By  on July 6, 2012

There’s a home improvement boom taking place in beauty chains across the U.S. — and it’s intended to rattle the foundation of department stores.

The leading specialty chains — Sephora and Ulta included — are busy overhauling existing stores and opening new locations in a bid to unseat department stores as the number-one purveyor of prestige beauty.

The retailers’ ambitions are huge: Ulta plans to open 1,200 doors, up from its original target of 1,000; Sephora wants to be the market-share leader in prestige, and Bluemercury aims to move deeper into the ultraluxury space, all while pursuing its ultimate goal of 300 locations. The latter is on track to open eight to 10 new stores this year. “As landlords get nervous, we get aggressive,” said Marla Malcolm Beck, chief executive officer of Bluemercury. She was referring to pressing harder on leasing space.

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Piper Jaffray analyst Neely Tamminga, who covers Ulta, said, “The rise of Gen-Y is pushing some of this development. This customer is far more educated on the need for preventative skin care and they are seeking innovation. They are also channel agnostic. They just want the best curated collection in beauty: enter Ulta, Sephora and dot-com.”

And, so it seems, Walgreens. In the din of the hammering and power tools, Walgreens is emerging as a surprise but formidable player. The drugstore continues to move beyond its mass market heritage as it opens more Look Boutiques across the Duane Reade chain, adapt the concept for its own nameplate and align itself with British retailer Boots. Today, there are about 40 Look Boutiques, but plans call for “several hundred” over the next few years, said Joe Magnacca, president, daily living products and solutions at Walgreens.

Sephora and Ulta, for their part, emerged from the recession full of gusto — and over the last five years have put increasing pressure on department stores.

“They’ve been able to grow at the expense of two major universes: department stores and drugstores,” said industry consultant Allan Mottus. His company, Mottus & Associates, continually tracks the specialty channel’s impact. Last year, Sephora, Ulta and single-brand beauty boutiques (à la Kiehl’s and MAC Cosmetics stand-alone stores) accounted for one-third of prestige beauty sales. As a point of comparison, in 1997, department stores accounted for 90 percent of prestige sales. Specialty shops continue to reap more attractive growth, too. Mottus said prestige beauty grew 11 to 12 percent in specialty retailers last year, compared to 4 to 5 percent in department stores.

Sephora plans to see to it that that trend continues. “Between Sephora’s freestanding stores, the growth of Sephora inside J.C. Penney and, at some point we should have the number-one market share in prestige beauty,” said David Suliteanu, president and ceo of Sephora Americas. “But I couldn’t tell you when.”

To get closer to that goal, Suliteanu is orchestrating sweeping changes inside existing Sephora stores, along with opening new locations, particularly through its partnership with J.C. Penney Co. Inc. Sephora plans to end the year with 386 shops inside Penney’s. And it continues to open anywhere between 25 to 40 freestanding stores each year. Sephora also continues to ramp up its digital strategy — is already the largest prestige retailer in the world, according to Suliteanu.

“We have this healthy balance of putting stores where they are needed on a consistent basis and making considerable, large investments in existing stores to elevate the client experience,” he said. “It’s the heart of our strategy.”

Inside the newly remodeled Sephora store in SoHo, shoppers buzzed around the sleek displays, played with electronic tablets, preened in oversize mirrors, squeezed BB creams (short for beauty or blemish balms) into the backs of their hand and meandered through the spacious Make Up For Ever boutique. Displays touted the “Nail Studio,” “What’s Hot Now” and “Sephora Favorites,” which group together multiple brands in one category, for instance face primers or mascaras. Everyone was in motion — testing, applying, browsing and, most importantly, buying.

The store is an illustration of Suliteanu’s vision of edging out the competition by investing heavily in Sephora’s existing stores across the U.S. and Canada.

“Over the last five years, we’ve actually devoted more energy and resources into our existing real estate to make sure the majority of our stores represent our latest thinking. Our latest thinking is evolving so fast that it pushes you to swing that investment needle more toward your existing real estate,” he said. “Our growth rate hasn’t changed that much, but what has changed is the number of ways in which we’ve evolved the client experience and the energy and investment that we’ve made to support those ideas. That part of the model has definitely ramped up.”

In his view, there’s a simple metric to gauge success: same-store sales. “If you are winning at the individual store level, you’re winning the [comparable] store battle. Over the last 10 years, we have consistently been at the top, in terms of comp-store sales.”

During the most recent earnings call for its parent, LVMH Moët Hennessy Louis Vuitton, Sephora’s same-store sales in the U.S. were 14 percent in the first quarter.

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