This is Part II of an ongoing series on the rise and evolution of Kylie Cosmetics. Read Part I, Part III, Part IV, Part V ,Part VIPart VII and Part VIII.

At the end of August, Kylie Jenner announced on Twitter that her eponymous beauty brand will start selling at Ulta Beauty’s 1,124 stores this holiday season. This is the first time Kylie Cosmetics will be available long-term at a third-party retailer—it did a small number of pop-ups at TopShop in the 2017 holiday season, where Kylie and her sister also sell their swimwear and lingerie brand Kendall + Kylie—and the brand’s first major push into physical retail. Kylie Cosmetics’ trajectory stands in stark contrast to fellow celebrity brand Fenty Beauty, which was created by Kendo (Sephora’s private label lab) and built from the ground up to sell in Sephora’s stores and online.

There’s no mystery as to why Ulta wants to sell Kylie’s products. She created one of the fastest growing beauty brands with very wide appeal and exposure, and her products sit at an accessible price point, aligning with Ulta’s audience. The deal gives Ulta an edge against other beauty competitors thanks to Kylie’s high profile and devoted following of young shoppers, and will further supercharge the retailer’s loyalty program.

Instead, the question is why Kylie wants to sell at Ulta. As we wrote previously in Kylie Cosmetics and the value paradox of celebrity brands, Kylie has built a one-of-a-kind brand that leverages her vast distribution (114 million Instagram followers) and the product development and supply chain of Seed Beauty, which gives the brand rapid speed to market and global scale without having to build a massive team (she currently employs under a dozen people). Early on, the formula worked: According to Forbes, in 2016 Kylie Cosmetics had revenue of $307 million from its 50 SKUs.

But in 2017, despite adding 30 new SKUs, Forbes estimated (with no citation) that the brand only increased revenue 7% to $330 million. (This contradicts the 25% growth cited in a WWD piece in August 2017, which would equate to $386 million for the year, although it’s possible the brand didn’t hit these projections.) Kylie’s pregnancy, which compelled her to take approximately six months off of social media, could be one reason behind the slowdown. The same Forbes piece explained the “taper off” of revenue with falling Lip Kit sales, but it cited unverifiable estimates to back up its claim. Regardless, the brand has generated over $300 million in net profit, and since Kylie owns 100% of the brand, one would hope this money is sitting in her bank account.

So with plenty of initial success selling direct-to-consumer, there are only a few reasons that could justify this deal and cause Kylie to take the margin hit. These theories are not mutually exclusive—a combination of them most likely led to this decision.  

The theories

Kylie Cosmetics’ growth has slowed and the brand wants to keep growing.

The brand has grown almost entirely online, save for a few pop-ups, and it’s possible that overall growth—99% of which is digital—is slowing. Opening in Ulta would surely reverse this course, allowing the brand to grow topline revenue, probably by hundreds of millions of dollars.

Even so, there’s a possible overlap between Kylie and Ulta customers. Ulta does not report its total customer count, but at the end of 2017 it had 28 million members in its loyalty program, which accounted for 90% of its revenue. Estimating that Ulta has 40 to 50 million customers annually, the number still pales in comparison to Kylie’s potential reach with her 114 million Instagram followers. Yes, this is different than converted converted customers, since many of Kylie’s followers have likely never bought her products—but it’s a unique position for a retailer to be in with one of its vendors; after all, brands sell to department stores for the department store’s reach, not the other way around. Additionally, Kylie Cosmetics’ annual revenue of $350 million is about 6% of Ulta’s $6 billion annual revenue.

We use the word “wants” for Kylie Cosmetics’ future growth, not “needs,” because Kylie has no external investors and technically does not need to turn on the turbo boosters and keep growing in order to exit the company a handful of years after launching the brand. As we wrote previously, it’s quite possible that Kylie actually can’t sell the brand because there is not really anything to sell; the brand is built on Seed Beauty’s supply chain and her personal distribution, which would evaporate if she exited.

Kylie Cosmetics has hit the ceiling on digital growth.  

