The Sephora Business Model: How Sephora Killed the Department Store
By 2020, the value of the global beauty market is expected to reach $675 billion. This should not come as a complete surprise given that the average women will spend 2 years of her life applying make-up; this amounts to about 55 minutes a day.
In recent years, the rise of YouTube beauty video-bloggers has managed to tap into the millennial beauty consumer: savvy, individualistic, and above all else, fickle. We do our research, we have particular tastes, and we’re loyal to no one. The beauty behemoth Sephora has relied on these qualities to create a business model that has transformed the beauty industry.
Sephora was founded in 1970 in Paris and acquired by the luxury conglomerate Louis Vuitton Moet Hennessy (LVMH) in 1997. It opened its first store in New York in 1998 and has quickly expanded since then. It currently operates in over 30 countries. In 2013, it commanded a 13 per cent market share of the beauty industry in the United States, 15 per cent in China and 27 per cent in France. It has over 700 stores in the US alone.
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 Estée 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, Estée Lauder has partnered with Sephora to create a new product line called Estée Edit. It includes 72 makeup and 10 skin care products that are an attempt to revamp the Estée Lauder image and introduce the brand to Sephora’s 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. Estée Lauder’s Estée 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 Estée Edit’s 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 research—they 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 country’s average”.
Sharon Collier, Cover FX’s president, stated in Bloomberg magazine: “Today a woman almost expects to go to a brand she want to buy and find her shade. . . it’s offensive to her when she can’t find her shade. It makes her feel like she’s 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
Sephora’s 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. Men’s 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 East’s 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 Iran’s 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 November’s election may renege on the deal. As a result, many consumer and luxury product businesses are waiting until Iran’s international standing becomes clearer to ensure that it make sense to invest in retail infrastructure.
Sephora, however, is too ambitious to wait—the company has jumped in with its characteristic entrepreneurial spirit, planning on opening stores next year.
Mariam Awan (3L) is a Staff Writer for Juris Diction.