Back-to-school skin care: Warren Buffett bets on Ulta Beauty as retailer banks on Gen Z purchasing power

16 Aug 2024 --- Gen Z’s strong purchasing power has retailers catering to the demands of younger shoppers. This demographic is carving out a distinct niche in beauty, and retailers such as Ulta Beauty are taking notice. We look at Unidays and Innova Market Insights research with students heading back to school and Ulta Beauty’s brighter prospects as it attracts one of the world’s most successful investors, Warren Buffett.

Innova Market Insights data reveals some 52% of Gen Z consumers are willing to try out new makeup products, highlighting them as key trendsetters in the global beauty market. According to consumer insights research from Ulta Beauty, pre-teens are considerably tuned in to brand activities.

The retailer’s analysis sees female Gen-Z shoppers starting to engage with beauty products, services and wellness routines by the average age of 12.6 years. For male Gen-Z shoppers, the average age is 13.5.

Ulta Beauty stock upgraded after a regulatory filing shows Buffett’s company, Berkshire Hathaway, purchased about 690,000 shares (Image credit: Ulta Beauty).The shrinking of the average age has led to parents and influencers voicing concerns about the “Sephora kids” phenomenon, which sees a spike in young consumers overusing certain intensive ingredients intended for adults that may aggravate allergies or eczema.

However, the flood of concerns has opened the door for business. This week, Indu, a British-founded entry-level skin care brand targeting teens, secured £4 million (US$5.1 million) in a seed funding round led by Unilever Ventures. The Sephora brand will direct the new capital injection toward expanding its brick-and-mortar retail presence in the UK.

Ulta Beauty Buffett boost

As Ulta Beauty shifts its focus toward servicing the skin care needs of Gen Z by relaunching its private label Ulta Beauty Collection, renowned investor Warren Buffett has noticed.

On Thursday, the US beauty retailer’s stock soared eleven percent after a regulatory filing revealed that Buffett’s company, Berkshire Hathaway purchased about 690,000 shares of Ulta Beauty, worth about US$266 million in the second quarter.

Key analysts subsequently upgraded their stock target, with Oppenheimer’s Rupesh Parikh and Erica Eiler seeing Buffett’s bet as “a vote of confidence for Ulta Beauty’s longer-term prospects and a further validation of [the stock’s] significantly discounted valuation.”

Another retailer hot on the Gen Z growth path is Kiehl’s, which recently entered the intimate care category with its Personals collection.

Backpack beauty staples

In the UK, student discount platform UniDays predicts British Gen Z consumers will spend approximately £1,600 (US$2,057) per person on back-to-school items in the beauty, fashion and technology segments.

The Back to Campus Deep-dive Student Insight Report surveyed 8,000 UK students and found that Gen Z consumers will spend £1.1 billion (US$1.4 billion) on beauty products alone. The students are projected to spend £1,118 (US$1,437) per person on these items, compared to £518 (US$666) for second to fourth-year students.

“As the first student loan payments arrive, Gen Z will be replenishing their school supplies, groceries, fashion, beauty products, and crucial tech items,” says Derek Morrison, managing director of Retail Marketplace at UniDays.

“This is a pivotal moment for brands to engage with Gen Z, particularly freshers who are projected to spend more than any other year group, with an average expenditure forecast of over £2,500 [US$3,214] per student.”

 Indu, a British-founded skin care brand targeting teens, secured £4 million (US$5.1 million) in a seed funding round led by Unilever Ventures (Image credit: Indu).Self-care spending soars

The Unidays report lists body care, makeup, hair care and fragrance are the most in-demand personal care items, with purchases expected to total £204 million (US$262.29 million), £192 million (US$246.86 million), £184 million (US$236.57 million) and £174 million (US$223.72 million), respectively.

“Gen Z is willing to spend on what they deem most important — but that doesn’t mean brands can’t give them a helping hand by meeting them at their passion points going into the new academic year. Offering a student discount, for example, would further influence students to make a back-to-school purchase,” explains Morrison.

“Back to campus is a key period of discovery in terms of daily routines, hobbies and interests. It’s essential that brands align with and enable students to fully embrace and enjoy this exciting time. In the spirit of discovery, appealing to freshers with free trials and exclusive content is a sure way to drive engagement.”

The report also indicates that first-year students are more likely to choose clothing and beauty boxes than older students.

Gen Z game-changers

The focus on traditional retail channels appears evident. Analysis from investment bank Piper Sandler shows that teen beauty consumers continue to prefer in-store shopping versus online shopping, with 85% showing a preference for in-store purchases.

Its report also targets popular engagement channels for Gen Z consumers, with Instagram significantly improving from fall ‘23 (+700 bps). The social media site is now the second most favorite app with 30% of teens.

TikTok remained number one but declined around 300 bps to roughly 35%. SNAP fell by around 600 bps to the number three favorite at around 22%.

In a Piper Sandler report, ELF continued its dominance as the number one cosmetics brand among Gen Z consumers (Image credit: ELF Beauty).Overall, the average Gen Z consumer’s core beauty wallet reached its highest level in April since spring 2018 at US$339 with growth across all categories.

Piper Sandler’s report reveals cosmetics still hold the highest share of total beauty spendings for Gen Z consumers, but fragrance is experiencing the greatest growth at 23% year-over-year.

ELF continued its dominance as the number one cosmetics brand, and grew its share by 16 points year-over-year to 38%. The brand also continues to rank in the top ten skincare brands and beauty destinations.

Beauty consumers still prefer to shop in-store versus online at 85% preference for in-store. Ulta is ceding some mindshare to Sephora, but with both retailers having roughly 60% loyalty membership penetration, our viewpoint remains that both retailers can successfully coexist.

“Our survey results indicate a slight increase in teen spending sequentially from fall 2023, but self-reported spending is down 6% year-over-year, well below pre-pandemic levels. We are seeing some significant shifts in brand preferences including the rise of smaller, innovative brands which are taking share from incumbents,” says Abbie Zvejnieks, senior research analyst at Piper Sandler.

“We think social media has led to an accelerated trend cycle including an increased emphasis on key products, and brands will have to be nimble to keep up.”

By Benjamin Ferrer and Sabine Waldeck