Sephora: Special Strategy for Specialty Retail Growth December 2013
Special Strategy for Specialty Retail Growth Sephora was founded in Paris, France in 1970 by Dominique Mandonnaud. Louis Vuitton Moet Hennessy (LVMH) bought the company in 1997, and since then Sephora has been operating as a private subsidiary of LVMH under the business segment “Selective Retailing”. LVMH
Business Segments
Wines and Spirits
Brands
Fashion and Leather Goods
Watches and Jewelry
Selective Retailing
Sephora
Le Bon Marché
Operates beauty products retail stores
Operates department and fine foods stores in Paris
DFS (Duty Free Shoppers) A luxury goods retailer catering to the traveling public (mainly at airports)
Perfumes and Cosmetics
Miami Cruiseline Operates luxury goods (jewelry, watch, handbags, beauty products, accessories and liquor) stores on cruise ships
At the end of June 2013, Selective Retailing operated a total of c.1,475 stores, of which c.1,413 were of Sephora alone (operating in c.30 countries) while the remaining c.62 were of the other three brands. Sephora is a retailer of beauty products and sells over c.13,000 products in its stores and via its online channel. Apart from its own brand, it also sells products from over 250 different brands (including premium/luxury brands such as Shiseido, Philosophy, Clinique, Boscia, NARS, Make Up For Ever, Urban Decay, and Too Faced Cosmetics etc.). Sephora opened its first ‘store inside a store’ at JC penny in October 2006 and currently operates c.375 such stores.
Specialty Retailing – The Sephora Way Sephora comes from the Greek word ‘Sephos’ (which means beauty) and the name ‘Zipporah’ (the beautiful wife of Moses). The company has cleverly devised its strategy to attract more of younger generation customers (the largest customer segment) in its stores. Some of the aspects of this strategy are as discussed below: 1. Wide variety of product range at different price points At a Sephora store, customers can find good quality products at different price points. Also, the merchandise is not arranged by brands (as is a common practice in department stores) but by product category. As an example, eye-lashes of different brands (and different price points) are stacked together. This clearly helps a customer to browse through different brands of the product they want to purchase and then choose the one they find good and affordable. By doing this, the company is able to cater to wide demographics across different income groups.
“
Their business model is very clever. Stocking exclusive products means Sephora can limit discounts, while private-label merchandise yields high profit margins.” - Joël Palix, President - Clarins Fragrance Group (distributes Thierry Mugler scents through Sephora)
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2. Continuous partnership with ‘powerhouse’ brands Sephora is continuously tying up with ‘powerhouse’ brands in the beauty segment to increase its offerings. Sensing the success of Sephora, these brands also want a presence in a Sephora store. Playing on the emotional side of customers, these brands evoke a sense of pride among customers of owning a ‘luxury-product’. These luxury beauty products are cheaper than other luxury products, like a handbag or a watch, even if they all come from the same brand. Not only these well-known brands are able to draw more customers in its stores, but availability of more affordable options generally results in a sale. Some of the recent collaborations of the company include brands like Elizabeth and James, MaryKate and Ashley Olsen (fragrance collection) and Marc Jacobs (makeup line). 3. Focus on in-store beauty services and loyalty program Large selection of merchandise along with superb customer service is what attracts customers to Sephora. Many in-store services like makeover, hair cut and nail care have set Sephora apart from the competitors. Sephora also runs loyalty programs like ‘Inside Beauty’ and ‘Top Brands’ to reward its customers. It also runs online beauty community called ‘BeautyTalk’, which is accessible on a mobile phone or a tablet.
“
Sephora's clients are avid beauty junkies and we want to reward her beauty addiction with a program that is built around what she loves: product.” - Sarah Choi VP - Beauty Insider Program, Sephora
Unlike other department stores where testing a beauty product generally requires assistance, customers at Sephora can freely experiment with the products. Sales associates at Sephora are trained beauty experts that intervene only when a customer asks for assistance explicitly. Some of the technology initiatives at Sephora are also helping it delight a customer. The company launched the ‘mobile payment system’ in the US in 2011, which allows customers to pay for their purchases directly with a sales assistant without queuing up at POS to make the payment. Sephora has launched a new service called “Color IQ” that allows its sales associates to scan customers’ face and help them choose the foundation color best suited to their skin complexion. This service is presently in use in the US as well as in Europe.
“
Less than 40% of beauty brands and prestige retailers have invested in cross-channel loyalty programs. In the company of some relatively static options from other brands, Sephora stands out for continuing to evolve its six-year old loyalty program to maximize user engagement.” - Stasha Rosen Research Associate, L2 Think Tank
4. Seamless shopping experience across channels Customers can make a purchase at a Sephora store or online using computers / tablets / mobile phones. Sephora has tried to give the seamless shopping experience to customers wherever they
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shop from. Its website is quite detailed and covers all the important information about all of its c.13,000 products.
“
We’re focusing on technology that blurs the lines between online and in-store. Our greatest focus is giving the customer a personal shopping assistant in the store. Customers can scan products to read ratings and reviews and all store associates are equipped with mobile phones to check customers out, so there’s no waiting in line…..…..Our strategy is and always has been about providing the best shopping experience regardless of where the customer is.” - Johnna Marcus, Director of Mobile and Digital Store Marketing, Sephora
Conclusion Sephora has captured attention of the global audience with its format, merchandising, services, and technology. Clearly, the company is here to stay. Powerhouse brands, which were once the forte of the department stores, want their presence on the Sephora shelves. As such, the large department stores will have to find ways to fight Sephora (other than preventing big brands from tying up with it) before the beauty segment business is lost to Sephora forever.
Appendix: Financial Snapshot Financial Snapshot Selective Retailing (EUR Bn) 19.7%
EUR 28.1Bn
22.4%
Geographic Mix (FY 12)
7.88 6.44
9.93
5.38
Fashion and Leather Goods
Asia 28%
FY 10
FY 11
FY 12 7.88
Selective Retailing
4.14
Wines and Spirits
Brand Mix* (FY 12) Sephora 68% c.EUR 5.4 Bn
Others 32%
3.61
Perfumes and Cosmetics
2.84
Watches and Jewelry
Others 8%
United States 36%
Other Europe 11%
France 17%
Revenue - LVMH (FY12, EUR Bn)
Note: * = Revenue for Sephora is estimated. It is not reported by the company; FY12 = Year Ended December 31, 2012 Source: Company Website; Company Reports; Secondary Research; Sutherland Analysis
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