Case Study:? Ulta Beauty: Where the Experience is Beautiful (Appendix 1, Company Case # 11, pp. 563-564)

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Ulta Beauty: Where the Experience Is Beautiful

In today’s retail environment, there is plenty of buzz about the “retail apocalypse”—the growing phenomenon that resulted in a record 12,200 brick-and-mortar store closings in 2020. While the COVID-19 pandemic contributed to that high number of closures, 2019 hosted more than 10,000 store closures, months before the world even knew of the deadly virus. Numerous longtime specialty retailers such as Pier 1 Imports, Sports Authority, Toys “R” Us, and Payless Shoe Source have gone out of business in recent years. Still others such as The Gap and Victoria’s Secret have been closing stores and showing signs of distress. And once massive general merchandise retailers Sears and J.C. Penney have been shrinking for years. Each has filed for bankruptcy, leaving many to speculate that they will soon be out of business entirely.

But all the buzz about ailing retail chains overlooks the retail areas that are thriving. And it’s more than e-commerce. Plenty of brick-and-mortar chains are booming. One such company is Ulta Beauty—one of the largest U.S. beauty retailers and a premier destination for cosmetics, fragrance, skincare products, hair care products, and salon services. Not only is Ulta now in a dead heat with beauty megaretailer Sephora for dominance of this market, its revenues doubled over a recent four-year period as the chain grew from 874 to nearly 1,200 stores. What’s the secret to Ulta’s success? Customers of all kinds enthusiastically flock to Ulta because, more than any other retailer, the chain offers a complete beauty experience.

Ulta opened its first store more than 31 years ago. But until a handful of years ago, Ulta operated quietly in the shadow of Sephora. Ulta’s sales were good, but the company had a lackluster market presence and a tepid brand image. It had always operated as a beauty superstore where shoppers could find hundreds of beauty brands. But that wasn’t enough to set it apart from rivals—discount merchandise mega-chains such as Walmart and Target and the increasingly growing presence of online behemoth Amazon. It wasn’t until Mary Dillon took over as Ulta’s CEO that the brand really started to shine.

Strengthening Its Competitive Advantage

Dillon built a strategy that capitalizes on competitive advantages that store-based beauty retailers have over online competitors. Shopping for beauty products is a deeply personal, uniquely emotional experience. Only in a real-world store can customers perfectly match a shade, see how a fragrance suits them, or feel the effects of a product’s performance. Customers often need advice about options or instructions on using products, something the online world has yet to perfect. And when a person needs a product immediately, even same-day delivery will not suit.

Dillon’s strategy amplifies the “personal” and “emotional” elements of the beauty shopping experience. For starters, Ulta invested heavily to hire, train, and reward the right employees, creating an army of frontline associates who not only welcome customers but make them feel at home. Ulta employees are pros at reading customers, understanding their needs and motives, and making recommendations that feel perfect to them. In turn, this builds trust, and trust increases the time and money customers spend in a store.

To make stores more fulfilling, Ulta also created an unparalleled product assortment. It boasts of “more than 25,000 products from approximately 600 brands.” But that’s only part of the product story. Ulta also focuses on introducing hot, new cosmetic brands such as Morphe, Revolution Beauty, and Jeffree Star, many with exclusive distribution rights. For example, in its early years, the massively popular Kylie Cosmetics brand was available only through its own online store. But Ulta scored a huge victory by becoming the only physical store chain to carry the brand’s growing beauty portfolio. With one of the biggest and youngest social media followings, Kylie Cosmetics is a perfect example of brands that have increased Ulta’s store traffic and sales. Such “gotta-have-it” new brands are bringing in younger consumers, giving Ulta a strong base across all age demographics.

Ulta has developed other enticements to enhance the shopping experience. Cosmetic shoppers love samples. Not only are they free, samples let customers try a product for a limited time to see how they like it. Although most beauty retailers provide in-store “testers” as well as mini versions of products to take home, they do so only for higher-end brands. But Ulta offers samples across a wider range of products than other retailers, including so-called “drugstore” brands such as Maybelline and CoverGirl.