Kylie Cosmetics might be the most successful and highest grossing digitally-native brand ever. Some of the largest digitally-native brands have moved offline and into wholesale much sooner than Kylie has from a revenue perspective: Casper ($300+ million in 2017 revenue), Warby Parker ($330 million in 2017 revenue), Honest Company (estimated $400 million in revenue), Harry’s (estimated $250-300 million in 2017 revenue) and Bonobos (estimated $200 million in revenue). While Casper, Warby Parker and Honest Company are near Kylie in topline revenue, a significant portion of these three brands’ revenue comes from both retail (Warby Parker will have 100 stores by the end of 2018, Casper has 18 current stores with another 200 on the way) and wholesale (Harry’s sells at Target, Walmart and J.Crew, and Casper sells at Target). So Kylie has outlasted all of them from selling online only.

The last few years have shown that growing offline and in wholesale is cheaper and longer-lasting for most digitally-native brands—even though the decreased margins are serious and often unanticipated by the brand when it first prices its products to sell direct-to-consumer. But Kylie has reached her audience for almost nothing (there is little evidence Kylie Cosmetics frequently promotes posts on Instagram), putting her in a different league than most other brands. She also definitely has the margins to support wholesale given the generous margins that beauty products afford and the relative pricing-to-quality ratio of the brand’s products, which are known to be good-enough.

Kylie Cosmetics needs to exist offline, but it wants to follow the same asset-light model that Seed Beauty allows.

If the digital growth for Kylie Cosmetics is slowing, and given the rising costs for other digitally-native brands to grow online-only, offline is the natural channel to embrace. However, the decision to go into Ulta is evidence that Kylie has ruled out a significant retail push for now, which would be much more capital intensive, but mostly allow it to maintain its margins.

Wholesale math is not as simple as taking a brand’s retail price and cutting it in half. There are a range of additional fees, from vendor allowances (a credit system for compensating the retailer for hitting certain sales thresholds) and slotting fees (access to the shelf space) to co-op advertising (brands refunding the retailer for any advertising that features its products) that seriously add up—not to mention the costs of staffing certain stations at stores like Ulta that it charges back to brands in one way or the other.

For example, if a product retails for $15, and costs $2 to make, the brand would net $13 selling it direct before marketing expenses and maybe $9 after them, while going wholesale would sell the product to a retailer for $6 to $7, netting only $4 to $5. Then add in all of the other fees and the gross profits (not even net profits) quickly disappear. Kylie can probably saddle this with lower inventory costs and higher margins given the brand’s scale, and her brand will likely earn a lot of free credits and promotions given her fame, but the economics will shift from the cushy math the brand is used to. Even if Ulta set up a concession relationship with the brand or some sort of special revenue share, which would be rare but is possible given the brand’s power, Kylie’s margins would still decrease substantially.

The effects

Theories aside, Kylie Cosmetics’ move into Ulta has a number of effects. There is some precedent for the team that runs Kylie’s brand, since Seed Beauty owns ColourPop, which already sells at Ulta. But Kylie is, as always, in a league of her own.

While decreased margins are often the biggest gripe of selling wholesale, free cash flow matters more to many companies (just ask Bezos). Ulta will likely give Kylie Cosmetics more scale and substantial topline earnings, but it will do so at the expense of adjusting the cost structure and fluffy economics it has so far enjoyed.

Though most brands report higher direct-to-consumer sales when they open offline channels in retail or wholesale, since Kylie has more reach than Ulta does, her biggest risk in selling at Ulta is that Ulta could divert away customers who previously bought from Kylie Cosmetics directly. Ulta’s allure to the brand—the retailer’s IRL presence, popular loyalty program and generous return policy—could also be an achilles heel for Kylie Cosmetics if it cannibalizes Kylie’s direct sales. This would only lower the brand’s margins and divert more customers to its wholesale partner, which will have worse economics than Kylie’s website.  

Moving into Ulta is both consistent with the evolving strategies of other digitally-native brands, yet unprecedented given Kylie’s reach and overall success. As the brand rolls out its products in store and the holiday season approaches, Ulta’s status as a public company should shed some new light on Kylie’s power—and on the questionable durability and sellability of Kylie Cosmetics.

Either way, the brand’s move is proof that the most powerful brands in the world can’t stand still in today’s fast-paced environment. The question to ponder is whether big strategy evolutions like this amount to a step forward or backward for a brand like Kylie Cosmetics that was effectively printing money beforehand. We’ll find out soon enough.