Target will begin rolling out its Ulta “shop-in-shop” remodels this month, with up to 100 stores this year and 800 total planned in the years ahead.
While only 5% of stores will get a facelift in 2021, this marks a significant leap in elevating the beauty department in a high profile section of the store with Ulta curating 50 premium or “prestige” brands to be featured in a 1,000 square foot set.
What’s Changing at Target
Target management has been intensely focused on upgrading its merchandising blueprint over the last few years to re-establish its “Tarzhay” reputation, starting in home and apparel where we have historically seen more short-term fashion-driven partnerships. Exclusives are now more important than ever, and Target is leaning into more multi-year partnerships with other retailers as well as suppliers.
As stores begin the resets here in August, it looks like this shop will be taking space from accessories and fashion jewelry rather than replace or cannibalize existing beauty sets. Each section will feature specialized displays, discovery zones, and on-trend, season-specific products, which will likely rotate every 3-6 months (and managed by Ulta).
Target has already remodeled 800 stores over the last few years with a particular emphasis in the beauty category. It’s worth noting that retail remodels typically bump up total store sales by 2-4% in the first year and add +5% over two years.
Even though this is a smaller reset that we estimate should generate approximately $10,000 per store per week (or $500 per sq ft), the lift to the beauty category itself could be more meaningful in the +10% range.
Beauty Trends at Target
For context, beauty and essentials at Target account for just over 25% of total store sales, although this also includes personal care, baby gear, cleaning, paper products, and pet supplies. We estimate that beauty and personal care combine for 10-15% of the store, which would make beauty a $10 billion business at Target.
More importantly, this has been the fastest-growing department at Target over the last decade (now double in size), which is likely why Target continues to make further investments to win in such a significant contributor to both growth and profits (gross margin in beauty categories are likely up to 2x most food/consumable products).
Ulta by comparison generates $7 billion across 1250 stores with just under half its business mix in cosmetics and the other half split between skincare and haircare. Stores average $5 million versus Target’s $50 million, although sales productivity is 25% higher at $500/sq ft with a meaningfully smaller footprint. Out of 400 brands across the store at Ulta, the top 10 brands account for 60% of sales.
In terms of beauty growth comparisons, Target grew the overall category 20% in 2020 (including essentials). Whereas Ulta declined nearly 20%. Target has meaningfully outperformed its peers whether versus big box or specialty retailers, over the last 18 months in nearly every category given its stronger traffic and eCommerce contribution.
Ulta has rebounded nicely so far this year and expects to grow by roughly 25% in 2021 (1Q up 65% lapping a 35% decline LY). Target beauty increased high teens in 1Q. Category growth rates pre-pandemic were comparable between the two retailers in the 6% range from 2018-2019.
According to Cleveland Research, beauty is Target’s most frequently purchased product both in store and online with roughly two-thirds of guests shopping the category.
Source: CRC Consumer Study, May 2021
What it Means for Beauty Brands
The Ulta upgrade will also be reflected in a premium online experience on Target.com, creating a halo effect for existing brands looking to win new customers. Now is a great time for beauty brands at Target to ensure their content and searchability are ready to capture new traffic on Target.com.
With the addition of Ulta shops, Target could become an even more important beauty destination for the Target Guest. This change presents further volume opportunities for all beauty brands at Target in the months and years ahead.
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