Few chief executive officers have the confidence or charisma to kick off an investor meeting with an impromptu rap, but for Mary Dillon, it’s all in a day’s work.
Urged on by Cowen’s Oliver Chen, the CEO of Ulta Beauty took the stage at the retailer’s recent biennial investor day and broke out into a quick beat by Run-DMC. “It’s tricky to rock a rhyme, to rock a rhyme that’s right on time,” Dillon rapped. She then gave a shout out to Chen and got down to business.
If the analysts didn’t admire Dillon before for the stellar performance of Ulta Beauty—during her five-year tenure, the company’s stock price has increased from the mid-$90 range to more than $300—they did now.
Taking on an unlikely challenge—whether it’s rapping or reinventing retail—and winning big is characteristic of Dillon, who has made Ulta one of the fastest-growing retailers in America in any category and a force to be reckoned with in beauty. She and her team have capitalized on the sheer breadth of Ulta’s retail footprint—more than 1,163 stores in all 50 states; the depth of its assortment across prestige, mass and professional brands, and the service side of its business to create a differentiated beauty experience unlike any other retailer in the sector.
The numbers are impressive. In 2013, when Dillon joined the company, Ulta reported sales of $2.67 billion. For 2017, that figure more than doubled to $5.88 billion. Comp stores have increased in the double digits every year since 2015, and earnings per share have risen from $3.15 to $8.16. Over the last two years, Ulta has increased its unaided awareness among consumers 16 points to 58 percent overall, driving awareness across key segments including Millennials (up 14 points), Latinas (up 19 points), African-Americans (up 15 points) and Gen Z (up 20 points). Ironically, the fact that Dillon, who has three daughters and has lived in the Chicago area for years, had barely heard of Ulta was what drew her to the ceo position in the first place.
“If you had a spec for whom you thought would take the job as ceo, it probably wouldn’t have been me,” said Dillon, who was ceo of U.S. Cellular and global chief marketing officer of McDonald’s before coming to Ulta.
She’s speaking post-investor conference, and though she’s been standing in front of the firing squad, so to speak, for five hours and counting, her energy hasn’t flagged. “But I knew right away that there was a whole world of possibilities to open up and a story to be told,” she continued. “The business had smart strategies from the start—this notion of all products and all categories in one store, as a business executive and a woman, I looked at it and said, ‘This has the right formula. Why don’t we know about it?’”
Dillon and her team have been answering that question ever since, creating an identity for Ulta Beauty as a distinct brand in and of itself that transcends the transactional. “Management is quite smart—strategic and visionary,” said Frédéric Rozé, ceo of L’Oréal USA. “They understand very clearly the dimensions of growth that they can maximize. They’ve been quite smart at spotting opportunity and very good at executing.”
Ulta’s surge comes at a time of increasing fragmentation in the U.S. beauty market, as traditional powerhouse players like department stores and mass merchandisers steadily lose share to specialty and direct-to-consumer online players. According to data from Euromonitor International, the specialty channel has increased its share to 15 percent from 10 percent in 2015. While Sephora has long dominated the channel, Ulta has become an increasingly formidable competitor as it successfully differentiates itself in the market.
The company is looking to drive home that message with a new ad campaign, rolling out now. Ulta retired its “All Things Beauty, All in One Place” campaign in favor of a new tag line, “The Possibilities are Beautiful.” A key message reinforced in the new ads is consumers don’t come to Ulta to get beautiful. They come because they are beautiful.
The goal is to take Ulta from a functional positioning to a more purposeful one. “We’ve staked our current brand purpose around beauty being limitless, and really not using beauty as a way to define ourselves, but to help us be who we are and be our very best,” Dillon said. “To me, that means beauty needs to meet folks where they are, whether it’s age, race, sexual orientation, gender identification. That provides a playground for us to be very open.”
“From Day One, we’ve said one of our biggest opportunities was to build the Ulta Beauty brand,” said Dave Kimbell, chief merchandising and marketing officer. “Ulta had done so many things well for the history of the company, but hadn’t invested in building its own brand. The progress we’ve made on that has been a big contributor to the impact we’ve had on the marketplace.”
Kimbell was at U.S. Cellular with Dillon, and also worked with her at Quaker Food. He said she asks for three things of her top execs: functional expertise, a collaborative spirit and enterprise thinking, particularly in how the actions of an individual impact the entire organization. “Plus, she’s a pleasure to be with and that makes going to work fun every day,” he said. The first to admit he’s not, nor ever has been, a teenage girl, the P&G-trained marketer seems genuinely excited about understanding consumer behaviors in beauty. “I learned early on that to be successful, you have to have a deep understanding of the emotional connection consumers have with products,” said Kimbell, an avid marathoner—15 and counting—whose favorite retailer is the local running store in Evanston, Ill., where he gets his shoes. “I like to go in and see what’s new and talk to people who share my passion. The correlation with beauty is similar.”
