Analysts Applaud Ulta and Target Partnership, but Prestige Brands Quiet
Wall Street reacted favorably to the news that Ulta Beauty has entered into a partnership with Target to bring prestige beauty to the mass giant.
But the brands themselves were much more measured in their response.
As reported, Ulta will open 100 shops-in-shop in Target and on target.com. To be called Ulta Beauty at Target, the concept will feature established and emerging prestige brands in the makeup, skin-care, hair-care and fragrance categories. The in-store shops will measure about 1,000 square feet and will be located next to the retailer’s existing beauty departments. Comparatively speaking, a full-line Ulta store is about 10,000 square feet.
“The partnership between Target and Ulta brings together two of the most successful U.S. retailers and should prove to be mutually beneficial for both,” Neil Saunders, managing director of GlobalData, wrote in a note.
That kind of sentiment helped Ulta’s stock close the day up 7.4 percent to 265.49, while Target was up just over 2 percent to $158.07.
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“At the headline level, this is a win-win, pairing a leader in beauty curation with a leader in mass merchandising,” Jefferies analyst Stephanie Wissink wrote in a report following the announcement.
But Wissink noted that the brand portfolio will determine the success of the venture — and most of those companies were not yet ready to comment following the announcement of the deal on Tuesday.
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“We are evaluating the new concept,” said a company spokesperson for the Estée Lauder Cos. Inc. “As always, we will make decisions for our brands that make sense to ensure that consumers have access to the brands they love, the experiences they want, and in the channels that they shop.”
Executives from other prestige brands that are sold at Ulta declined to comment on their plans.
Historically, prestige brands have been loath to enter mass market distribution, and many retailers — CVS and Walgreens/Duane Reade among them — have tried and failed. Sephora found success with its Sephora Inside J.C. Penney format, which debuted in 2006.
But more recently, Penney’s fortunes have faltered, with the retailer filing for bankruptcy earlier in the year and slashing its door count. And while Sephora’s e-commerce sales have soared during the pandemic, its heavy concentration of mall locations has proven to be a challenge, as consumers are still largely staying away from such locales in droves.
Analysts posit that the Target-Ulta partnership will be very attractive to consumers — especially coveted younger shoppers. Piper Sandler reported that its most recent Teen Survey found that Gen Z loves Ulta and increasingly favors Target, too. “Stores still matter to teens,” wrote analysts Erinn Murphy and Matthew Egger. “Eighty-six percent of teens, despite COVID-19, still prefer to buy beauty in store. Ulta is the number-one beauty destination for all female teens, taking significant share from Sephora….Target also gained share, moving from 7 percent to 11 percent among teens and Amazon was flat at 5 percent share.”
Retail consultant Wendy Liebmann said figures like those demonstrate why the partnership makes sense for both players. “Target has been so successful with order online and pickup in store that people no longer have a compelling reason to be in the store all the time. How do they think about using all that space in the store?” she said. “The surprise of having an Ulta in ‘my’ Target could be an opportunity to get people back into the physical store.”
In her report, Wissink noted that together, Target and Ulta count more than 100 million loyalty members, with some overlap. Shoppers will earn Ulta loyalty points when buying inside Ulta at Target. Using the figures for the average sales per square foot of each retailer — $311 for Target and $558 for Ulta — she estimated that each Target at Ulta outpost could reasonably be expected to have sales of about $400 a square foot, with each shop generating about $400,000 a year for a total of $40 million.
Although the brands are staying silent for now, that may be a luxury they may not be able to afford for much longer. The pandemic has taken a toll on prestige beauty sales, particularly in the makeup category. According to data from The NPD Group, overall beauty sales fell 17 percent to $3.7 billion for the third quarter. Ulta felt the pinch, too. In its most recent earnings report, sales were down 26.3 percent to $1.2 billion.
As brands look to offset those losses, Ulta at Target may be a way to do that, and more palatable than, say, launching on Amazon. After all, Ulta already has a track record of proving that it can sell prestige beauty under the same roof as mass brands, while still preserving the integrity and image of the brand.
“We understand what it takes to be successful in prestige beauty,” said Ulta chief executive officer Mary Dillon. “Understanding how to think about the brands and the experience they provide and to celebrate their stories — we do that really well. We have proved to prestige that we know how to do this.”
And Target is a well-known entity, too, one that already has significant businesses with many of beauty’s biggest cross-channel players, including L’Oréal, Unilever and Coty. Moreover, the retailer has been steadily broadening its focus on beauty and wellness, and is lauded in the market for its innovative approach to the category.
“Beauty is a category where we’ve invested heavily and grown fast,” said Brian Cornell, ceo of Target. “As we thought about what’s next, one retail peer came to mind. By bringing these two brands together, we will redefine the retail experience.”
Cornell noted that this isn’t Target’s first foray into inking deals for more upscale offerings. It has a similar partnership with Disney for stores-in-store, and also added Levi’s Red Tab to its brand matrix recently.
“Over the last five years, we’ve made great advancements in our in-store experience in new and remodeled stores, and invested in service and in our teams,” Cornell said. “We have new brand partners who want to take advantage of the enhancements we’ve made in our stores and online.”
In-store service will be a key component of Ulta at Target. The units will be staffed by Ulta-trained Target employees, and Ulta will also bring a digital component to service with its GlamLab virtual try-on tool.
In terms of the overall business, Piper Sandler’s Murphy and Egger noted that Target will own the inventory but Ulta will own the brand relationship. In the end, say analysts, it’s the strength of those relationships that will determine the success of the Target-Ulta partnership.
“The pros for a brand is that it’s an incremental point of distribution to capture new or existing customers in a well-trafficked store that has been open during COVID-19 times,” said Richard Gersten of True Beauty Capital. “But the con is that certain brands want to be positioned well. Will the in-store execution and service be appropriate for how these brands want to be positioned? Conceptually it’s interesting — but the jury is out.”
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