The battle for the prestige beauty shopper in the U.S. is on, as the retail landscape continues to convulse in an environment forever changed by the coronavirus pandemic.
On one side: Sephora, the global prestige beauty retailer owned by LVMH Moët Hennessy Louis Vuitton, which on Tuesday revealed it had formed a strategic partnership with Kohl’s Corp. to open 850 in-store shops over the next three years. On the other: Ulta Beauty, which three weeks ago unveiled its own deal with Target Corp. to open units in 100 doors in 2021, with more to come in the years ahead.
Both efforts are scheduled to launch in the fall, although the scale is somewhat different — Sephora at Kohl’s shops will measure about 2,500 square feet, while Ulta Beauty at Target is designed at 1,000 square feet. Sephora said it will phase out its relationship with beleaguered department store J.C. Penney Co. Inc.
But Sephora and Ulta are more evenly matched when it comes to share of wallet of the aspirational beauty shopper in North America. Ulta is the larger brick-and-mortar player, with 26.7 percent market share, according to Euromonitor International. Sephora ranks third on the list — but it is the only player solely in prestige and is the largest player in that category, having edged out Macy’s Inc.
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The deals come at a pivotal time for prestige beauty, when sales during COVID-19 have sagged. In the third quarter of 2020, The NPD Group reported a decline of 17 percent to $3.7 billion versus the year before, with the makeup category plunging 31 percent.
Still, “the jury is out” when it comes to whether or not prestige brands will want to enter Target or Kohl’s, said one high-ranking executive, who requested anonymity. Said another, “If we wanted to enter Target, we don’t need Ulta to do that.”
Marc Rey, the former chief executive officer of Shiseido Americas, said those points of view are too black-and-white in today’s environment, though. “Today the consumer shops where she wants to shop and she is mixing mass, direct and prestige,” he said. “The frontiers are becoming very blurry between mass and prestige. The U.S. is becoming more premium and masstige than ultra-prestige.”
Some industry watchers believe Kohl’s may be more palatable to prestige brands than Target, noting it is closer to J.C. Penney in terms of shopping experience and consumer profile. Stifel analyst Mark Astrachan sees both moves as major distribution plays at a time when beauty’s big players, including the Estée Lauder Cos. and L’Oreal, are seeing shrunken department store businesses.
“You’re seeing people seemingly moving downstream…[but] their exposure, the collective exposure to department stores is like death by 1,000 paper cuts,” he said. “All these brands are trying to move where the puck is going proactively.
“Yes, it’s downstream, but it isn’t necessarily a consumer that you don’t want,” he continued, “especially one where you can engage from an entry level prestige standpoint, and hopefully see them increase usage and trade up through the portfolio over time. Isn’t that the name of the game? It seems to me it’s a no brainer, if you’re a big beauty brand, to want to do this.”
Steph Wissink, managing director at Jefferies, said the move seemed like a lateral one for Sephora, given the retailer’s existing relationship with J.C. Penney. She described it as “staying in the same midtier department store alley, but moving to the survivor.”
But for Kohl’s, the partnership is seen as major. The retailer had developed its own masstige beauty assortment over the past few years with brands like Pur, Lorac and Laura Geller, but Sephora will bring “a more sophisticated merchandising and curation strategy,” Wissink said. And it will bring prestige brands, which Kohl’s has had limited access to in the past.
Kohl’s stock price spiked on the news, closing up more than 13 percent on Tuesday to $36.52.
There is considerable upside for Sephora, too — namely in gaining a significant presence in off-mall locations, a real estate sector that Ulta has dominated. “Outside of urban areas, Sephora stores are located in malls,” said Jane Hali, ceo of Jane Hali & Associates. “It is much easier to go off mall to [Kohl’s]. You don’t have to be locked in a mall, just drive up, park, or [buy online pick up in store] or curbside [pickup]. It is not so easy to get curbside from department stores in malls. You usually have to drive to the top of the garage area to pick up.”
Still, the presence of Ulta in those strip malls may work against Sephora at Kohl’s, said Rey. “Many of the Kohl’s stores are at the same mall where there is a Target,” he said. “As a brand, you look at it and ask how much business is going to be additional and how much is it going to cannibalize your existing Ulta business.”
Rey also noted that Target may be more effective at recruiting a new customer to the prestige sector. “Target has a high frequency of visit because of its assortment and it is probably easier to extend the consumer base to people who don’t shop a lot in prestige,” he said. “I would argue that as an entry prestige brand, you increase your trial level if you go to Target.”
The biggest loser in the deal looks to be J.C. Penney, which has housed Sephora Inside J.C. Penney since 2006. At its height, over 650 of Penney’s 1,600 locations featured a full-service Sephora assortment in a space that usually measured around 2,000 square feet.
The problems between Sephora and Penney’s became public in May, when Penney’s filed a temporary restraining order against Sephora, arguing that the retailer was trying to cut short their joint enterprise operating contract. It is not known exactly how long that contract lasts, but it doesn’t expire “for several years” Penney’s said at the time.
“The move symbolizes the downfall of Penney’s,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “Sephora was what brought many women through the door there.”
Still, to make the partnership at Kohl’s work, Gordon said the retailer will need to continue the upgrade strategy it has pursued under ceo Michelle Gass. “Sephora could work at Kohl’s, but to maximize the chances of that, Kohl’s needs to strengthen the upper end of its women’s apparel and accessories assortments so women find other things in Kohl’s that match what they find in the Sephora section,” said Gordon. “Otherwise Sephora is an island.”
For its part, a spokesperson for J.C. Penney said it’s business as usual for now. In a statement, the spokesperson said: “Over the last 15 years, we have enjoyed a long-standing partnership with Sephora to serve our customers through Sephora inside J.C. Penney. That partnership remains strong and will continue until the end of the agreement. We are developing a new, inclusive beauty concept that offers our customers a wide array of product. This endeavor will advance our Plan for Renewal to offer compelling merchandise, drive traffic and deliver an engaging experience for all customers. We look forward to unveiling this new concept, which will be enhanced by our salon offerings to provide an improved beauty experience. Until then, we will continue to faithfully serve our customers through SiJCP.”
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