BUS478

CASE SYNOPSIS FOR:

SEPHORA

Prepared by:
Erin Yin
Leo Duan
Nana Fong
Jingmei Qin
Lucy Liang

Prepared for:
Jerry Sheppard

Submitted on November 10, 2014

F I R M H I S T O R Y
Sephora is a cosmetics brand chain store founded in French by Dominique Mandonnaud in 1970.

In 1997, Louis Vuitton and Moet Hennessy (LVMH), the worlds leading luxury goods group, acquired

Sephora. The first U.S. store was opened in New York in 1998 and the first Canadian store was opened in

Toronto in 2004. Sephoras North American headquarters is located in San Francisco. Sephoras website

was launched in U.S. in 1999 and in Canada in 2003. Sephora sells a broad category of products from

more than 100 brands and its private label including skincare, color, fragrance, body care, smile care, and

hair care (Sephora, 2014).

T H E O R G A N I Z A T I O N T O D A Y

Today, Sephora is the leading chain of perfume and cosmetic retailers worldwide. It operates

approximately 1,900 stores in 29 countries, with an expanding base of over 360 stores across North

America. Moreover, Sephoras beauty website is also the largest North American store in terms of sales

and selection of products and brands, with a variety of beauty products from over more than 100 brands

including NARS, Make Up For Ever, Urban Decay, Sunday Riley Skincare and Too Faced Cosmetics.

The company has debuted fragrance collections with Mary-Kate and Ashley Olsen, as well as a makeup

line with Marc Jacobs in 2013 (Hamilton, 2012).

Sephora's customer loyalty rewards program is outstanding among competitors. The Beauty

Insider program in Sephora is a free reward program that provides the loyalty customers special products,

exclusive information, and an all-access pass to personalized beauty (Sephora, 2014). The program is

operated nationwide both at Sephora stores and the official website. Every dollar spent on merchandise at

Sephora will be counted as one point under the account. The program is free to join, and allows customers

to enjoy seasonal promotions, redeem for deluxe rewards with points, and receive birthday gifts every

year. There are three different levels, BI, VIB and VIB Rouge, with spending thresholds of $0, $350 and

$1000 respectively (Sephora, 2014).

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 According to Health and beauty specialist retailers in Canada, beauty specialist retailers

recorded remarkable growth over the course of the period they reviewed, increasing by a current value

Compound Average Growth Rate of six percent, including five percent growth in 2013. As a leader in

both in-store and online shopping, Sephora has consistently positive results. To be exact, Sephora USA

LLC showed a strong year-to-year increase of nine-percent in sales in 2013 (Euromonitor, 2014a). The

companys operating revenue increased 3.35% from $2,454,000 to $2,536,000 between 2012 and 2013

(Bereau Van Dijk, n.d.).

P R O D U C T S A N D S E R V I C E S
According to Joanna (2008), in her article Sephora celebrates 10 years of beauty, the store went

from offering 11,000 products in 1998, to more than 13,000 products 10 years later. These products span

250 classic and emerging brands of skin care, color, fragrance, makeup, bath & body and hair care. As

well, Sephora also sells its own private label brand comprised of color cosmetics, skin care, and bath and

body products including innovative items such as headline-grabbing anti-wrinkle cream. The wide variety

of brands fulfilled womens needs to use multiple brands in order to achieve a desired result (Euromonitor,

2014a).

In Health and beauty specialist retailers in US, it mentions that Sephora also provides limited

assistance self-service in stores. This service is complemented by store associates who offer an

assortment of services and advice women on what cosmetics go best with their skin tone and complexion

(Euromonitor, 2014b). Sephora trained their product consultants in the Science of Sephora program to

ensure that sales associates are skilled to identify skin types, have knowledge of application techniques

and an understanding of the history of makeup (Joanna, 2008). By doing this, Sephora is able to take

advantage of taking items from out behind counters and encouraging customers to test a wide variety of

products (Euromonitor, 2014a). Moreover, the company expanded its retail stores in the mid-2000s to

include more specialized service areas, such as a hair styling counter, the Nail Bar, the Brow Bar, and the

Smile Bar, among others (Joanna, 2008).

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 Sephora also has a great commitment to e-commerce and advertising on different platforms both

offline and online. As part of its online offerings, Sephora features Sephora TV, the Sephora Glossy and

an active message board to offer feature videos on new products and techniques and helpful comments

from fellow shoppers to customers (Euromonitor, 2014b). As Euromonitor (2014b) says, Online

offerings like these seek to differentiate Sephora from other online retailers and translate the helpful no

pressure attitude of its stores to an e-commerce environment.

I N D U S T R Y E N V I R O N M E N T

Porters Five Forces framework applied to Sephora:

Threat of entry: Low

The threat of new international beauty retailers is low because it requires high capital investment

in inventory, efficient distribution network, reputable brand image, and relationships with a great number

of brands.

Threats from supplier: Low

Sephoras suppliers do not possess substantial bargaining power because Sephora features beauty

products from more than 100 brands and its own private label. Moreover, the suppliers have to comply

with Sephoras Suppliers Code of Conduct to conduct business legally, ethically and responsibly (Supply

Chain Transparency).

