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Sephora: Behind the Scenes of the Beauty Behemoth

Written by Baker's Dozen, Posted on December 2, 2015

Sephoras competitive advantage in the prestige beauty space

stems from integrated business and operating models that support
the companys broader objective to enhance the customer
experience at every touchpoint.

Business and Operating Model Alignment

Sephora is a prestige beauty retailer that captures value by selling

prestige products at a price above cost to consumers both online
and in-store. The company has developed a competitive advantage
amongst its peer group (department stores and other specialty
beauty retailers) by employing a business model that is wholly
focused on a superior holistic customer experience (1). Sephora
creates value with business strategies that address existing and
anticipated consumer needs more effectively than competitors. The
companys operational model facilitates the successful
implementation of those business strategies that support the
broader mission- in this way, the operational model serves as a sort
of subgroup of the business model. While specific financial data is
not available for Sephora as an LVMH subsidiary, the firms double
digit revenue growth and operational model investments point to a
strategy designed to achieve business model objectives versus a
cost savings(2).

Business/Operating Model Details

Business StrategyConsistent Shopping Experience

Sephora offers a uniquely consistent shopping experience across its

brick-and-mortar, web, and mobile platforms with access to over 200
prestige beauty brands across product categories (skincare,
makeup, fragrance, hair, and beauty devices). Graphics, promotions,
and featured products are aligned on all customer interfaces,
allowing for seamless browsing and purchasing regardless of format.

Supporting Operational StrategyCombined Marketing

Efforts

Unlike its competitors, the digital and traditional marketing efforts at

Sephora are organized under the same department, fueling
collaborative decision making(3). In contrast, most peers historically
operated online businesses in a silo, resulting in a disaggregated
consumer experience with inconsistent discounts and product
placement (e.g. a serum featured in-store may not be highlighted on
the website; integrating the business units has proven challenging
for most. The joint reporting structure of the Sephora marketing
teams has granted the company a competitive advantage as
consumers purchase across physical and digital platforms.
Business StrategyLeveraging Size to Enhance Product
Offerings

Sephora leverages its strong reputation to attract new brand

partners, control its competitive environment and gain product
exclusivity rights to offer best-in-class product curation for
consumers. A partnership with Sephora is highly sought after by
emerging prestige brands. Given demand for shelf space, Sephora is
discerning regarding brand expansion and ruthless in discontinuing
underperforming products. Protective of its image, Sephora dictates
to whom its brand partners can sell to avoid association with lower-
end stores. The company negotiates for exclusive made for
Sephora products and exclusive early rollout rights for new brand
product launches.

Supporting Operational StrategyPhysical Store Design

Sephora stores are constructed to facilitate the brand showcasing,

product trial, and cross-brand purchasing that contribute to
Sephoras reputation and negotiating power within the industry.
Stores are designed for a consumer-led retail experiences with large
aisles for group shopping and self-explanatory shelves organized by
brand, product, and color. Endcaps feature either testable products
or digital interfaces where consumers can obtain personalized
information on recommended products. In traditional retail outlets,
customers travel from counter to counter to learn about products,
but the Sephora store design encourages simultaneous product
experimentation.

Business Strategy Customer Service Across Platforms

Sephora offers a superior customer service experience both in-store

and online. In-store, Sephora employees are reputed for their deep
product knowledge across brands, providing immediate customer
assistance. Sephora released two programs on its website to
address customer needs around product retrieval in 2015 (4). In the
US, Sephora announced 48-hour shipping for domestic orders. In
France, the company launched Click and Pick Up service where
customers can pick up their on-line orders at a local store within two
hours.

Supporting Operational StrategyEmployee Training

To support its in-store customer service, Sephora requires

employees to attend Sephora University, a comprehensive induction
program where employees are schooled in beauty science, Sephora
products, the Sephora Attitude (customer focused sales approach)
and the Sephora Management Style(5). While the data is not publicly
available, I imagine the recent 48-hour US shipping initiatives and
Click and Pick Up program have been facilitated by enhancements
to Sephoras inventory management strategy- I assume local stores
and warehouses must hold greater inventory volume to meet
expedited delivery or pick up.
 Business Strategy Interactive Beauty Technology

Sephora invested in technological solutions to address customer

demands for targeted product recommendations to drive sales.
Partnering with Pantone, Sephora developed Color IQ, an in-store
interface that scans skin pigmentation to identify precise color
matches across makeup brands(6). Sephora acquired the software
company Scentsa to create an in-store touchscreen interface to
assist consumers with fragrance purchases.

