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updated: 2/22/2017 10:31 AM

How Ulta grew from the suburbs into a top national retailer

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Two executives left their careers at Osco Drug nearly three decades ago to launch a store designed to change the way women shop for cosmetics.

The business partners started Ulta, with a handful of stores in the northwest suburbs, and turned it into one of the largest beauty retailers in the United States. The company now has a net income of about $269 million and stores that stock more than 20,000 products, from cosmetics to salon styling tools.

The founders, Terry Hanson and Dick George, learned as they went along and have since retired and passed the growing company to new leadership.

It all started when George, who was president of Osco, left his post in 1989 and wrote a business plan for a new retail concept that would offer more cosmetics and fragrances than any other store. This concept included a hair salon and later nails and skin care services, all in the same store where shoppers could find both mass market and high-end cosmetics and fragrances. This provided the convenience for the time-strapped shopper who was able to find everything under one roof, eliminating the need to visit multiple stores.

Terry Hanson replaced George as Osco's president, but not for long. He quit just a few months later to help George develop his new retail concept. "I just believed in it so strongly," said Hanson, 70, of Naperville. "I left Osco and four months later we closed on the venture capital and started the store. I was so convinced it would work."

Others at Osco also thought the concept looked promising and 11 additional executives followed Hanson and George, who then raised $11.5 million in venture capital and launched Ulta in 1990.

The first five stores opened in Lombard, Naperville, Morton Grove, Mount Prospect and Arlington Heights.

Looking pretty

About 27 years later, the retail experience, loyal colleagues, strong financial backing and determination drove the growth of what is now called Ulta Beauty with its headquarters in Bolingbrook. 949 stores span 48 states, including 36 local stores with plans for a new Michigan Avenue location this summer.

The publicly traded company had net income of $269.5 million, up 27 percent, for first nine months of 2016, compared to the same period the previous year.

Many factors helped fuel Ulta's success at a time when other retailers are closing stores. An attractive mix of products, good customer experience and an online component are key, industry experts say.

As Ulta thrives, higher-end beauty brands, hurt by declining traffic in traditional department stores, are being added to Ulta's shelves, said Phyllis Ezop, president of Ezop and Associates, a La Grange Park strategy firm.

"Ulta has been pursuing a particularly good mix of bricks and mortar versus online, reflecting an overall retailing trend toward greater integration of the two," Ezop said. "Despite online's higher growth rate, Ulta recognizes the value of putting an emphasis on physical stores, with plans for adding many new locations," she said.

The growth trend is expected to continue. "The retailer appears to be well positioned for success with those new stores," she added.

Shopping patterns

Beginning in Ulta's early days, service and convenience were always important, the founder said. Providing services all in one store, often in a strip mall, made shopping easier.

Hanson found that women enjoy parking closer to a free-standing store instead of spending a lot of time at an indoor mall. The founders also stayed away from handing out samples, which was common at department stores years ago. "Women didn't want to be 'attacked' going into the store by clerks who would spray them with fragrances," Hanson said.

He said mall locations also had higher rents. He, therefore, looked at stand-alone stores or those in strip malls that had lower overhead costs.

In studying shopping patterns, Hanson found that women usually use a wide range of cosmetics. Shoppers often want both mass products, such as Maybelline or Cover Girl, and prestige products, like Clinique, Lancome or Estee Lauder. "By combining the mass products and prestige products in one store, women had the opportunity to do their shopping all in one place," Hanson said.

Foundation with touch-ups

The founders continued to tweak the stores over the years.

"I was with Osco for about 20 years and had a lot of retail experience," Hanson said. "I knew we could make this (Ulta) work. But when you start something like this, there's a lot of gray areas that come up. So you need to experiment and make changes, to make sure it works the way it should work."

Starting in 1994, they did a makeover to eliminate some of the typical drugstore items from their shelves, including vitamins and oral health products, such as toothpaste. The lines of cosmetics and fragrances increased. They also went for a more upscale look and added more space to the salon and areas to test the products. By 1999, the company, which originally was named Ulta3, dropped the number 3 to simplify their signs and brand.

The founders eventually trained others to take their place as they faced retirement. The former Osco executives say they are proud of the leadership and where Ulta is headed.

"I am just amazed at how well the stores work today under the new leadership," Hanson said, referring to CEO Mary Dillon.

Dillon, 55, was hired in 2013 with goals to make the brand more well known and to strengthen the e-commerce component. She brought a wealth of experience with her. After marketing Gatorade for PepsiCo she moved up in that company, working on Quaker Oats and becoming division president. She was global marketing chief at McDonald's and then became CEO of U.S. Cellular in 2010 before she left for Ulta.

Taking risks

Hanson stayed as CEO of Ulta until about 2000 and then switched to CEO of the dot-com side of the business. He retired in 2002, but stayed on the board to see the company go public in 2007. He retired from the board in 2008 and now spends his winters in Arizona. George left Ulta in 1994.

Looking back, Hanson says it was about taking risks.

"The toughest part was convincing the prestige product companies to take a chance on us," Hanson said.

In addition, retailers need to cater to all consumers and their shopping habits, said Dave Kimbell, Ulta chief marketing and merchandising officer.

Women and men, ranging in age from teens to senior citizens, come into the store, all seeking products to help improve their skin or their overall look. The stores offer products for various races to help enhance their features, regardless of their skin tones, Kimbell said.

Besides the hair salon, the stores also offer skin and brow services and cater to groups, like bridal parties, he added. "We want to be where our customers are," Kimbell said.