As Ulta sees it, the playground is a big one—with a lot of upside. The demographics that Dillon references are key to her vision of future growth, particularly tapping into the increasing spending power of Latinas, African-Americans and Generation Z. “Sociopolitical dynamics are changing every day and are affecting the way people think about brands and retailers,” Dillon said. “We know that Latinas, for example, overindex in beauty, and we are continuing to deepen our insights around meaningful variables.…As we become more sophisticated with our personalization efforts, this segmentation capability and our deep knowledge of our guests and their attitudes are going to continue to represent a fantastic platform for us to engage even more meaningfully and drive more share of wallet.”
Ulta is gaining consumer insights through its Ultamate Rewards loyalty program that has grown from 18 million members in 2015 to almost 30 million currently, which executives estimate comprises 30 percent of the “beauty enthusiast” market in the U.S.. Loyalty club members represent 95 percent of the retailer’s transactions, and on average spend $200 annually at Ulta Beauty. The company says that represents about 30 percent of her overall yearly beauty spend.
Kimbell and his team are focused on increasing that share of wallet by harnessing the enormous amount of data that Ulta captures to create a personalized experience for customers that replaces promotional programs as an incentive to buy. “Our vision is to make sure we’re personalizing across every touchpoint—in-store, online, e-mail, app, social and digital marketing, direct-mail components,” Kimbell said during the presentation. “By better understanding our guests, we’re better able to tailor the messaging, communications and experiences that we deliver to them every day.”
That means targeted product recommendations, customized homepages on ulta.com, event-based messaging and personalized promotions and e-mails, for example. Ulta isn’t the only retailer trying to crack the codes of one-on-one commerce. During the conference, Ulta put its money where its mouth is and unveiled two acquisitions and two investments meant to ramp up personalization. The business has invested in digital workflow partner Iterate and online booking tool Spruce, and acquired QM Scientific and GlamST, which will allow it to better build out its augmented reality and artificial intelligence capabilities.
While they are the first acquisitions in Ulta’s history, Dillon has no intentions of going on a spending spree to achieve her vision for the future. “We have the capacity financially to do a lot of things,” she said when asked about making more acquisitions. “[We’re] not chasing after bright, shiny objects. There are so many brands and retailers and companies that we could own, but I’m really strict about it because once you buy something, you own it.”
Continuing that train of thought, she addressed a question about buying brands specifically. “Right now we have access to a lot of brands, and we don’t have to own them,” Dillon said. “It’s not a never, but I would say that the notion of acquiring brands is something I feel like we don’t have to do right now.
Indeed, an early-morning store tour with Kimbell through Ulta’s Michigan Avenue flagship the following day shows just how far the retailer’s brand matrix has evolved, particularly in terms of the prestige market. A big pink Benefit area is front and center, with gondola after gondola of brands such as Anastasia Beverly Hills, MAC, Lancôme, It Cosmetics, Tarte, Estée Lauder, Urban Decay and Too Faced cascading one behind the other through the depth of the store. Prestige brands occupy the left half of the store as you enter and face the 10-seat salon in the back, while the right side contains mass brands, hair care and tools, prestige fragrance, accessories and body-care products, a fast-growing category for the retailer.
Ulta has added more than 250 brands in the last two years alone—from key established players such as Chanel and MAC to coveted direct-to-consumer newcomers like Morphe and Kylie Cosmetics, whose launch over the pre-Thanksgiving weekend is believed to have driven the largest sales weekend in Ulta’s history. Despite a softening overall in the makeup category in the U.S., Ulta reports its makeup business, which accounted for 51 percent of sales for the fiscal year 2017, is robust. Skin care, bath and fragrance comprised 21 percent; hair-care and styling tools 19 percent, and salon services, 5 percent.
Citing statistics from NPD, Ulta reported a 23 percent share of the U.S. prestige market, a year-over-year increase of 5.6 percent. The retailer, which has always had a prestige assortment, pursued brands like MAC and Chanel for years, but it’s only recently that Ulta has become equally as attractive a proposition for many such brands. One key that unlocked the golden gates, so to speak, was Ulta making the decision to report its sales through NPD, which happened shortly before Dillon joined the company. “Before, the brands that weren’t with us didn’t have visibility into our volume and how much growth we were delivering,” said Tara Simon, senior vice president of merchandising, prestige. “Once the industry had a better indicator of what was going on, that helped us a lot.”
