At 25 years old, Ulta Beauty is one of the hottest beauty retailers in the U.S. with a reach of more than 800 doors, and plans to get bigger fast.
But despite its size and might, beauty vendors and Wall Street analysts alike applaud the retailer for its nimbleness.
Ulta’s constant tinkering with the mix, merchandising and marketing is part of its quest to draw in more customers.
“We are not complacent,” said chief executive officer Mary Dillon. “It’s an ever-changing world we live in….We’re always going to be in a mode of testing and experimentation. We can’t stand still,” she added, referring to a competitive landscape that includes Sephora, Kohl’s Corp. and Macy’s Inc., among others.
The strategy reflects a key management tenet of Dillon’s that she calls “continuous improvement.”
“We’re in a mode of being celebratory, but we’re just getting started,” she declared.
The retailer is expanding its presence at a rapid-fire pace, opening approximately 100 units a year with a goal of reaching 1,200 doors by 2019 in a bid to introduce its nameplate to more consumers across the country. The store expansion is part of Dillon’s five-year growth plan, adopted in 2014 and intended to result in 500 new stores, an e-commerce operation that accounts for 10 percent of sales and comparable-store sales growth of 5 to 7 percent a year.
Ulta also is testing a smaller-format store, which is half the size of its typical 10,000-square-foot box, in two rural markets — Vernal, Utah, and Morganton, N.C. — and plans to roll out several hundred of them. It’s also looking at a 7,500-squarefoot box in certain markets.
When Dillon took the reins as ceo two years ago, she inherited a beauty emporium that housed mass, prestige and salon brands, along with beauty services, under one roof. This democratic view of beauty retailing has amassed a legion of loyalists. After all, approximately 80 percent of its sales come from its 15.5 million loyalty club members. But there are still plenty of beauty shoppers who are unfamiliar with the Ulta name, and many who do know the retailer aren’t aware that it also offers hair, brow and skin-care services. Dillon acknowledges that Ulta’s name recognition lags behind many of its competitors. But she sees this reality as a huge opportunity, particularly since Ulta has yet to fully turn on its marketing might.
Ulta plans to do just that in September, when it launches its first national advertising campaign, “Go Ahead, Lose Yourself,” across TV, radio, digital and social media.
The campaign, coupled with Ulta’s growing store base, could help double its share of the U.S. beauty market to 6 percent, up from its current 3 percent, over the next five years, said several analysts.
Ulta’s stepped-up marketing effort includes its UltaMate Rewards loyalty program. In early 2014, the retailer migrated all program members to one platform and invited its sales associates to join so they can better explain the benefits to consumers.
“The way it works is the more you spend, the more points you get, and our guests love that simplicity,” Dillon said. “But behind that, we have the ability to use good, keen consumer insights to partner with our vendors and say, ‘How can we help you understand how to grow your brand?’ And for our guest, she gets more personalized offers.”
Dillon said one of the most surprising findings gained from the data is that only 7 percent of its loyalty-card members have visited a salon at Ulta.
“So now that we know only 7 percent of our guests have tried our salon, you can imagine what a great opportunity that is for us to help them understand the possibilities and give them offers to come in and try the salon with services like blowouts and updos.”
Dillon said salon patrons spend two-and-a-half times the amount and shop twice as frequently a year as Ulta’s nonsalon customers.
At an Ulta store in Glendale, N.Y., a sign stationed alongside the salon read: “An invitation to new guests: $30 haircut and style.” It encouraged customers to book online at ulta.com/salon.
Elsewhere in the store, Benefit Cosmetics offers brow-shaping and Dermalogica provides skin-care treatments in its MicroZone pod.
Dermalogica entered Ulta doors in 2006, and offers services across the chain. It’s also worked with Ulta to create customized treatments, such as the Power Resurfacing Peel, or three 30-minute sessions over the course of three weeks priced at $40 each, or three for $90.
Steve Kurland, global ceo of Dermalogica, said Dillon’s vision for Ulta centers on the customer.
“It’s really quite simple: She seems to have focused the entire company on the total reason for being and that is the guest,” Kurland said. “It’s a very ambitious vision, but it is backed up by the results that she has achieved in a short time.”
Wall Street analysts are also particularly keen on Dillon.
