Retailers from Target to Kohl's make big bets in beauty as department stores reel

Key Points
  • Mass retailers like Target and Kohl's are investing more in beauty and hoping to grow their market share in makeup, nail products and perfumes.
  • Target announced a partnership with Ulta Beauty, while Kohl's aims to at least triple its sales in the category and is planning to work with smaller, indie beauty brands.
  • The shift is happening as America's department store makeup counters are losing their clout, opening a window of opportunity for other players to grow in the space.

In this article

Fans gather at local Ulta Beauty in Houston to greet Kylie Jenner at the launch of her cosmetics line on November 18, 2018 in Houston, Texas.
Rick Kern | Getty Images

Some retailers are betting that lip glosses, eye shadow palettes and facial scrubs will be the next big thing to drive customers, especially younger ones, to their stores.

As the likes of Ulta Beauty and LVMH-owned Sephora continue to open new locations across the United States, mass retailers like Target and Kohl's are investing more in beauty and hoping to grow their market share in makeup, nail products and perfumes.

With this, a category that has historically been dominated by America's department store chains is now increasingly moving out of malls. And while the coronavirus pandemic has driven an overall decline in beauty sales this year, sales of makeup and other personal care items have been surging online, which could prove to permanently shake-up the beauty landscape even further. With department store makeup counters losing clout, beauty could bring big business to companies that were not investing as much in the space before.

"How customers want to experience beauty is shifting," said Alexandra Wilkis Wilson, former co-founder of Glamsquad, and current co-founder and managing partner at the investment firm Clerisy.

"The idea of a sales associate spraying perfume on cards and handing them out, and then offering to do a makeover, seems unhygienic or even dangerous to a consumer right now," she said. "And even after there is a [Covid-19] vaccine distributed, my sense is the consumer's view of hygiene and shopping for beauty is going to change."

This hesitancy from consumers is clearly there: 41% of people said they felt either "unsafe" or "very unsafe" testing beauty products in stores during the pandemic, according to a survey of 1,097 consumers on Nov. 11 by the retail analytics firm First Insight. Twenty-two percent said they plan to actually buy more beauty products this holiday season compared with last, while 35% said they're planning to buy less.

But post-pandemic, analysts expect a strong rebound as people look forward to getting dressed up again, which is part of the reason for all the renewed interest in the space.

"Everyone is all-in for getting back to special occasions," said Telsey Advisory Group CEO Dana Telsey. "People have missed birthdays, graduations, anniversaries ... there's going to be demand for makeup."

'Mass exodus' out of department stores

Department stores were already losing customers prior to the pandemic, which accelerated that trend. Now, there is a bigger window of opportunity for other players to grab market share in the beauty category.

Neiman Marcus, Lord & Taylor and J.C. Penney filed for bankruptcy protection this year. Penney, which had over the years opened hundreds of Sephora boutiques in its stores, is closing roughly one third of its locations, while it is set to be acquired by two mall owners. Neiman has since emerged from bankruptcy, but is also closing some stores. Lord & Taylor, the oldest department store operator in the nation, is liquidating.

"The department stores traditionally owned that space," Stacey Wilditz, president of SW Retail Advisors, said about beauty. "And then it was the mass exodus out of department stores."

"What destroyed department stores is the, 'I just want your money mentality,'" she said, referring to sales associates who aggressively push samples of perfumes and lotions to customers.

Sales of prestige beauty products in the U.S., which are defined as products mainly sold in U.S. department stores, dropped 17% year over year to $3.7 billion during the third quarter, according to data from The NPD Group. That marked a softer decline than during the second quarter, buoyed by nail products and body products like cleansers and exfoliators. Sales of fragrances were also up, NPD said.

"We are seeing two stories unfold for beauty – one of stagnation and the other of recovery," said Larissa Jensen, a beauty industry advisor at NPD.

"Though it remains a powerful force in the industry, the needle has yet to move in a positive direction for makeup. ... Alternately, the shifting consumer priorities toward self-care and treating themselves to little luxuries has helped both skincare and fragrance to enter a phase of recovery," Jensen said.

Target, Kohl's vie for market share

Eyeing an opportunity, Target and Kohl's both are competing to be bigger names in beauty — but with slightly different strategies.

Target went the way of partnering with a company that has already carved out a dominant space in the industry. It will open Ulta makeup and skincare shops inside of hundreds of Target stores. This will allow Target to offer more high-end beauty products that it was not able to give customers before. The hope, for Target, is that customers will visit the retailer for their lipstick and then toss other items in their carts.

Target has struck a deal with Ulta Beauty to open shops with makeup, skincare, hair products and more inside of hundreds of its stores.
Source: Ulta Beauty

Beauty is a high-margin category compared with others like grocery, Telsey said, making it an appealing one to grow in. Consumers also grow very loyal toward their favorite beauty brands, she said.

"These products can drive traffic," Telsey said. "And that's what everybody is looking for."

According to Target CEO Brian Cornell, "beauty has been a very important part of our business for years now."

"We've made significant investments in the space," he told CNBC's Becky Quick. "It's been an area where we've seen great growth and market share gains. And this partner, with Ulta Beauty, will allow us to take it to another level."

Kohl's, meantime, says it plans to at least triple its sales in beauty. In a bid to do so, it's also testing a shop called the Wellness Market in 50 stores, which includes a variety of personal care products.

On the heels of the Target-Ulta tie-up being announced, CEO Michelle Gass said Kohl's is "highly committed to the beauty category," calling it "a very large and attractive market."

"Our customers want beauty ... And just given the disruption in the marketplace, we have a real opportunity to introduce new elevated brands to our customers," she said earlier this week during a call with the media, adding that the retailer is in talks with a number of smaller, indie beauty brands.

And though traffic is falling at department stores, Macy's, which also owns the cosmetics chain Bluemercury, still wants to hold on to a slice of the market.

"Our sweet spot is really what we can do with services, and our experience," in beauty, CEO Jeff Gennette said in a phone interview. "And that's something that some of the mass players can't do as easily. ... And all of that is starting to go digitally right now."

Macy's digital beauty sales are up about 75% year to date, he said, adding that Macy's is best when it comes to prestige fragrances.

Customers shop for makeup at a Sephora store.
Getty Images

The entire beauty category has experienced a surge online during the pandemic, with many consumers wary of going or unable to go to stores. Sales in makeup and beauty items online were up 54% during the third quarter, according to Salesforce's quarterly shopping index. Ulta's e-commerce sales surged more than 200% during the latest quarter ended Aug. 1.

The overall gains have also been boosted, in part, by trendy direct-to-consumer beauty brands like Winky Lux and Glossier that have built and cemented their businesses on the internet, making it easier for consumers to buy lip balms and blushes online.

For Target and Kohl's, though, they'll work to perfect the in-store shopping experience to win consumers over in the beauty aisles, as shoppers feel more comfortable returning to stores and sampling products on their skin. Analysts say, for now, there's plenty of market share to go around.

"We all know, when you shop for cosmetics, it's very much about experimentation," said Wilditz.

"The share that's up for grabs from the department stores — that's what everyone is chasing," she said. "And if they can get a piece of that, then maybe they can capture something else along with it."

How retailers are cashing in on digital sales
How retailers are cashing in on digital sales