Threats from buyer: High

Customers purchase beauty products at three types of shops. They are department stores,

cosmetic retailing stores, such as Sephora, and drug stores. Customers have strong bargaining power in

general because competition is intense in beauty industry and the switching cost is low.

In order to have access to a full line of products, deluxe samples and beauty advice, brand loyal

customers prefer to shop at specific department stores or on the brand website. Customers who invest less

in beauty find drug store products more affordable compared to higher end products carried at Sephora.

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Threat of substitutes: Low

There is a lack of substitutes to beauty products. Consumers could produce some kinds of

homemade products at home (DIY), but the variety of products they can make at home will be limited.

Competitive rivalry: Medium

Competition is intense in beauty industry. Sephora competes directly with large cosmetics

retailers such as Societe De Distribution Aeroportuaire, Marionnaud Lafayette, MH Muller Handels

GMBH, and LVMH Fragrances and Cosmetics Singapore (MintGlobal, 2013). However, the operations

of these competitors largely concentrate on their home country, whereas Sephora has established a

powerful presence in countries around the world.

C O M P E T I T I V E E N V I R O N M E N T

Sephora competes in a highly competitive industry. Industry players who feature other types of

business models have captured significant market shares. These business models include traditional

department stores, specialty stores, pharmacies as well as prevalent online stores. In addition, more and

more supermarkets show intention to venture into the beauty industry. This creates more severe and

complex challenges for Sephora. Even though most of these stores introduce customer loyalty programs

to provide samples and store discounts, buyers switching costs are fairly low.

The following discusses the competitive dynamics between Sephora and other industry players.

Cosmetic Retailers

Similar to Sephoras concept, its direct competitors also focus on retailing a wide range of

medium- and high-end products for their clienteles. As identified in Porters Five Forces analysis, these

competitors have very strong presence in their home country, but are not well known of by consumers in

other continents. Taking Canadas Shoppers Beauty BOUTIQUE for example, it enjoys a more powerful

presence of over 300 stores nationwide as compared to Sephoras 38 stores across Canada (Chiu, 2014).

However, Sephora has expanded to 29 countries, whereas Shoppers has not yet brought its business to

anywhere beyond Canada (Sephora, 2014).

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 This competitive environment with cosmetic retailers has the potential to change after local retail-

ers successfully launch international expansion. To maintain a leading international presence, Sephora

always takes steps to penetrate underserved markets before competitors make the move.

Department Stores & Specialty Stores

Department stores and specialty stores are the most popular beauty shops in developing countries

because they are well available in most cities and towns. They are also common in developed

communities since they are attractive to loyal customers. These traditional stores are struggling with

survival and development in recent times. They are losing customers to Sephora and other cosmetic

retailers. Sephora has developed solid cooperative relationships with popular high-end brands such as

Lancme, Dior, Marc Jacobs and Estee Lauder. This may create an environment where customers choose

to switch from traditional shops to cosmetic retailers.

Drugstores

Drugstores offer low-end beauty products and target consumers who invest less on skincare and

makeup. Even though there is not direct competition between this group and Sephora, drugstore beauty

products are cheaper alternatives to Sephoras collections. Drugstores have a wide market base in students

and younger generations. This base increases during recessionary times and some of Sephoras customers

may switch over to more affordable products to cut down household expenses.

eBay, Craigslist and Amazon

Online shopping is a popular alternative to shopping in stores because of the convenient 24/7

access. These websites offer even bigger selections than Sephoras ranging from high-end products to

low-end products, and even counterfeit products (Shanahan, 2014). Their target segmentation is mass

beauty consumers (Nagel, 2005), so it possibly overlaps with Sephoras market segmentation.

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C U R R E N T S T R A T E G Y
Business Level Strategy

Sephora is currently using differentiation as business level strategy that provides customers with

convenience and pressure-free shopping experience. Unlike traditional cosmetic counter where customers

have to interact with a salesperson, which could be uncomfortable to customers sometimes, Sephora

allows customers to walk through the store and choose the products they want. Since Sephora carries a

huge selection of products, customers could easily look for and find possibly everything they want here.

Corporate Level Strategy

Sephora is using related-linked diversification for its private label products as corporate level

strategy. The company produces these products in a central manufacturing factory and distributes them to

different store locations, which exemplifies an example of operation relatedness of this strategy.

Moreover, Sephoras core competencies such as its brand name, cooperation with over 100 brands and its

sophisticated inventory management are shared among stores. Sephoras inventory is shipped from

various manufacturers of all these brands, so an efficient inventory management system is crucial to get

the products organized and efficiently distributed to stores. Sephoras success in inventory control allows

it to prosper and expand geographically (Warehouse/DC Best Practices, 2011).

International Strategy

Sephora has implemented global international strategy. With the largest market in North America

and second largest market in its home, France, Sephora is aiming to open 100 new stores in a global scale

each year (Retail Detail, 2014). Although Sephora operates stores all over the world, each store offers

similar product selection, interior atmosphere and customer services. This allows Sephora to maintain a

corporate image across stores by providing customers with a similar experience and degree of satisfaction.

