Ulta-Beauty-Case-Study.Pdf
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W&M-M-196 ULTA BEAUTY1 Introduction Ulta announced record-breaking financial performance in the third quarter of FY2016. Revenues increased by 24.2 percent to $1.131 billion, while comparable sales and transactions grew by 16.7 and 11.1 percent, respectively. The retailer had consistently grown revenues by greater than 20 percent since FY2010. During this time, Ulta had also increased net income from 3.2 percent in FY2009 to 8.2 percent in FY2015, through careful management of SG&A expenses, which had dropped from 24.7 percent in FY2009 to 22 percent in FY2015. Further financial information is found in Exhibit 1. As a result, shares of Ulta grew 38 percent in 2016, exceeding the S&P 500 by approximately four times during the same period1. In 2015, Ulta became the largest beauty specialist retailer in the U.S. Ulta was uniquely positioned in the marketplace by offering both mass brands (e.g., CoverGirl, Maybelline) and prestige brands (e.g., Lancome, Clinique).2 According to Fabian Garcia, CEO of Revlon, Ulta “has completely debunked the old notion that you were either prestige or mass. The fact that Ulta challenged the old paradigm is a good enough proof that the world is moving.”3 Brian Yarbrough, an analyst at Edward Jones & Company, agreed by stating that, “they are changing the way people shop as they have allowed people to buy both mass and prestige, as well as get salon, brow and other services which historically would have been done at multiple locations. No other retailer offers all three in the same spot.”4 The retailer attracted “beauty enthusiasts”, who were heavy purchasers of beauty products.5 The company estimated that there were 72 million “beauty enthusiasts”. They accounted for approximately 77 percent of the spending within the beauty market. Only 15 million of these customers, however, currently shopped at Ulta. 6 These customers were very different from “replenishment shoppers” who were habitual beauty product buyers and less willing to experiment. Beauty enthusiasts enjoyed experimenting with new products in physical stores, where product trial was encouraged. These shoppers were influenced by beauty bloggers, product reviews on retailer 1 This case was prepared by Yanhua (Rita) Liu, MBA 2017, under the supervision of Lawrence J. Ring, Chancellor Professor of Business and EMBA Alumni Chair in Executive Education and Professor Ron Hess, Associate Professor of Marketing, as a basis for class discussion. It is not intended to illustrate either effective or ineffective management. Copyright, 2017, by the Raymond A. Mason School of Business Foundation 1 websites, social media, and store employees. “For many beauty users – young and old – the convenience of online shopping can’t compete with the ability to try before they buy.”7 Beauty specialist retailing grew by 48 percent in the U.S. from 2012-2016. This performance represented the second fastest growing retail sector, behind only off-price department store retailing.8 As a result, competitors from a wide variety of sectors – even outside the traditional beauty channels - entered or significantly strengthened their beauty offerings. Pharmacy retailers, such as CVS and Walgreen’s, were especially interested in growing their shares of this lucrative market. According to eMarketer, 50 percent of females purchased cosmetics from pharmacies.9 In response, CVS and Walgreen’s expanded and redesigned their beauty areas to grow this important business. CVS introduced beauty consultants and Walgreen’s added higher-end beauty brands. Both retailers also established beauty-specific loyalty programs to lure these customers. According to Brian Owens, Director of Kanter Retail, “they (CVS and Walgreen’s) want to convert shoppers who may have gotten ideas at Sephora or Ulta (Beauty).”10 Competition also appeared from outside the traditional beauty channel. Sizable beauty areas were added to Anthropologie and Barnes & Noble in 2016.11 In addition, strong growth in digital subscription offerings had also occurred. These services deliver a box of sample beauty products to customer homes for a small monthly fee. Purchases of the sample products could be made in store or online. More recently, subscription services were added by Sephora, Allure Magazine, Target, Walmart and others. Competition had also intensified from large branded retailers such as Mac, Chanel, and Urban Decay, as well as niche beauty retailers.12 Well-established beauty brands such as Este Lauder and L’Oréal were more aggressively opening branded stores in response to Sephora’s decision to restrict store space devoted to these brands to make room for LVMH parent brands.13 In addition, Bluemercury, an upscale niche beauty retailer, had also grown significantly in recent years and was acquired by Macy’s in 2015. The department store was very interested in growing this part of its business in the future. Over the past decade, Ulta established itself as a very successful retailer and the largest beauty specialist retailer in the