1

May5,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

1) SephoraandUltaarethetop-twobeautyretailchainsintheUS.In2016,theyaccountedfor22.7%and26.7%ofUSbeautyspecialistretailsales,respectively.Inthisreport,wediscusstheirloyaltyprograms,whichareverydifferentandfittheirpositioninginthemarketaccordingly.

2) BeautyInsider:Sephora’sBeautyInsiderprogramfeaturesmultiplemembershiptiers—themorethecustomerspends,themoreexclusivetherewardsandbenefitsare.Thiscreatesapremiumfeelingforthehigher-spendingcustomerandmatchestheretailer’spositioninginthehigher-endsegment.

3) ULTAmateRewards:Ulta’sUltamateRewardsprogramfeaturesvalue-relatedrewards,suchaspointsfordiscountsandextrapointsaccrualforhigher-tiermembers.Indeed,mostofUlta’scustomerscitepriceandpromotionsasreasonstheyshopthere,accordingtoProsperInsightsMonthlyConsumerSurvey.

Beauty Loyalty Programs:

Sephora Vs. Ulta

Deborah Weinswig

Managing Director,

Fung Global Retail & Technology

deborahweinswig@fung1937.com

US: 917.655.6790

HK: 852.6119.1779

CN: 86.186.1420.3016

2

May5,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

IntroductionSephoraandUltaarethetop-twobeautyretailchainsintheUS.In2016,theyaccountedfor22.7%and26.7%ofUSbeautyspecialistretailsales,respectively,accordingtoEuromonitor.

Sephorawasfoundedin1970,andin1997,wasacquiredbyLVMH,oneofthelargestluxurygoodscompaniesintheworld.Ithasover413storesacrosstheUSandCanada,aswellas573outletsinsideJCPenney.Sephorafocusesonbeautyproductsinthemiddletohigh-endsegments.Italsooffersbeautyservicesandbeautyclassesatsomeofitsoutlets.

Source:Shutterstock

Ultawasfoundedin1990andoperates974storesintheUS.Itexpectstoopen100netnewstoresbytheendoffiscalyear2017.Theretailersellsdrugstoreitemsalongwithmid-rangebeautyproducts,andoffersbeauty(hairandbrow)andskincareservicesatitssalons,whicharefeaturedinallofitsstores.

Source:Shutterstock

Toretaintheirloyalcustomersandcapturecustomerdata,bothbeautyretailchainshavewell-establishedloyaltyprograms:BeautyInsiderandUltamateRewards.

3

May5,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

Toretaintheirloyalcustomersandcapturecustomerdata,bothbeautyretailchainshavewell-establishedloyaltyprograms:SephorahasitsBeautyInsiderprogramandUltahasitsUltamateRewardsprogram.Inthisreport,wecomparethetwoprogramsandanalyzehowandwhytheydifferfromeachother.

WhatDrivesConsumerstoShopatSephoraandUlta?WelookedatthereasonsconsumerscitedforshoppingforhealthandbeautyproductsatSephoraandUltabyanalyzingdatafromtheProspermonthlyconsumersurveyconductedinNovember2016.

Merchandisemix:Accordingtothesurvey,themerchandisemixisasignificantdriverforbothretailers:65%and77%ofloyalcustomersmentionedselectionasareasontoshopatSephoraandUlta,respectively.

Qualityandservicevs.priceandpromotions:Sephoraleadsonqualityandservice,whileUltaleadsonvalue-relatedfactorssuchaspriceandpromotions.

Location:Ultaisalsopreferredbycustomersbecauseofitslocation,whichcorrelatestomanagement’sfocusonrealestateasacorecompetency.

Loyaltyprogram:LoyaltyprogramplaysamoreimportantrolefordrivingcustomerstoshopatUltathanSephora:citedby31%ofUlta’scustomersand21%ofSephora’scustomersasareasontoshopatthelocation.

Figure1.ReasonsforShoppingMostOftenatSephoraandUlta,November2016

SampleSize:SephoraCustomers:N=101;UltaCustomers:N=148Source:ProsperInsights&Analytics,MonthlyConsumerSurveys

0%

20%

40%

60%

80%Seleceon

Quality

Promoeons

Price

Locaeon

BrandsAvailable

LoyaltyProgram

Service

Sephora Ulta

Sephoraedgesonqualityandservice,whilemoreUltacustomersmentionedvalue-relatedfactorssuchaspriceandpromotions.