Strategic decisions such as cooperation with a new brand and introduction of promotions are made at

headquarters. Sephora favors a global strategy because it allows the company to facilitate its corporate

coordination and operations.

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Cooperative Strategies

Sephora is using joint ventures as cooperative strategy when it operates overseas and the market

is new to the company. Sephoras expansion into Latin America presented a relatively new market to the

company. To better insure success in this market it formed a joint venture with local Mexican cosmetic

company Grupo Axo in 2010 (Business Wire, 2010). By cooperating with another company to do

business in an unfamiliar market, Sephora could gain better knowledge of the new market as its partners

have previous experience to share. Moreover, Sephora would bear less risk from a strategy failure.

S T R A T I C C H A L L E N G E S
Product Localization

People from different cultural backgrounds have diverse perceptions of beauty. When operating

in a global marketplace, Sephora has to understand the needs of local customers in order to better position

it. It could improve its local responsiveness by tailoring its product selections to local market. For

instance, Sephora could minimize the amount of tanning products carried by its stores in Northern Asia

because this group prefers paler skin. Another way to follow changing customer demands is to collaborate

with local brands. These brands have been running business in local market for some time and are aware

of local consumers preferences. As a result, they are able to supply adapted products for these buyers.

Risk Associated with Sephoras Joint Ventures

Every joint venture has its implicit risks such as an imbalance of resources and management input

into the venture. Thus, it is inevitable that Sephora will encounter potential challenges from joint ventures.

For instance, if a partner chooses to invest less human or financial capital into the venture, Sephora would

have to take the initiative and come up with new corporate strategies to overcome the obstacle.

Furthermore, political issues could potentially affect Sephoras joint ventures in emerging

markets such as China and India. A case in point is that China has been overwriting its commercial

policies on local and oversea business over the recent years, so any new changes to the policy might give

or take away Sephora joint ventures market share in China.

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R E F E R E N C E S

Anita Hamilton. (2012, January 04). How an Upstart Beauty Company Broke into the Big Leagues.
Retrieved from http://content.time.com/time/specials/packages/article/0,28804,2094921
_2094923_2102878,00.html
Bereau Van Dijk. (n.d.). Sephora beauty Canada Inc. Retrieved from https://mintglobal-bvdinfo-
com.proxy.lib.sfu.ca/version-20141030/Report.OnePage.serv?_CID=70&context
=1DBVAOOSQ9BBL33&Format=Default&FromId=List&SeqNr=1
Business Wire. (2010 October 29). Sephora Continues Expansion in Latin America with Entry into
Mexico. Retrieved from http://www.businesswire.com/news/home/20101029005233/en/Sephora-
Continues-Expansion-Latin-America-Entry-Mexico#.VFg_hFaJn6w
Chiu, S. (2014, January 10) Can Shoppers Drug Marts enhanced beauty BOUTIQUE concept overtake
Sephora in the Canadian luxury beauty market? Retail Insider. Retrieved November 09, 2014,
from http://www.retail-insider.com/retail-insider/tail-insider.com/2014/01/can-shoppers-drug-
marts-enhanced.html
Euromonitor International. (2014a, June 2). Health and beauty specialist retailers in Canada. Retrieved
from http://www.portal.euromonitor.com.proxy.lib.sfu.ca/portal/analysis/tab
Euromonitor International. (2014b, May 19). Health and beauty specialist retailers in US. Retrieved from
http://www.portal.euromonitor.com.proxy.lib.sfu.ca/portal/analysis/tab
Joanna Cosgrove. (2008, October 21). Sephora celebrates 10 years of beauty. Retrieved from
http://www.beautypackaging.com/contents/view_online-exclusives/2008-10-21/sephora-
celebrates-10-years-of-beauty/
MintGlobal. (2013). Peer Report for Key Financials & Employees.
Nagel, A. (2005). Amazon Beauty Turns One. WWD: Women's Wear Daily, 190(75), 18. Retrieved from
http://proxy.lib.sfu.ca/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&A
N=18641784&site=bsi-live&scope=site
Retail Detail. (2014 October 15). Sephora aims to open 100 new stores per year. Retrieved from
http://www.retaildetail.eu/en/eur-europe/eur-personal-a-household-care/item/16845-sephora-
aims-to-open-100-new-stores-per-year
Sephora Inc. (2014). Retrieved November 08, 2014, from http://www.sephora.com/about-us
Shanahan, M. (2014, January) Counterfeit Makeup: The New Threat to Your Skin Popping up
Everywhere. Retrieved November 09, 2014, from http://www.babble.com/beauty/forget-
counterfeit-handbags-counterfeit-makeup-threatens-your-skin/
Supply Chain Transparency. (n.d.). Retrieved November 08, 2014, from Sephora:
http://www.sephora.com/contentStore/mediaContentTemplateNoNav.jsp?mediaId=12700031
Warehouse/DC Best Practices. (2011 November). Sephoras gorgeous network eorganization. Retrieved
from http://www.logisticsmgmt.com/images/site/LM1111_SUP_WDC_Sephora.pdf