Another area of growth is the fact that many of the recently added prestige brands are available only in a fraction of doors. Chanel, for example, is in only 2 percent, or 21, of all Ulta doors, while MAC is in 27 percent and Estée Lauder, 51 percent. As penetration increases, so will sales.
A key differentiator between Ulta and many of its competitors, according to brands, is its willingness to give brands (relatively) free rein to express their own identities. Exclusivity, which represents 9 percent of overall sales, is another growth driver and Ulta is willing to delve into its trove of customer data with brands if the brands, in turn, are up for creating unique propositions. For example, Tarte’s Double Duty Beauty collection came about after a conversation between Simon and brand founder Maureen Kelly.
“We dug into the data on where we thought she had opportunity, and she had a lot of passion around busy working moms, the idea that everything needs to work harder, and what if everything had more than one function,” Simon said. Double Duty Beauty Shape Tape Contour Concealer was part of the collection and has since become the top-selling concealer in the U.S., Simon claimed. Simon said women are buying multiple shades of the concealer, using it as a concealer, contour and highlighter.
“Boom. You have a complete look in a flash,” Simon said. “Our guest wants something cool she can’t find in other places. Exclusivity is important to her and to us. It gives us a point of difference in the market. We fight for exclusivity and we partner with our brands on it.”
Over the last two years, the retailer has doubled down on prestige skin care, adding 20 brands in 2018, including Kiehl’s and Kate Somerville, and expanding its roster of skin-care services with a new bar concept that includes those brands as well as Dermalogica and Murad. Simon anticipates adding another 15 to 20 treatment brands to the store’s shelves in 2019, noting that the strategy isn’t necessarily to have a full lineup. “It’s about the hero,” she said. “People want to know, ‘What is your best-selling eye cream that is cruelty-free and vegan?’ We have a section called ‘new and loved,’ where you can bring a hero sku or two into a small footprint and tell the story so the customer knows this is something new and cool. Not everyone has to come in on a 3- or 6-foot gondola presentation.”
Ulta has also upped its cool credentials considerably by being the first brick-and-mortar retailer for some of the hottest digitally native brands, like Morphe, Makeup Revolution, ColourPop, Dose of Colors, Lime Crime, Ofra and, of course, Kylie Cosmetics and KKW Fragrance. “We are perfectly poised to go after this,” said Monica Arnaudo, who joined Ulta last October as senior vice president of merchandising on the mass, hair and accessories side. “What has been happening on the prestige side is now transferring to the mass side, with all of these emerging brands. There’s been a blurring between mass and prestige, and that is because we’re having brands come in with accessible price points.”
By differentiating Ulta’s mass business thusly, as well as improving the overall experience with testers, sales associate education and even in-store events—like an in-store appearance by influencer Jaclyn Hill to promote her Morphe collection, Arnaudo and her team have been able to increase the mass business in an otherwise tough market, posting double-digit comp-store sales increases since the fourth quarter of 2017.
Arnaudo oversees the hair category, as well, an important business for Ulta on both the product and service side. Ulta has a salon in each store, with an active customer base that spends on average twice as much as a regular customer and has a higher propensity to be an omnichannel shopper. The company says its sales of professional hair care are growing two times faster than the market, and that prestige brands are driving the biggest gains across the category.
For both the mass and prestige businesses, exclusivity is important—Morphe’s James Charles palette, which launched the day before Kylie’s lip kits, was a key factor in the biggest sales weekend ever—and so is agility. While most mass retailers reset the planogram annually, Ulta has been able to inject newness into its stores much faster. To help fledgling brands navigate the bureaucracy of a behemoth like Ulta, the company set up an emerging brands team to guide them through the process.
“At the core, we’re looking for something special and differentiated, so our first filter when we’re looking at a brand is, ‘Does this serve a unique and compelling need of our guests?,” said Kimbell, when asked how the team decides to take on a new player. “We look at their growth plans, their approach to innovation, how they tell their story. As consumers evolve, we will continue to evolve our assortment, and we anticipate becoming even more sophisticated in terms of localized assortments and making sure that where there are different opportunities in different stores, we deliver the best experience.”
Take the launch of Juvia’s Place, a makeup line geared toward women of color. Ulta’s merchants visited the brand’s founders last February, and by late September, the line was available in about 500 stores. “The customer is moving so fast because she can,” Arnaudo said. “She has access to so much that we need to be nimble and flexible and able to evolve to meet her needs and expectations. Tara and I talk about the customer’s insatiable desire for newness. We need to be able to keep up with that.”