Supporting Operational StrategySephora Innovation Lab

The Innovation Lab develops and tests new shopping technologies

and foster a culture of innovation development throughout the
organization. The Lab is responsible for ideating, experimenting,
learning, and launching new technologies to support Sephoras
business strategy of delivering interactive beauty technology to
address consumer needs(7). Select current projects include:

Pocket Contour- a virtual makeup artist application that

provides personalized guidance on contouring, a growing trend in
beauty
Beacons- an in-store alert program for customers who want
timely, personalized messages around birthday promotions, loyalty
program updates, and in-store trainings

Sources

1. Sephoras Winning Formula: Highly Relevant Personalized

Data (Forbes, 2014):
http://www.forbes.com/sites/johnellett/2014/09/14/sephoras-winning-
formula-highly-relevant-personalized-data/
2. LVMH First Half 2015 Results (LVMH Releases,
2015): http://www.lvmh.com/investors/publications/
3. How Sephora Reorganized to Become a More Digital Brand
(HBR, 2014): https://hbr.org/2014/06/how-sephora-reorganized-to-
become-a-more-digital-brand
4. LVMH First Half 2015 Results (LVMH Releases,
2015): http://www.lvmh.com/investors/publications/
5. Sephora
Website: http://www.wearesephora.com/Home/Page/Id/9-the-
sephora-university.sls
6. Sephora Expands Digitial Palette with Pantone Color Matching
Technology (Branchannel.com,
2012) http://brandchannel.com/2012/07/26/sephora-expands-digital-
palette-with-pantone-color-matching-technology/
7. Sephora Bets on Big Digital Growth with Disruptive
Experiences (Forbes,
2015) http://www.forbes.com/sites/barbarathau/2015/03/06/sephora-
grooms-digital-leaders-with-innovation-lab-debuts-mobile-
experiences/
beauty, consumer focus, Consumer Goods, consumer tech, specialty
retailer
1

5 thoughts on Sephora: Behind the Scenes of the Beauty Behemoth

1.

December 13, 2015HKrentzman says:

Great job, Bakers Dozen! This is a really interesting example. You

laid out the business and operating models quite clearly.

A couple of thoughts:
1) Sephora is a unique example of a beauty retail concept that has
extensive private label products. How do you think this will scale
given its position in the broader LVMH organization, which includes a
host of other beauty brands? Do you think it could eventually
become a standalone brand? How would that impact its relationships
with its suppliers?
 2) It is remarkable that Sephora has no real direct comparablesthe
only one I can think of is Blue Mercury, which is significantly smaller
in size. The only other competitors in terms of replaceable
customer experiences are beauty departments in large department
stores. Do you think there is room for a new entrant with a similar
model?

3) I thought the Interactive Beauty Technology was especially

interesting as a tool to drive sales among existing products. Its
pigmentation reading technology reminded me of Mink, another
product that aims to deliver high personalization in makeup choice,
but does so by bypassing established brands. How do you think
Sephora would view a product like Mink?

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1.

December 14, 2015Baker's Dozen says:

