Kohl’s has a new method for luring drive-by shoppers into its stores: adding “+ Sephora” to the sign.
The department store’s 2020 partnership with the beauty retailer has become a key piece of its strategy, worthy of changing its shopping center signage and displacing its in-store jewelry counters. Originally expected to reach 850 Kohl’s stores, the company last year said it would bring beauty shops to all 1,100 locations.
Kohl’s CEO Tom Kingsbury in May this year said the concept should be in 900 stores by the end of 2023 and that the Sephora at Kohl’s shops drove Kohl’s beauty sales up 150% in 2022.
At the same time, the executive highlighted the Sephora partnership as one of Kohl’s top priorities.
“We are bringing in new customers, and they are shopping at more than twice the frequency of our average customer. Our investments to support this partnership are yielding the outcomes we intended,” Kingsbury said on the earnings call, according to a Seeking Alpha transcript.
Target, which made a similarly timed deal to add Ulta Beauty shop-in-shops to its stores, is less ride or die about the partnership, but has likewise called out positive impacts from the concept. Target CEO Brian Cornell in May said the mass merchant has seen double-digit growth in beauty sales for the last three years in a row.
For both retailers, the partnerships bring a broader assortment of prestige beauty products to stores. That move makes for good business all year round, but it’s particularly important around the holidays. In 2022, prestige beauty brought in $9.3 billion in the October to December timeframe alone, according to Circana data, up 12% from the previous year.
“Prestige beauty is really where the holiday focuses,” Larissa Jensen, beauty industry adviser at Circana, said. “That's really where I think the majority of the holiday volume for beauty really happens in terms of gifting. You're getting a more luxurious gift versus just beauty products that you would buy at a drugstore.”
For fragrance, this is doubly true. The holiday season is “critical” for prestige fragrance, which as a category does somewhere in the range of 40% of its sales in the last three months of the year, according to Jensen. Fragrance accounted for about a third of total prestige beauty sales during the holidays last year, and brought in roughly the same amount as skin and hair care combined. For fragrance, the week of Christmas is more important than the rest of the month of December, with sales during that period skyrocketing “without fail” for the past 20 years, Jensen said.
“Holiday for prestige beauty has been phenomenal for the last several years. So ’21 and ’22 have been very, very strong holidays — and we're talking strong growth on top of strong growth,” Jensen said. “We are forecasting that the holiday period will be positive, but it will be a much more tempered growth from what we've seen in years past.”
Even with a slower growth rate, Kohl’s and Target have invested deeply in deals that broaden their reach in a key category. So how are these shop-in-shops performing, and how could they impact the 2023 holiday season?
A growing — and giftable — category
Both Sephora at Kohl’s and Ulta Beauty at Target are in the building stage, but the efforts now span several hundred stores each. In August, 850 Kohl’s stores included Sephora shop-in-shops and Target had 421 Ulta shop-in-shops that same month. The large number of locations gives both retailers another pillar to lean on during the holidays, when Circana found beauty was sixth on a list of categories shoppers plan to purchase as gifts.
“Beauty’s just accessible,” Jaime Bettencourt, senior vice president of North America and global sales at Mood Media, said on why the category makes a good shop-in-shop candidate. Mood Media is a firm that provides retailers with in-store experience solutions like custom music and signage. “You can have something small as a lip gloss, or you can go all the way up to something that's a little bit more luxury skin care.”
Reflecting on the partnership at the start of the year, Target’s Cornell said the Ulta partnership is “clearly driving even more traffic to Target,” and is complimenting Target’s core beauty assortment, which is also growing. “We're just becoming more and more a destination for that beauty shopper,” Cornell said.
During the holidays, these beauty shop-in-shops also mean more convenience for shoppers, according to Katie Thomas, lead of the Kearney Consumer Institute.
“You’re doing that holiday shopping, you’re trying to get a lot done in one store: It’s just very advantageous to have more beauty options right there at your fingertips,” Thomas said.
Beauty can be particularly appealing because of the constant state of innovation, according to Jensen. Consumers told Circana beauty was one of the key categories innovating in retail, whether in terms of new shades, new products or new packaging.
“They feel like they're always discovering something, right? So I think that that's also what makes it fun,” Jensen said. “And it's a relatively affordable gift versus buying maybe someone a pair of boots or like a pair of Uggs or a new coat. It doesn't necessarily have to be a big spend, but there's obviously a lot of value.”
The appeal varies by category. Fragrance and skin care are gifting categories, according to Jensen. But skin care and makeup also tend to drive self-purchasing during the season, as shoppers stock up on value skin care sets for themselves or buy a new set of makeup for holiday festivities.
“When we look at the sales of makeup and skin care — fragrance by far and away has much more importance in that fourth quarter,” Jensen said. “Because it's just the gifting.”
Kohl’s is well aware of the gifting potential that comes from having a Sephora shop-in-shop in most of its stores. Last year in November, the company was already discussing ways to “elevate gifting” in the Sephora shops by offering gifts as low as $35 for its lower-income consumer. CFO Jill Timm also highlighted that beauty shoppers see the category as essential, which makes it less turbulent than other discretionary categories.
