Cleared for takeoff: Macy’s to grow beauty brand

Faced with dwindling expansion opportunities for traditional department stores, Macy is looking to significantly grow standalone beauty stores following its recently completed acquisition of the 60 unit specialty beauty retailer Bluemercury.

Macy’s announced it would acquire Bluemercury on Feb. 3 for $210 million and closed the acquisition on March 9. On both occasions the company offered few specifics, but directionally indicated it, “plans to operate and significantly expand Bluemercury stand-alone specialty stores, enhance its online capabilities and add selected Bluemercury boutiques and private-brand products to Macy's stores nationwide over time.”

With only 60 stores in operation, physical expansion opportunities for Bluemercury would seem to be abundant and Macy’s 2015 capital expenditure budget is sufficient to fund expansion. Macy’s said it plans to spend $1.2 billion on capital expenditures this year, up from $1.07 billion last year, with the increase said to reflect new investment in growth initiatives.

Macy’s growth intentions for Bluemercury come as the entire department store channel faces limited organic growth opportunities and beauty departments are under increased competition. For example, Macy’s contends Bluemercury is “widely recognized as America’s largest and fastest-growing luxury beauty products and spa services retailer,” and the company does offer a wide range of pricey brands whose exclusivity is aided by a strategy of limited distribution. However, other beauty retailers that skew more mainstream can easily lay claim to the fastest growing title.

Ulta Salon, Cosmetics & Fragrance has been on a tear of late, opening 100 stores in 2104 and is rapidly closing in on 800 units, more than double the number of stores the company had just five years ago. The company’s model of blending mass and prestige brands in 10,000-sq.-ft. locations with a full service space is resonating with customers as evidenced by consistently strong high single digit same store sales growth. A new ad campaign with the tag line, “get all things beauty in one place,” speaks to the company’s broad assortment value proposition.

In addition to Ulta, Macy’s beauty business has faced increased competition from Sephora, the specialty beauty retailer owed by global luxury goods giant LVMH Moët Hennessy Louis Vuitton. Sephora operates roughly 1,900 stores in 29 countries worldwide, with an expanding base of more than 360 stores across North America in addition to 1,500-sq.-ft. departments inside JCPenney stores.

Given the growth of Ulta and Sephora it’s not hard to see why Macy’s was attracted to what appears to be the untapped potential Bluemercury’s 60 unit operation even as it withholds specifics on expansion targets.

We see such opportunity for Bluemercury to expand their business rapidly across the country in the digital channel and also maybe perhaps overseas down the road. We also look forward to opening Bluemercury shops within our Macy's stores,” Macy’s CFO Karen Hoguet said during a conference call to discuss fourth quarter results. “This accelerated growth won't happen overnight, but we do expect it to make a difference in our top-line results over the next two to three years. We will be testing different ideas and will rollout those ideas that have potential.”