Thanks, HKrentzman- appreciate the comments! Below are some of

my thoughts on your feedback

1) Sephoras partnership with Marc Jacobs was the first time Sephora
partnered with another LVMH subsidiary to expand its beauty line.
Sephora already sells products under its Sephora Originals name. As
you noted, Sephora is incredibly protective of its supplier-
relationships. For a long time, department stores prevented brands
carried on their beauty floors from entering Sephora (think Bobby
Brown, Estee Lauder etc). So much of Sephoras business model
relies on its product mix so I do not think it will expand to become a
beauty conglomerate. I believe this capability will continue to be
used to facilitate strategic production partnerships
2) Sephora doesnt have a direct competitor, but its peer group
includes Ulta and Bluemercury. I do not think Ulta is a direct threat
as it is slightly lower-end than Sephora. Bluemercury is better
positioned to pose a competitive threat- acquired by Macys earlier
this year, Bluemercury has seem tremendous store growth as it
expands its brick and mortar presence. The customer value
proposition is not identical- Bluemercury offers a smaller selection of
 brands on the high-end of prestige and offers beauty services at
many locations- but it is the most likely to cause Sephora to respond
competitively.
3) Sephoras use of technology is to drive sales of its partner brands
online and in-store. I do not think they would be supportive of an at-
home DIY product that may divert sales from its partner brands. I
can imagine Sephora carrying the product as a tween/teen gift for
younger girls to experiment with at home.

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2.

December 14, 2015MM says:

Really interesting read and I appreciated the very clearly laid out
flow.

Im curious to see how Sephora evolves its operating and business

models to address changes in the industry (e.g., personalization
trend mentioned in the above comment, move away from brick-and-
mortar stores). Based on your post, it seems that their Innovation
Lab is hard at work thinking through these issues. Do you think they
will be able to navigate challenges and sustain their double-digit
growth?

I was reminded of Play! by Sephora a new subscription box service

that was launched to compete with Birchbox and other similar
sample-based models. I do think Sephora is better positioned to
differentiate in this area and create value (e.g., they can offer better
samples based on their brand relationships vs startups like
Birchbox), but I am not confident they can actually capture this
value through increased online or in-store sales. Id be curious to
hear your thoughts on the subject.

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1.

December 14, 2015Baker's Dozen says:

 Thanks, MM! Appreciate the comments!

To your first point, I am confident in Sephoras ability to continue to

sustain its outsized growth rate. Sephora has developed sufficient
leverage with legacy and startup brands that I believe it will
continue to anticipate and fulfill consumer needs. To your point, they
are investing heavily in this effort through their formalized
innovation efforts

To your second point regarding PLay!- there is a lot of discussion in

the business community as to whether the subscription box model
leads to real conversion, or if now that the model is so rampant and
has lost much of its newness allure, its real value-add is in
brand/product awareness. Sephora already offers many
opportunities for product sampling- free with purchases in-store and
on-line- so I imagine Play! will be used by the retailer to 1) asses
consumer reactions to new products of existing brands before
stocking inventory to carry in-store or on-line 2) experiment with
new brands featured in-store and on-line, and 3) promote new
product categories sold in-store and on-line (e.g. the recent growth
of the prestige mask market)

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3.

December 14, 2015Ruby Tamberino says:

Something Ive always found fascinating about the cosmetics

industry is how the success of individual products and product lines
are materially varied across ethnic, cultural, and geographic lines,
due to the nature of the products as semi-consumables and the
differences in how various cosmetics look and feel on different skin
types/tones. I understand why consistency of experience is an asset
to Sephora in terms of building brand recognition and universalizing
how consumers experience the store, but do you think they would
be more successful if they tailored their product offerings, marketing
efforts, and sales force training materials according to where a given
store is located and/or the clientele to whom that location primarily
caters? This might build even stronger brand loyalty because
customers would perceive a heightened sense of luxury due to the
custom and personalized nature of their visit to Sephora.

http://juris-diction.ca/the-sephora-business-model-how-sephora-killed-the-
department-store/

BRAND LAUNCHES: THE ESTEE EDIT

When Sephora first opened, department stores had more leverage with
beauty suppliers. They leveraged this influence to prevent companies
from selling in Sephora stores.

Companies such as Este Lauder initially obliged. However, as sales at

department store beauty counters has decreased, the cosmetics
conglomerates have been more willing to partner with Sephora. Estee
Lauder owns brands such as Clinique, Bobbi Brown, MAC, and Smashbox,
and while MAC Cosmetics had maintained standalone stores, Clinique,
Bobbi Brown and Smashbox are now major Sephora staples.

In fact, Este Lauder has partnered with Sephora to create a new product
line called Este Edit. It includes 72 makeup and 10 skin care products
that are an attempt to revamp the Este Lauder image and introduce the
brand to Sephoras millennial consumers.