Creating a fast-moving retail culture is a personal passion project for Dillon, whose first paying job was at Osco Drug when she was a teenager, where she started in the candy and tobacco department (“They were together because they came off the same truck in those days.”) and then moved to cosmetics. While the retail landscape has changed considerably since then, the central tenets of business haven’t. “I learned that the notion of what I knew as an employee about what was and wasn’t working for our guests and processes was important,” she said. “Not that I had a voice then, but 41 years later, I take that with me everyday. I really value the opinions of our front-line associates, the folks who are working in the stores every day and interacting with guests.”
On her Instagram account, @ultabeauty_ceo, Dillon frequently posts pictures of herself with sales associates from around the country (as well as the occasional selfie, as on Halloween in a bride of Frankenstein costume), and is quick to cite creating meaningful jobs for women when asked what she considers her biggest impact on the business. “To be able to create jobs and internal promotions and career paths for thousands of women at Ulta, that’s really cool,” she said.
Dillon is a first generation college graduate who studied marketing and Asian studies at the University of Illinois in Chicago. She started her career at PepsiCo, but didn’t set her sights on the c-suite until her 30s. Today, she is one of only 24 female ceo’s on the Fortune 500 list. “It wasn’t until I started working in business that I realized I had a lot of ambition, and I think ambition is a word women don’t use enough,” she said. “It took me a long time to realize that. It wasn’t until I was in my 30s that I thought I could be a ceo, because as I would go up to the next level in an organization and look ahead, I’d think, ‘I can do that, too.’ I just bootstrapped my way into it.”
Dillon describes her leadership style as “what you see is what you get,” and she is unfailingly personable, peppering her speech with words like “highfalutin,’” sharing her decision to let her hair go gray or answering analysts’ questions with a folksy ease. “I have values that I lead with. I’m very consistent—I don’t show up as a different person,” she said. “I work really hard so I’m going to deliver the goods, but I also really value collaboration. It’s easy to say but a little bit harder to do.”
Simon, who joined Ulta about a year before Dillon, tells a story about the ceo’s early days, when she lamented that the executives in Ulta’s Bolingbrook, Ill., headquarters were a bit quiet. “Mary said to me, ‘More people speak to me on the running trail in Evanston at 6 a.m. then speak to me in the halls,” Simon remembered. “Early in her tenure, she made it a big priority to understand the company culture and evolve it, making sure people had more fun at work. She was also super curious about the business, and because she didn’t come from beauty, was eager to learn it,” Simon continued. “Zero ego in her game.”
The same holds true when it comes to creating the customer experience. “We’re here to help people engage and discover and immerse themselves in this category,” Kimbell said. Consequently, while e-commerce is a growing part of Ulta’s business—almost $1 billion, approaching 20 percent of sales—the team believes strongly in the future of brick-and-mortar. (Sephora’s digital penetration is reportedly in the 30 percent range.) Ulta has 1,163 stores, most of which are about 10,000 square feet in size. Chief financial officer Scott Settersten said Ulta will open between 70 and 80 stores annually through 2021, aiming for a total of around 1,400.
Executives declined to provide a goal for e-commerce growth, and during his Investor Day presentation, Settersten said moving forward the company will no longer break out salon, retail and dot-com sales or provide quarterly guidance to analysts. “We view our online business as a commerce and engagement channel that drives our guests to shop not only online, but more often in stores,” said Kecia Steelman, chief store operations officer, during Investor Day. “They spend almost three times more than a store-only guest and shop on average about 10 times a year, eight times in the physical store and two times online, compared to store-only guests, who visit our stores about four times a year. So we still view our e-commerce business as driving largely incremental sales and margin dollars.”
Growth for fiscal year 2018 is expected to be in the 7 percent to 8 percent range. Projecting out, for 2019 to 2021, Ulta expects comp-store sales growth in the 5 percent to 7 percent range, and is also implementing a cost-savings plan called Efficiencies for Growth, which it estimates will result in $150 million to $200 million in savings.
While Ulta has aggressively expanded its real estate purview over the last couple of years—opening a Manhattan location, for example—the emphasis will be on increasing penetration in key markets, Dillon says, a strategy which is driving growth for heritage brands, too.
“The majority of Ulta stores are in lifestyle centers or off-mall locations, which results in a different shopping pattern and opportunity to reach new consumers, as well as engage those who know and love our brands,” said Chris Good, group president, North America, of the Estée Lauder Cos. Inc. “Ulta’s unique shopping environment also attracts many consumers who are looking to trade up from mass to prestige.”
There are market rumblings that Ulta is considering international expansion, which could put it head to head in multiple markets with Sephora. Dillon was firmly non-committal on the issue when asked about it during Investor Day. “International continues to be an opportunity that we’re studying. If the conditions are right from our consumer perspective and competitive cost of doing business, we think there might be opportunity,” she said. “We’re studying it and we don’t have anything to announce today. There’s plenty of work to do in the U.S.”