There once was a gap in the cosmetics retail market. Shoppers could grab inexpensive, questionable quality products at their local drugstore or grocer, or they could visit the high-end counters in department stores to purchase expensive, exclusive cosmetic brands. But that gap has rapidly and effectively been filled by specialty beauty brands such as Sephora and Ulta.

In dedicated stores, usually located conveniently in local shopping centers or malls, Ulta and Sephora create in-store experiences that allow consumers to play with the products. The products on their shelves range from private-label to trendy national brands, and the store designs are hip and fun.

As a result, these retail options appeal greatly to millennials, who tend to exhibit little brand loyalty. By visiting a Sephora or Ulta, they can review various options, without having to visit separate stores or counters. They also enjoy the potential of finding a unique, cutting-edge product that no one else is wearing; the stores’ assortment strategies explicitly seek to stock lesser known brands and items. The “treasure hunt” experience created by these stores thus allows young beauty consumers to have fun in the process. Most of them have watched bloggers apply various make-up styles or read reviews of different products online, so they feel self-sufficient enough to search and try the cosmetics on their own.

As a result of these compelling appeals, both these brands have enjoyed remarkable growth rates. At Ulta, that has meant tripling the number of its stores since 2007, increasing its single-quarter profits by up to 30 percent, and growing its revenues by 21 percent. For Sephora, which is owned by the luxury French conglomerate LVMH, the numbers are a little harder to discern. Still the brand operates almost 1,800 stores worldwide, 360 of them in North America. It also plans to create an “Innovation Lab” that will be tasked with developing new in-store and e-commerce technologies to ensure its continued growth.

In response to these developments, many drugstore chains have sought to make their cosmetics offerings more appealing as well, using better lighting, more sophisticated displays, and increased tester options.

In the department store channel, JCPenney even has acknowledged Sephora’s dominance, entering into an agreement to located more than 400 Sephora “store-within-a-store” operations in its outposts. Similarly, Macy’s acquired a brand called Bluemercury, a chain that runs dozens of spas and specialty stores, seemingly to compete more effectively and directly with Sephora and Ulta. It represents the first time Macy’s has undergone such a massive acquisition in decades, suggesting that it is taking these market shifts very seriously.

Discussion Questions:

1. Why are Sephora and Ulta so successful?
2. Which retailers are their primary competitors?
3. Should other competitors “stay the course,” or should they copy Sephora and Ulta? Justify your answer.

 

Source: Sarah Halzack, Washington Post, March 9, 2015