STAYING RELEVANT: CELEBRITY COLLABORATIONS

Sephora frequently collaborates with social influencers and famous

YouTube gurus to maintain a prominent social media presence.

For example, it collaborated with Jaclyn Hill for its Becca Highlighter in
Champagne Pop colour. Este Lauders Este Edit line will have Kendall
Jenner and Irene Kim as Guest Editors. They are not only featured in an
extensive library of video content on the Sephora website but will be
uploading content on Este Edits instagram account (@theesteeedit).
The account will also feature user-generated content from
consumers. Statistics show that brand engagement rises by 28 per cent
when consumers are exposed to both professional and user-generated
content on brand channels.

EMPOWERING THE CUSTOMER: BRINGING BACK CHOICE

The average Sephora customer walks into a store already having done
their researchthey have no patience for proselytizing sales associates or
inaccessible products behind traditional department store counters.
Sephora not only offers easy access to high end products but also the
opportunity to compare different brands. Unlike traditional beauty
counters, Sephora employees are not tethered to a single brand. They
cross-sell brands, offer criticisms, and are not required to push particular
products. Customers explore products on their own and are given the
autonomy to make their own decisions.

ATTRACTING MINORITIES: COLOUR DIVERSITY

Traditional makeup lines have typically catered to a narrow range of skin

colours. Lamenting this fact, the former beauty director of Essence
magazine has stated, foundations and concealers [are] not going dark
enough. Most companies seem to stop at Kerry Washington. Any women
darker than her seem to be out of luck. Brands at Sephora have a more
diverse colour range. Clinique makes its Even Better Makeup SPF15 in 30
different shades, form very fair to deep; Bobbi Brown sells its
foundations and powders in 20 shades, half of which range from tan to
espresso. Part of this shift has been a growing awareness of the spending
power of minority customers: [i]n the U.S., the multicultural demographic
comprises over a third of the population, and their spending power is
growing more quickly than the countrys average.

Sharon Collier, Cover FXs president, stated in Bloomberg magazine:

Today a woman almost expects to go to a brand she want to buy and find
her shade. . . its offensive to her when she cant find her shade. It makes
her feel like shes not being recognized by the company. Cover FX
currently has 40 shades of foundation. Other brands are trying to catch
on. Even traditional, mainstream brands are beginning to offer a wider
colour variety and signing Asian, Latin, Middle-Eastern, and Native
American models and spokeswomen.

CONTINUED EXPANSION: GLOBAL AMBITION

Sephoras unique business model has allowed it to continue its expansion

into non-traditional arenas. At the start of this year, Sephora opened its
first store in Mumbai, India, and Chief Executive Vivek Bali stated:

India is a young country with 65 percent of the population below the age
of 35 years, which is a fantastic base for a beauty business because young
consumers will be consumers for a long time . . . At the same time, more
and more women are coming into the workforce and gaining more and
more independence . . . and more money to spend. Mens grooming is
growing too the metrosexual man in Delhi, Bombay and Bangalore is
very conscious about their appearance.

Iran is perhaps an even more illustrative example; sanctions on the

country have been lifted after it signed the Joint Comprehensive Program
in Vienna with six world powers, accepting restrictions on its nuclear
program. Iran is the Middle Easts second biggest market for beauty
products after Saudi Arabia, and following the nuclear accord, there are
expectations of strong growth in an economy that has suffered from years
of under-investment and trade restrictions due to sanctions.

Euromonitor, a market research company, forecasts that Irans beauty and

personal care market is expected to triple in the next five years to more
than 10 billion euros. Despite the promise, there is concern that sanctions
can be reinstated if Iran fails to fulfill its commitments. There is even the
possibility that a Republican successor to President Obama after
Novembers election may renege on the deal. As a result, many consumer
and luxury product businesses are waiting until Irans international
standing becomes clearer to ensure that it make sense to invest in retail
infrastructure.
Sephora, however, is too ambitious to waitthe company has jumped in
with its characteristic entrepreneurial spirit, planning on opening stores
next year.