By and  on November 9, 2007

In December 1999, while waiting at the airport for an early morning flight from New York to Dallas for her final interview with Ulta Salon, Cosmetics & Fragrance Inc.'s then-chairman Sam Parker, Lyn Kirby penned a vision for beauty retailing that hadn't existed before.

Her ambition was to reposition Ulta from a discount store into a democratic beauty experience that housed mass, salon and prestige brands under one roof. That vision marked a departure for the industry, which has had a long tradition of separating products into retail classes.

When Kirby took over as president and chief executive officer, Ulta's assortment was heavy on mass beauty brands and had a smattering of salon products and gray-market prestige goods.

Recalling her early impression of the retailer, Kirby said, "There was no clear path to reposition the company from where it was into a multibillion-dollar business that would have access to salon and prestige brands."

Now, eight years later, her impromptu mission statement has served as the framework of the firm's evolution into a full-service purveyor of mass, salon and, increasingly, prestige beauty products, and its recent initial public offering. Ulta began trading on the Nasdaq on Oct. 25, with shares opening at $33 a share, up from its initial offering price of $18 a share. Shares closed at $30 Thursday.

"We have repositioned Ulta from a discount beauty store to a total experience with all the attributes of a category killer — size, real estate and marketing — with the service of a department store," Kirby said.

Wendy Liebmann, president of consulting firm WSL Strategic Retail, said, "Ulta is a concept that is absolutely ripe for consumers," adding that it caters to women's propensity to shop across all channels.

The Romeoville, Ill.-based retailer has built a chain of about 236 stores by planting its flag in suburban off-mall shopping centers. Kirby said the chain plans to end the year with 250 doors and sees the potential to have 1,000-plus stores over the next decade. She would not comment on Ulta's future rate of expansion, but noted, "We will open 50 stores this year, which is up from 31 last year."As Ulta expands, so will its competitors. For instance, Bare Escentuals — the mineral makeup brand that distributes to Ulta — has earmarked a long-term target of 400 branded boutiques. Meanwhile, beauty apothecary Bluemercury aims to reach 300 stores by 2010, and Sephora, which plans to end the year with more than 180 units, continues to expand its concept in J.C. Penney Co. Inc. department stores. The hyper-growth of stores may present a challenge for Ulta, as it enters markets where its competitors, particularly Sephora, have already set up shop. Industry sources speculated that a 1,000-unit store base may also eat away at Ulta's comparable store growth.

Ulta's leg up, asserted Kirby, is its democratic approach to beauty and its off-mall locations, which allow customers to park near the front of the store and avoid traipsing through the mall passing other beauty retailers along the way.

Kirby said Ulta's locations allow a shopper to dash into the store to replenish her shampoo and their layouts encourage impulse shopping once there. Ulta occasionally does deviate from its real estate strategy. For instance, the retailer is building a store on Chicago's bustling State Street, which is slated to open early next year. Kirby, who eschews the word flagship, said the multilevel State Street store is slightly larger than Ulta's prototype of 10,000 square feet. Older stores are generally 8,500 square feet.

Ulta's most ambitious feat has been attracting prestige brands. WSL's Liebmann noted, "Ulta has had to drag prestige brands kicking and screaming into that format. It's been a long process that Ulta has been dogged about."

Kirby's own account confirms that struggle. "The behind-the-scenes look at prestige was really knocking on the doors of the brands over eight years," she said. Her intention when meeting with prestige players was to detail changes that had taken place in suburbs across the country, as convenience-minded women began seeking out beauty in more places, at times at the expense of department stores. At the end of each conversation, Kirby said she and her team would remind prestige and salon executives, "When you are ready, we will be ready."

Ulta began to gain traction with prestige fragrance brands in late 2002, and by 2004 started to attract upscale cosmetics brands to the mix.Bare Escentuals, which propelled its business by selling its premium products on QVC and via infomercials, began distributing to Ulta a decade ago. Kirby acknowledged that Bare Escentuals' success may have helped attract additional upmarket brands to Ulta. "People know that Ulta knows how to develop a prestige brand," she said.

Diane Miles, Bare Escentuals' president of wholesale and international, said the two brands have evolved since linking arms. For instance, Bare Escentuals entered Ulta essentially as a bath and body line, but in the last five years has repositioned itself as a mineral makeup line, said Miles. She added that Ulta's real estate strategy brings prestige products to places where competitors aren't typically located. As for why Ulta seems to attract emerging brands, Miles said, "You don't have to have a big infrastructure to do business with Ulta, or Sephora, because they provide the sales force. For department stores, a brand needs a certain critical mass to distribute to them."

