- Sephora plans to renovate physical stores.
- Ulta will leverage data to alter the customer experience.
Beauty titans Sephora and Ulta Beauty (NASDAQ: ULTA) have increased their licensing focus on personalization, which could lead to more growth and deal activity for startup and sponsor-owned brands.
Personalization is a must-have component of success in the beauty space, whether that’s provided internally or through a brand partnership. That’s why large retailers such as Sephora and Ulta serve as kingmakers for their brand partners who understand a positive, tailored customer experience might be the difference between sinking and swimming.
Household names such as Urban Decay and Tarte Cosmetics were once much smaller brands and beneficiaries of Sephora’s support in their infancy, said Artemis Patrick, Sephora North America CEO, speaking at the National Retail Federation Big Show conference last week.
Founded in 2000, Tarte, for example, began selling its products at Sephora in 2003. Fast forward roughly a decade and Kose, a Japanese cosmetics company, acquired a 93.5% stake in the company for USD 135m.
“Every single person… feels that they have a vested interest in making these little baby brands become big brands.”
Beauty is a much more active sector in M&A compared to the rest of the consumer products space, Richard Kestenbaum, co-founder and partner at Triangle Capital, previously told Mergermarket. Since 1 July, the cosmetics and toiletries subsector has produced more deals than any other category in the consumer products segment, besides miscellaneous, according to data from this news service.
Some of the most notable deals in beauty from last year include Helen of Troy’s USD 240m acquisition of Olive & June, The Estée Lauder Companies’ [NYSE: EL] acquisition of Deciem, and TSG Consumer Partners’ majority investment in skincare brand Summer Fridays.
Summer Fridays became the top skincare brand by market share at Sephora as of December, according to data analytics firm YipitData, which says it accounts for 10.5% of sales in the category. This news service reported before the TSG Consumer acquisition that the company brings in roughly USD 100m in revenue.
During its most recent earnings call, Ulta highlighted new brand partnerships with skincare brand Oak Essentials and wellness brands The Honey Pot and Joylux as helping drive category growth in Q3.
That same quarter, Oak Essentials received first-round dual funding from Silas Capital and Unilever Ventures to fuel the company’s expansion. The Honey Pot launched with Ulta in October after being acquired by Compass Diversified [NYSE: CODI] in January for USD 380m. Seattle-based Joylux announced a USD 4.5m round of funding, bringing its total raised to date to USD 22m.
Other sponsor-backed companies in the space include IMAGE Skincare (MidOcean Partners since 2015), milk-based skincare brand Beekman 1802 (Eurazeo since 2021), NO NONSENSE (Flacks Group since 2022) and retailer Cos Bar (Tengram Capital Partners since 2015).
Much of the resilience in the beauty category resides in the capacity for personalization, which is now largely — but not exclusively — handled through increased technological capacity.
Ulta, for one, wants to tap into the information provided by its loyalty program, through which 95% of its sales flow, said VP of digital products Josh Friedman. “We need to do a better job progressively profiling our customers with full transparency and permission from them,” said Friedman.
The program provides its members product recommendations and reminders on refills, but Friedman said a closer look at the data may lead to organizational adjustments. Currently, Ulta’s personalization efforts are focused on the e-commerce experience. It recently announced a partnership with Instacart [NASDAQ: CART] offering same-day delivery from 1,400 stores.
Patrick noted Sephora’s plans to renovate several of its stores are part of a larger bet on brick-and-mortar’s viability. She said the company sees an in-store experience with an expert who can usher along the customer journey as critical.
“We have never looked at technologies as a way of replacing human interaction,” said Patrick, who took her post last year. “Beauty is so tactile [and] demonstrative… and a category with a deep passion around it.”
Sephora’s parent is LVMH [PAR: MC].
Ulta has also made investments on physical retail experiences. In 2022, it invested in LUUM, an AI and robotics-powered lash extension service the company proceeded to formally collaborate with in 2023. LUUM in November announced a USD 30m Series A funding round that Ulta also participated in.
Source: Mergermarket