“It’s the best box out there,” said Oppenheimer analyst Rupesh Parikh, calling it the go-to place for suburban beauty enthusiasts. “It continues to enhance its merchandising, which is one of the keys to their success.”
Ulta’s financial performance has kept those accolades coming.
The retailer continues to grow at a staggering rate, achieving $3.24 billion in sales in 2014, or a 21.4 percent gain over the prior year. Its total same-store sales, which include its e-commerce site, gained 9.9 percent during the year.
Ulta has steadily attracted prestige brands to the assortment. It’s a path forged by former ceo Lyn Kirby, who wooed brands by knocking on doors and dramatically improving the in-store experience. Now Benefit Cosmetics boutiques are found in approximately 600 locations, and Lancôme and Clinique boutiques each occupy about 100 doors. The addition of these brands has helped fuel those double-digit sales gains, as prestige cosmetics and skin care lead the company’s growth.
While walking through the Glendale, N.Y., store, where upscale brands such as Bare Escentuals and Philosophy are front-and-center, Dillon is quick to point out that mass brands, or what she called “accessible brands,” are also an essential part of Ulta’s positioning and competitive advantage.
“What we are all about is creating a differentiated environment, understanding the guest, where she shops and what she wants,” said Dillon. “We are always going to have competition, but nobody does what we do on the scale we do it. We’ve got all these categories, price points and services. It’s the notion of all things beauty in one place.”
When speaking about strategy, Dillon frequently refers to putting the customers — and the store associates — at the center of Ulta’s decision-making.
“The guest insight is really driving our model and the way we think about categories, products and services. We are very focused on a [consumer] segment that we call the beauty enthusiast,” Dillon said. “She’s somebody who absolutely loves to shop for beauty. She likes to curate her own look, and walk across the store and pick from lots of great categories and brands. When she wants assistance, she can get it, but sometimes she doesn’t. For her, it is absolutely critical that she can pick up a Maybelline product, an Urban Decay product and a Murad product. She loves the notion of being able to put them all together.”
Dillon’s focus on the customer also is winning her points with Ulta’s vendors.
Bare Escentuals has collaborated with the retailer to create a number of exclusives tailored to the Ulta consumer, using its customer relationship management data, or CRM.
“[Mary’s] brought a strategic vision,” said Bare Escentuals ceo Simon Cowell. “She has a strong brand and marketing background and most importantly, she has a great passion for the guest.” He added that Dillon — who prior to joing Ulta in 2013 was ceo of U.S. Cellular and held marketing posts at McDonald’s Corp. and PepsiCo Inc. — has a natural curiosity about the business. He recalled that shortly after she arrived at Ulta, she visited Bare Escentuals headquarters in San Francisco and spent the entire day with Cowell and his team as he took her through the company’s history. She then used these types of meetings to help inform her vision for Ulta, said Cowell. “Something has kind of shifted at Ulta. It’s asking what’s next for Bare Escentuals and how can Ulta amplify that? It’s thinking in a more visionary way.”
Ulta continues to test new brands in the assortment, particularly though its Web site, where it can gauge consumer interest before rolling out to stores. That was the case with Skyn Iceland, which the retailer began selling on ulta.com in September 2013, before introducing one product, Hydro Cool Firming Eye Gels, to stores one year later, said Skyn Iceland’s president and founder Sarah Kugelman. The range will begin rolling out to more stores in August and is slated to be in all 800 Ulta doors by February. “It’s a game-changer for us. It will double the size of our business,” said Kugelman.
William Blair analyst Daniel Hofkin said of Dillon, “She came in with fresh eyes and said, ‘How fast should we be growing? What is working and what is not?’ She’s very good at identifying what Ulta’s strengths are. She’s not trying to make sweeping changes for the sake of it.”
Dillon prefers to take a more evolutionary approach. “I am a big believer in testing and learning and not changing things too dramatically overnight. It’s too risky,” Dillon said. “If something is not broken, I’ve learned not to go ahead and try to fix it. Let’s sit back and try to hypothesize about what areas will continue to make us stronger.”
Now, she is fine-tuning, constantly asking, “What can we do better?”
Parikh at Oppenheimer said, “There’s so much growth ahead. They have so much opportunity in the U.S.”