How Ulta Beauty evolved its merchandising strategy to compete in a crowded market

Ulta Beauty has to protect its castle.

The speciality retailer that sells makeup, skin-care and hair-care products from both mass and prestige brands is warding off competitors, new and old, from all angles. On the high end, Sephora has won over many beauty customers with bigger budgets. In the drugstore, Walgreens and CVS are revamping those departments to follow the Ulta and Sephora merchandising and layout strategies. And never sleep on Amazon: Amazon’s total beauty sales in the U.S. increased 40 percent year-over-year in 2017, according to One Click Retail, and its fastest-growing category within beauty was mass cosmetics, increasing by 60 percent.

It’s not even safe from fashion retailers, as they expand to sell cosmetics, lured by their Insta-popularity and high margins: From Forever 21 to Karl Lagerfeld, few fashion brands seem to be immune to the beauty boom.

To maintain market share in an increasingly cluttered industry, Ulta is hinging its strategy on high-low shopping: It’s one of the few beauty retailers to sell both mass-market and prestige products in one place. The next merchandising and inventory steps it takes, then, are key. Newness is a big focus — the company launched 92 new brands in stores and online across all categories in the past year — but beyond brand launches, the merchandising team is working to elevate the mass shopping experience to make it easier for customers to navigate, try on and discover new product, to make shopping more consistent.

“It’s a very competitive landscape, and we are hyper-aware of what our competitive set is doing,” said Monica Arnaudo, svp of merchandising at Ulta Beauty. “So to win, we look at our DNA: We have the unique proposition of bringing together the high, mid and low price ranges and assortments, and we’re laser-focused on continuing that strategy.”

Uniting mass brands like NYX and high-end brands like Nars under one roof can result in a clash, since different price points set different experience expectations for shoppers. But despite competition from Sephora, Ulta has proven it can win over prestige beauty market share: In November 2017, NPD Group reported Ulta had grown its prestige beauty category by 28 percent. While Ulta doesn’t break out sales figures by category, CEO Mary Dillon said during the company’s third-quarter earnings call in March that comparable sales of prestige skin care, fragrance and cosmetics were up by 20 percent. Over the past year, the company has added or expanded prestige brand collections like MAC, Chanel Beauté and Estée Lauder.

But with its pretty packaging, in-store testers and high-profile product launches, prestige beauty is an easy sell. Ulta’s next task: Remake its mass-market inventory in beauty’s higher-end image.

“In mass cosmetics, it’s been really interesting to watch, because you can see that what was transpiring on the prestige side has started to happen on the mass side,” said Arnaudo. “The industry is moving very fast, because the customer is moving very fast. And young, emerging brands, no matter the price point, can achieve an unbelievable level of desirability based on digital influence alone.”

One of Ulta’s new brand launches is ColourPop, the cosmetics brand specializing in matte lipsticks selling for $6 each. To Arnaudo, it doesn’t matter that the lipsticks go for under $10 a pop; the young brand, cultivated online and through social media channels like Instagram, has become a cult classic. Shades and new product sell out instantly. For Arnaudo, that shift in dynamic means that mass brand positioning needs to be reconsidered in the Ulta ecosystem.

“It’s so important we offer an elevated, consistent customer experience across categories and price points in our stores,” she said. “The traditional drugstore world is a sea of product with little navigational guidance, and all the product is encased in packaging. That’s not us.”

To update its mass beauty section, Arnaudo said Ulta is working to roll out a new category layout that will mirror the prestige side. More visual content, like brand imagery and how-tos, will accompany each brand. Popular products will be grouped by trend, as well as by brand. Store employees will be assigned to assist customers shopping for mass brands, whereas they were typically left to their own devices before. And there will also be the option to test products in store.

“The fact that Ulta sells both categories in one location is a differentiator in the marketplace — it’s how we shop today,” said retail analyst Jane Hali, the head of Jane Hali & Associates.

As the customer experience gets a makeover in the mass category, Ulta’s merchandising team (there are two: prestige cosmetics and skin care fall under prestige merchandising SVP Tara Simon, while mass cosmetics, skin care and hair care fall under Arnaudo) is constantly seeking out new brands to bring into the fold, whether it’s online-only or in stores as well. To Arnaudo’s point, the beauty industry is moving faster than ever before, but she said that it’s not the pace of trends that’s new, it’s the pace of production. Ulta, then, is seeking out brand partners that are set up to provide a consistent flow of new products into Ulta’s stores. ColourPop is one such company, as is Morphe, a U.K.-based cosmetics brand. Arnaudo said that a brand doesn’t need to have hit a certain sales volume to be considered, but tiny brands will see much smaller early rollouts.

Finally, weaving throughout Ulta’s merchandising moves is customer insight gleaned from monitoring purchasing behavior within its Beauty Enthusiast loyalty program, which has 28 million members, per the company’s internal figures. Those 28 million make up of 90 percent of sales, so according to Arnaudo, merchandising works alongside Ulta’s CRM team to determine white spaces in inventory, plot out exclusive product launches with brand partners, and track purchasing behavior to better stock its stores.

For Ulta, creating a consistent experience across categories backed by customer intel is critical: According to the company, 77 percent of its shoppers buy both prestige and mass brands.

“It’s a competitive landscape so for us; that’s how we differentiate,” said Arnaudo.

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