4

May5,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

AnOverviewoftheTwoLoyaltyProgramsLoyaltyprogramsplayavitalroleforbothSephoraandUlta.AccordingtoUlta’s2016annualreport,UltamateRewardsmemberscontributed90%ofthecompany’srevenue.AsforSephora,80%ofitstransactionsweremadethroughtheBeautyInsiderprogram,accordingtoBridgetDolan,VPofSephora’sInteractiveMedia.

Fundamentally,thetwobeautyretailchains’loyaltyprogramsaresimilartothoseinotherindustriessuchasairlinefrequent-flyerprogramsorhotelloyaltyprograms—customersearnpointswiththeirspending,andthemoretheyspend,themoretheygetrewardedandthebetterthebenefits.

Inthefollowingtable,weoutlineandcomparethemainfeaturesofthetwoprograms.Enrolmentisfreeforbothprograms,customerscanearnonepointperdollarspent(basicplan)andreceiveafreebirthdaygifteachyear.

Figure2.ComparisonofSephoraBeautyInsiderandULTAmateRewards

NumberofMembers(asof2016) 17million(USandCanada) 23.4million

AverageNumberofMembersperStore 17,241 24,025

MemberDriverofSalesasa%ofTotalSales 80% 90%

MembershipTiersBeautyInsider(free)

VIB($350annualspending)VIBRouge($1,000annualspending)

Basic(free)Platinum($450annualspending)

Points

Earning OnepointperdollarspentBasic:1pointperdollarspent

Platinum:1.25pointsperdollarspent

Expiry NeverBasic:expiresafteroneyearPlatinum:pointsneverexpire

Rewards Giftredemption Giftredemption,money-offpurchase

Bene

fits

BasicMembersFreebirthdaygiftFreebeautyclasses

FreebirthdaygiftExtrapointsduringbirthdaymonth

Higher-TierMembers

SeasonalsavingsFreecustommakeovers

Privatehotline(VIBRougeonly)Exclusiveproducts&events(VIBRouge

only)Freeshipping(VIBRougeonly)

ExtrapointsformultiplieroffersCashcoupononbirthday

Extrafreegifts

Source:Companywebsites/KatjaMakeupArtistry/BeautySkeptic

UltamateRewardsmemberscontributed90%ofthecompany’srevenue,whereas80%ofSephora’stransactionsweremadethroughitsBeautyInsiderprogram.

5

May5,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

UltamateRewardsrequiresahigherspendingof$450overthecourseofoneyeartoreachthenextmembershiptierPlatinum,whichishigherthanthe$350requiredtoreachSephora’sVIBstatus(VeryImportantBeautyInsider).However,SephorafeaturesonemoretierknownasVIBRouge,wheremembersenjoyevenmoreexclusivebenefits.

UltaSeeingFasterGrowthofitsMembershipBaseUltahasseenmuchfastergrowthinitsloyalmemberbasethanSephora.UltamateRewardshad15millionmembersin2014,whichgrew56%toreach23.4millionmembersin2016.Duringthesameperiod,SephoraBeautyInsidersawitsmembershipgrow17%from14millionto17million.

OnUlta’sfourthquarterearningscallforfiscal2017,seniormanagementstatedthatthecombinationandthesimplificationoftheloyaltyprogramhavehelpedtoacceleratemembershipgrowth.

Ultahasalsosignificantlyincreaseditsin-storeexecution,withstoreassociateshelpingeducateandconvertpotentialmembers.

Figure3.MemberNumbersfortheRespectiveLoyaltyPrograms,2014vs.2016

Source:Companyreports/Pressreleases/CNBC

WhatDifferentiatestheTwoLoyaltyPrograms

LeverageCustomerDataBothSephoraandUltahaveleveragedthecustomerdatafromtheirloyaltyprogramstoprovidepersonalizedexperiencesfortheirmembersacrossdifferenttouchpoints.

AccordingtoUlta’sCEOMaryDillon,UltamateRewardshelpedtodelivermoretargetedandpersonalizedoffersacrossallchannels,andinitiativessuchasequippingstoreassociateswithadigitaldevicethatgivesthemthe

14

17

15

23

10

15

20

25

2014 2016

Mem

berN

umbe

rs(m

illion)

SephoraBeautyInsider UltamateRewards

6

May5,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

abilitytotracktheprofilesandpreferencesofindividualcustomers,aswellastoprovidemorepersonalizedcustomerinteractions.