U.S. As the retailer faced new competition from nearly every sector in retailing, future growth would be more difficult to achieve. According to Yarborough, an analyst at Edward Jones & Company, “there’s no way that sales are going to continue to run it. At some point, they are going to slow and run out of square footage growth.”14 The central question for the retailer was how it could 2 sustain its previous performance into the future. What strategic initiatives would Ulta need to focus on to continue its growth and financial performance? History Founded by Richard E. George in 1990, an Illinois based company, Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ: ULTA) was the largest specialty beauty retailer in the U.S. and a one-stop destination for cosmetics, fragrance, skin care products, hair care products and salon services.15 In the early 90’s, beauty products were sold in distinct retail channels: department stores for prestige products, drug stores and mass merchandisers for mass products, and authorized retail outlets and salons for professional hair care products.16 Ulta beauty started as a discount beauty store and focused on delivering an unique customer shopping experience and then developed a successful business model - “All things beauty, All in one place ™”. Ulta offered a full range of beauty categories, brands and price. Ulta offered prestige, mass products and full salon services in one retail store so their customers could find everything they need in one shopping trip. The business model allowed Ulta to serve female customer of all ages, demographics and lifestyles.17 In 1990, the first five stores opened in Naperville, Illinois, under the original name “ULTA 3 Cosmetics and Salon”. Ulta.com started on February 27, 1998.18 During 1990 to 1999, Ulta changed company names four times, from “Ulta3, Inc.,” to “Ulta 3 The Cosmetic Savings Store, Inc.,” to “Ulta 3 Cosmetics & Salon, Inc.,” and to “Ulta Salon, Cosmetics & Fragrance, Inc.” 19 The frequently changing names indicated that Ulta was continuing to improve the store image and provide sophisticated service. By 2000, Ulta operated 84 stores in 12 states. Exhibit 2 indicates that the new store layouts of level 6 and level 7 were introduced for improving the display of prestige cosmetics and skin care brands, including moving cash registers to the front of store, making room for the boutique, and adding sleeker and modern design elements. By 2010, Ulta operated 390 stores in 41 states. On October 24, 2007, the company traded publicly on the NASDAQ. 20 From 2011 to 2012, Ulta rapidly expanded to 48 states with 554 stores, and by January 30, 2016, Ulta operated 874 retail stores across the U.S.21 Environment Market The beauty and salon service industry was large in U.S. According to Euromonitor International and IBIS World Inc., this industry delivered approximately 3 $127 billion in overall sales. Approximately $74 billion represented the beauty products market that included cosmetics, haircare, fragrance, bath and body, skincare, salon styling tools and other toiletries. The remaining $53 billion consisted of the salon services industry that included hair, skin and nail services. Exhibit 3 provides the U.S. beauty and salon service industry breakdown. The beauty market was expected to maintain a slow and steady growth trend, with an anticipated annual compound growth rate of 2 percent from 2016 to 2020. 22 The key drivers included a recovering economy, population growth, especially among millennial women aged 18-34 and Hispanics, and quickly growing luxury beauty categories. In 2015, the luxury beauty product sales increased 7 percent over 2014 while the mass market rose just 2 percent.23 Within the beauty products market, color cosmetics were heavily driven by new fashion trends and experimentation to refresh a woman`s look, while haircare and facial skincare were mainly driven by high levels of regular use and penetration.24 The beauty market was less sensitive to the economic cycles than many other markets. During the recession, growth in the beauty market fell moderately compared to the drop in the global GDP growth rate.25 However, the beauty market was seriously impacted by seasonality. The holiday season from October to December generated more than 25 percent of the industry`s annual revenue.26 Fragrance and gift set revenue typically peaked during the winter holidays, Mother`s day, and Valentine`s Day.27 The beauty industry was significantly influenced by changing customer shopping behavior and preferences. Beauty shoppers, especially the millennial customers who were social media savvy and closely followed fashion trends, preferred to test and trial the beauty products before purchasing them. Competition The beauty industry was highly fragmented and competitive. Beauty players included specialty retailers, department stores, mass merchandisers, drug stores, TV shopping networks, internet retailers, and supermarkets. Exhibit 4 shows that Ulta targeted two highly engaged consumer segments, the Beauty Enthusiasts and Beauty Enthusiasts on a Budget.