Interview Transcript

How is the mass beauty market channel structured in the US?

Walmart is about 33% of the entire beauty business in the mass market. CVS and Walgreens and Target, those four together make up about 75% of the syndicated data in the market. Walgreens would be second largest, CVS would be third, but that teeters back and forth, as far as volume is concerned, and I think CVS may have taken over Walgreens this past year. I have to wait till the 2018 data comes through. Then Target also has a great business here and is the darling of the industry, as far as top line growth is concerned.

I think there will be continued pressure there because their operating income continues to shrink, which is what's been causing some dings to their share price, which they can get margin out of several different ways. They can cut their SG&A, but they can also ask for an increase from the supplier community to offset some of that. Everybody start your business or, if you want to be considered a beauty player, you would have distribution at Ulta versus any of the big four.

They're not as attractive because the cost to serve is so much higher. Whatever happens with Ulta on their margin requirements going forward, they may be considered very high cost to serve in the future versus what the payback's going to be. Then you have e-commerce, where Amazon is a massive player, undisclosed amounts of money, but it's multi-billions for their beauty and personal care business. A couple of billion sits outside that's not recognized in the Amazon business, and they're fairly decent to do business with, as far as the margin structure's concerned.

When you mean cost to serve are you referring to the gross to net for the brand?

Yes, the trade fuel that you would spend. The cost to do business with the drug retailers is the highest, and then Walmart and Amazon are the lowest, and Target and Ulta sit in the middle. Then you've got off-discounters, like the value distribution channel etc., that have a good-sized business. I know Ross [Ross Stores Inc.] has 500 million or a billion, that they take out the market.

Ross does around 14 billion, as a total store. You don't see it go through any syndicated data, but I know that's how big their business is, so you take that out of the market.

What's the difference in the cost to serve? How should we look at that between Ulta, and say Walgreens, for example?

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