Sephoraalsoutilizesitsloyaltyprogramtoprovideacoherentandpersonalizedexperienceacrossdifferenttouchpoints,accordingtoDolan,theprogramenablesSephoratoproviderelevantrecommendationstotheirmembers.Forinstance,itrecordstheskintypeofindividualcustomersandtheemailsreceivedbythecustomerwillhavethatattribute.

RewardsandBenefitsIntermsofrewardsandbenefits,BeautyInsiderisskewedmoretowardservices,whileUltamateRewardsfocusesmoreonvalue,whichalignswiththerespectivepositioningofthetwobeautyretailchains.Forinstance,Sephoraoffersfreebeautyclassestoallofitsmembers,andfreecustommakeoverstohigher-tiermembers.Ulta’sprogram,ontheotherhand,focusesmoreonvaluepurchases.Thisisdeliveredbygivingmembersextrapoints,whichistranslatedintomoney-offpurchases.

Wecomparedthetwobeautyretailchains’loyaltyprogramswiththosefromotherindustries,andidentifiedsomesimilarities.

Figure4.ComparisonofRewardsandBenefitsforSephora,Ulta,AirlinesandSupermarkets

RewardsandBenefits Airlines Sephora Ulta Supermarkets

MembershipTiers 3–4 3 2 1

AccrueExtraPoints ü* ü*

PointsforMoney-offPurchases ü ü

ExclusiveEventsandServices ü* ü*

*Forhigher-tiermembersonlySource:Companywebsites/FungGlobalRetail&Technology

Useoftiersandexclusiveservices:Sephora’sloyaltyprogram,similartoairlinefrequent-flyerprograms,hascreatedapremiummembershiptiertoretainitshigh-valuecustomers,andoffersthemexclusiveproductsandservices.SephoraVIBRougemembersenjoydedicatedcustomerservice,unlimitedaccesstothebeautystudio,invitationstoexclusiveeventsandearlieravailabilityofproducts.Thisissimilartobenefitsenjoyedbytheairlines’higher-tierloyaltyprogrammembers,suchasdedicatedcheck-inlines,aswellasaccesstoairportlounges.

Money-offpurchases:Ultacarriesmostlydrugstoreitemsandmid-rangebeautyproducts,wherevaluehelpstobuildloyaltybetterthanservice.ThisissimilartotheapproachbysupermarketchainssuchasSainsburyandWoolworths,wherecustomerscanearnpointsformoney-offpurchaseswiththeirloyaltyprograms.Asvalueandselectionarethekeyfactorswhycustomersshopattheseretailers,theydonotsegmentoffhigh-spendingcustomers.

SephoraBeautyInsiderisskewedmoretowardservices,whileUltamateRewardsfocusesmoreonvalues.

7

May5,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

KeyTakeawaysLoyaltyprogramsareaneffectivetooltoretaincustomers,encouragespendingandcollectcustomerdatatoenhanceoperations.Inourview,aneffectiveloyaltyprogrammusthaveaclearvaluepropositionandmatchthepositioningoftheretailer,andthiscanbefoundinbothUlta’sandSephora’sprograms.

Sephora:Sephorasellsmostlymid-tohigh-rangebeautyproducts,andmostofitscustomerscitedqualityasthereasontoshopthere.Theuseoftiersandexclusiverewardsnotonlyhelpstoretaincustomers,itcreatesasenseofluxuryandmatchesthemorepremiumpositioningoftheretailer.Inaddition,ithelpstoencouragecustomerstospendmoreandprogresstoahighertier.

Ulta:Ultasellsdrugstoreitemsandmid-rangebeautyproducts.Mostofitscustomerscitedvalue-relatedfactorsasreasonstoshopthere.Similartosupermarketloyaltyprograms,theuseofpointsformoney-offpurchaseseffectivelyencouragescustomerstoretainandspendmoreattheretailer.

Inourview,aneffectiveloyaltyprogrammusthaveaclearvaluepropositionandmatchthepositioningoftheretailer,andthiscanbefoundinbothretailers’programs.

8

May5,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comEddieWongSeniorResearchAssociate

HongKong:8thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223004406London:242-246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NewYork:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017

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