Beyond its amazing selection of goods, Ulta distinguishes itself by offering in-store services such as haircuts and facials. This not only drives store traffic and generates additional revenue, the sights, sounds, and smells of these services enhance the energy level in stores. Ulta’s data shows that salon services guests spend almost three times as much as other customers. This prompted Dillon to move the Benefit Brow Bar—a station for eyebrow shaping—to the front of the store so that shoppers would see services being performed the moment they enter. It worked. Salon sales increased by 15 percent in just nine months following this move.

The Power of Rewards

One of Dillon’s strongest strategy moves is the makeover of Ulta’s previously stale loyalty program. Now with well over 33 million active members, the rebranded Ultamate Rewards program is far simpler and more engaging. Like any good loyalty program, the improved Ultamate Rewards positively affects the customer experience in multiple ways. For starters, rather than simply tossing out gratuitous giveaways, it lets Ulta use pricing as a relationship-building tool. Rather than the former blunt-force approach that doled out freebies for reaching certain points milestones, Ultamate Rewards now lets customers use their accumulated points as store credit for items of their own choosing. This not only gives customers more autonomy, it lets them apply points to high-end brands such as Urban Decay—brands that never go on sale.

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Ultamate Rewards also lets Ulta interact with each customer in a personal way. It can design messages, incentives, and rewards to suit individuals based on all the information in company databases, including shopping history. “There’s a lot of information we have to work with to deliver that targeted offer to the right person,” says Ulta’s director of loyalty marketing. “The majority of our promotions and engagement with guests has transitioned to the loyalty program, so we’re now creating even more value in the currency around points and the ability to accrue them toward other products.” As icing on the cake, Ulta can pair Ultamate Rewards with a company credit card for an immediate customer benefit of double points. The new rewards program is working well. Ultamate Rewards membership continues to grow, and rewards members account for a whopping 90 percent of company sales.

Ulta’s chain of brick-and-mortar stores give it substantial competitive advantage. However, the chain also has a strong e-commerce presence, making it a true omni-channel retailer. When it comes to online beauty products sales, Amazon is far and away the leader. In fact, including the broader category of beauty, health, and personal care, Amazon sells more globally than any other retailer save China’s Alibaba. This is Amazon’s second-most-shopped category and one of its fastest-growing ones. But in addition to lacking face-to-face interaction with customers, Amazon makes a sizable portion of its cosmetics sales through third-party vendors, priced 35 to 40 percent higher than the same products at Ulta. Even with its massive scale, Amazon achieved less than two-thirds of Ulta’s revenue in beauty products last year. And of all the beauty products Amazon sells, cosmetics is showing the lowest growth.

Although Dillon believes that building physical stores is critical to the company’s growth, she is equally committed to boosting Ulta’s online shopping experience. Recent investments in Ulta’s distribution system have dramatically improved its e-commerce processing. But Ulta has also made major improvements in its online customer interface with an infusion of tutorials, tips, and social content. “People want to buy online, and they want to come into the store and try things,” says Dillon. She notes that Ulta can more effectively guide customers through the shopping process and into new experiences online than in stores. Although Ulta has yet to break the billion-dollar mark in online revenues, its e-commerce business is growing far more rapidly than in-store sales. Thus, e-commerce is both a key part of the Ulta customer experience and a major contributor to the company’s financial performance.

Under Dillon’s guidance, Ulta has now put the customer experience at the forefront in all aspects of its retail business. This focus has played a key role in helping the company escape the negative effects of the “retail apocalypse.” More broadly, beauty and cosmetics remains a genuine growth industry, and Ulta, Sephora, Amazon, and others are doing well. So long as Ulta focuses on continually improving the customer experience, its future looks as bright and vibrant as the palettes of colors throughout its stores. 11

Questions for Discussion

1. Describe Ulta Beauty’s targeting strategy. Does the chain provide a truly differentiated customer experience?

1. How did Ulta Beauty become the nation’s leading beauty retailer based on the retail marketing mix?

1. In terms of the major types of retailers, how would you classify Ulta Beauty?

1. Can Ulta Beauty continue to maintain its edge against the competition in coming years? Explain.