online visitors over the last 12 months compared with Ulta (188.5 million to Sephora’s 233.9 million).

“Their [internet] strategies are not completely different. Both are doing very similar things,” he shared. “Only Sephora is doing it better over the long term and their audience is getting younger. But when you see such complementary online strategies with similar approaches, those differences are not so significant.”

Amazon can eat both Sephora’s and Ulta’s lunch

As Sephora and Ulta follow similar paths both in-store and online to attract new customers and keep them coming back for more, Amazon sits in wait. Health, personal care and beauty products are estimated by eMarketer to be a $16 billion business for Amazon and now with its acquisition of PillPack, more customers will rely on it for their on-going health needs, of which skincare is an extension.

In beauty overall, Amazon sales in 2Q2018 are estimated to have reach $950 million, up 26% over same period last year, according to One Click Retail. Year-end sales could reach $4 billion if Amazon keeps its current pace, leaving both Sephora and Ulta in the dust online. And while Amazon has been slow to attract luxury beauty brands, its sales of prestige grew 57% in the last quarter reaching an estimated $250 million.

Customer loyalty is prime for the future of beauty retail

The AT Kearney’s report says customer loyalty is the key that unlocks the future of beauty retail and that the primary challenge for Sephora, Ulta, Bluemercury and all the other retailers that rely upon foot traffic for beauty and cosmetic sales is the encroachment of online, most especially Amazon. “As online sales of beauty and personal care products rise, loyalty becomes elusive, creating new challenges for beauty sellers,” the report states.

The customer loyalty that is elusive for everybody else is hardly elusive for Amazon, thanks to its 100 million paying Prime members. Coresight Research reports that 52.5% of Prime members bought beauty products in the past 12 months as compared with only 16.9% of non-members. And further that 48% of U.S. women have bought beauty or personal care products on Amazon in the past 12 months. (Note: the AT Kearney report above surveyed only online beauty shoppers; this one references all U.S. women.)

Currently beauty and personal care products are the second-most-shopped category on Amazon, Coresight reports. Only books register a greater number of shoppers in the U.S. And we all know what Amazon did to brick-and-mortar book retail.