“Even during inflationary times, they need to replenish their lipstick or makeup or cosmetics and skin care,” Timm said at the time. “So, we feel like this is definitely a thing that can continue to drive our business during the holiday period.”
This year, Kohl’s is planning to stock “hundreds” of beauty gift sets through Sephora at Kohl’s — and if last year is any indication, that could boost sales significantly. In the fourth quarter last year, beauty sales at Kohl’s increased 90% year over year, and the Sephora shops that were open in 2021 experienced high-single-digit comp growth. The department store said almost 8 million of its customers bought products from the shop-in-shops in 2022.
Of course, both Kohl’s and Target — with their wide-ranging assortments — are capable of selling beauty products on their own. But in addition to the name recognition that comes with working with Sephora and Ulta, Kohl’s and Target also receive increased access to a more high-end beauty assortment — and the new shoppers that come with that.
Target’s Ulta partnership allowed it to accomplish something that may have been unlikely on its own: bringing Rihanna’s Fenty Beauty brand into stores. The celebrity introduced top sellers and mini sizes and sets to the mass merchant, but only through its Ulta shop-in-shops. It’s a handy example of what Ulta has done to elevate Target’s beauty offering.
“We hear that a lot ... certain brands ‘don’t want to be in Target’ because they don’t think it’s premium enough, which to me is wild because everyone shops at Target,” Thomas said. “Target has always been good at kind of learning from doing something like this, including when they did a lot of designer collabs — they learned a lot from that.”
Target was proud of its beauty business before it brought in Ulta, but customers wanted access not just to the mass beauty products Target sold, but to prestige offerings as well. In that way, Ulta Beauty at Target was a means to an end.
“Beauty at Target has been a success story for a number of years. We have an incredible assortment that's been relevant for a while,” Target Chief Growth Officer Christina Hennington said in February. “But adding Ulta Beauty has completed our assortment. Our ability to offer prestige products in our store with the servicing experience and expertise that Ulta has brought to the table has been the missing link. And so we've completed that picture.”
Hennington said the retailer is a market leader in beauty, and that sales through Ulta Beauty at Target in 2022 were more than four times higher than in 2021. Mass beauty, which is often found at mass merchants and drugstores, is a larger market, but prestige is growing faster in terms of unit performance in every category, according to Jensen.
“For all the retailers in these partnerships, it's about expanding the footprint and getting further entrenched in an industry that is performing exceptionally well — and actually, outperforming every other industry that's out there right now,” Jensen said.
Mass and prestige beauty are the only categories Circana tracks that are growing units right now, Jensen said. She also noted that specialty stores like Ulta and Sephora have been growing their share of beauty sales every holiday season. In that regard, the decision by both Target and Kohl’s to expand their respective beauty partnerships via distinct, branded shop-in-shop experiences could be a wise one.
“When you're shopping in a Target or in a Kohl's, it's all about discovery,” Bettencourt said. Partnerships like these help broaden the assortment and could bring in new customers and drive more foot traffic. “Some of that is association credibility … Sephora has a really great brand.”
Retailers can also do the work to further distinguish a shop-in-shop from the core shopping experience. For example, Bettencourt’s company works with retailers on things like curating different music, displaying unique signage or even incorporating a specific fragrance. Staffing a section of the store with experts in that space can also make a concept stand out.
At Kohl’s, part of the allure of its Sephora shop-in-shops is the impact it could have on growing a strong women’s business overall.
“Bringing Sephora in is already bringing in a younger consumer. One of the other things that we’re working on is ancillary products such as women’s, that when the younger customers coming in to buy Sephora, we want to make sure that they can also buy women’s apparel, women’s accessories, women’s footwear, et cetera,” Kingsbury said in March. “So, we really feel that we’re started — we have something that’s bringing in a younger consumer. Now we need to expand it to other categories within the store.”
In August, the executive said that work had begun, with chief merchant Nick Jones scoping out new brands to add to Kohl’s assortment on New York trips “pretty much every week” to capitalize on the new customer base. Expansions in home decor and gifting are also targeted at Sephora customers. At that time, CFO Timm said about 40% to 50% of the Sephora at Kohl’s customers are shopping around the rest of the store.
Capitalizing on those new shoppers, who might be used to higher prices thanks to Sephora’s assortment, could help Kohl’s reinvent itself in the mind of the consumer, who might have pinned Kohl’s into a certain price point that’s “not necessarily where you want to be,” Thomas noted.
“You don't want to be that narrow,” Thomas continued. “I think it is a good opportunity for Kohl's to start to diversify again, and maybe just expand the price point offerings that they have.”
Ultimately it may be too early to tell the long-term impact of these partnerships, whether they’ll drive growth for years to come or fizzle out. But in the meantime, Kohl’s and Target each have a new page in their retail playbook — and a convenient testing ground in the holiday season.