Given the challenges facing U.S. department stores, Ulta offers an alternative point of distribution. Randi Shinder, founder and ceo of FusionBeauty and Clean Perfume, said, "Prestige brands need alternative channels to grow their business, because the opportunities for distribution are so limited." Shinder began distributing her Clean fragrances to Ulta about five years ago, and the FusionBeauty line there nearly three years ago. "We see huge growth at Ulta," she said.

Its cross-pollinated mix seems to be resonating with consumers. For the fiscal year ended Feb. 3, Ulta's sales were $755.1 million, up from $579.1 million in the prior year.

Kirby — who began her career at Avon in Australia, later working for the direct seller in New York — said through her experience, she learned the power of merchandising through print. That said, she has increased the frequency of Ulta catalogues and worked to reposition them from a discounting vehicle to a tool for emphasizing value. Kirby, who left her post as president of Sears' now-defunct beauty venture Circle of Beauty to join Ulta, also saw the challenges facing department stores. "For prestige brands, Ulta offers a terrific incremental sales opportunity," she said, noting some consumers have defected from department stores and, in her view, younger shoppers never truly adopted the channel. "We will always continue to grow our mass brands, but our fastest growth opportunity will be in prestige."In a bid to reaffirm its move upmarket, Ulta began remodeling its store base two years ago, and expects to have completed 25 remodels by this holiday, said Kirby. The remodels mirror Ulta's new stores.

A recent visit to several Ulta units revealed a clean shopping environment with about five sales associates strolling each store. Signs touting promotions hung in Ulta's large windows to entice passersby. The original stores had salons at the front, but hair services are now at the back of the store, so shoppers first see the retail area.

The retailer is highlighting Bare Escentuals' Pure Platinum Collection, an Ulta exclusive, while also giving ample space to its private label line of mineral makeup. Ulta's private label display, which used to resemble a musical organ at the entrance, has been replaced by a smaller fixture situated off to the side. The entryway now touts promotions and new scents. For instance, Ulta featured a 73-piece makeup collection in a train case priced at $24.99.

In most stores, the left side is assigned to mass market beauty lines, including L'Oréal's HIP, Max Factor, Cover Girl, Revlon, Rimmel, Almay, Prestige, NYC, NYX and Physicians Formula.

There is also space for emerging trends, such as an area dedicated to glow moisturizers. Makeup mirrors and beauty appliances, often a difficult category to merchandise, and a number of impulse items, such as iPod speakers, are situated behind mass beauty. The rear of the store is devoted to the salon, where there are usually about eight chairs. The area is relatively quiet in the day, but buzzes at nights and on weekends. Near the salon are the professional brands including Rusk, Sebastian, Frédéric Fekkai, Biolage, Joica and Abba. Close by, there's a skin care collection stocked with venerable brands, including Dermablend, Murad, Kinerase and Exuviance.

There are also pricy hair appliances, complete with a table of more than 20 blow-dryers plugged in and ready to sample. Mass merchants, such as Target, have borrowed this approach.

The right side of the store and the center is where Ulta merchandises its prestige brands. Like Sephora, Ulta has become a launching pad for up-and-coming lines, such as Amazing Cosmetics and Joey NY. Other brands include Boujois, Smashbox and Urban Decay, as well as department store brands like Elizabeth Arden and Christian Dior.Fragrances are displayed on the wall and in nearby aisles. It appears that there has been a slight reduction in scents to make room for a larger men's grooming area. Ulta prominently features fragrance introductions and has been touting Britney Spears Believe. Ulta also reserves some flex space to expand on hot categories or those that can drive impulse sales.

The stores are a far cry from Ulta's origins in 1990. The retailer was originally called Ulta 3 (for price, selection and service) and was created by drugstore executives, namely Dick George and Terry Hanson, who cut their teeth at Osco Drug and American Drug Stores. A friend at a hair design school told Hanson of the need for one store that met all beauty needs.

The original stores were more mass-oriented, because those are the vendors that could be secured. At first, the executives had trouble getting shoppers to understand the concept, which was originally based primarily on price. But shoppers could find many of the same items at discounts elsewhere. As the chain evolved, appliances grew in importance along with the salon services. The "3" was dropped from the name in 1999. Kirby's early-morning decree inked in the airport that year has helped to establish Ulta as a stand-alone brand, said vendors. Tom Winarick, president of Prestige Cosmetics, said, "Ulta has brought more of the European retail model to the U.S. market, where mass and prestige coexist under one roof."

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