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Sephora: Forging a New Model

David Suliteanu and his team have molded the retailer into the most influential beauty retailer in America.

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Sephora America's CEO David Suliteanu with Modern Beauty Britt Maren and his retail Dream Team, Margarita Arriagada, Julie Bornstein, Sharon Rothstein and Mary Herald

Jeff Riedel

The Fragrance Sensorium in the Union Square Sephora.

The Fragrance Sensorium in the Union Square Sephora.

Jimmy Hamelin

The Disney Reigning Beauties Cinderella Collection developed by Sephora Originals

The Disney Reigning Beauties Cinderella Collection developed by Sephora Originals

George Chinsee

Makeover stations at the Beauty Studio.

Makeover stations at the Beauty Studio.

Bruce Damonte

Appeared In
Special Issue
Beauty Inc issue 09/07/2012

What a difference a decade makes.

 

On August 31, 2002, Sephora shut down its 21,000-square-foot Rockefeller Center flagship, a store that sources estimated cost $30 million at the time to build and was touted as one of
the most daring experiments in beauty retailing.

 

Fast-forward 10 years—almost to the date. The retailer has just thrown open the doors of its revamped Union Square flagship, replete with manicure bars, makeover stations and a futuristic fragrance tester that enables shoppers to choose a scent based solely on its olfactive qualities rather than the attendant marketing. The store’s opening comes on the heels of other high-profile Manhattan renova- tions, each with its own play areas and interactive tools, be it a gadget that one can wave over a customer’s face to find the perfect foundation shade or a touch-screen computer that enables users to navigate through the store’s skin-care offerings (more on both anon).

 

Store count in the U.S. has grown from 71 in 2002 to 321 today (plus 370 more in J.C. Penney doors around the country), and one month earlier, Sephora unveiled its first store in Brazil, an opening salvo in the world’s third-largest beauty market, which remains stubbornly closed to many international brands.

 

Even Estée Lauder, the grande dame of department store beauty retailing, is dipping its toes into Sephora by rolling out in 25 doors, 14 years after the merchant landed on these shores.

Clearly, Sephora is a retailer whose time has come. The chain may not be the biggest prestige beauty retailer in the U.S.—with 810 doors, Macy’s still holds a commanding position—but it is the most influential.

“Sephora is powerful in terms of headspace,” says John Demsey, group president of the Estée Lauder Cos. Inc. “They define the white space, in many instances, in terms of where beauty is going. They establish and reinforce beauty trends, which has an influence on the overall general market. They are true merchants.”

That leadership role has paid off handsomely. While Sephora executives adamantly refuse to discuss numbers, industry sources estimate that Sephora, a division of LVMH Moët Hennessy Louis Vuitton, does $2 billion in North America at retail. That figure would make it the second-largest prestige beauty retailer in the U.S., behind Macy’s but ahead of Nordstrom. David Suliteanu, president and chief executive officer of Sephora Americas, won’t comment on any sales figures. But he is quick to tell the goal: to be head of the pack.

“The way we have positioned ourselves in the industry, to be leaders in terms of new thinking, new ideas—it pushes you,” says Suliteanu. “You want to work really hard to stay there. The opportunity to be number one in this country is a great motivating force.”

Though there is a ways to go—Macy’s was estimated to have 2010 beauty sales of $3.25 billion—Suliteanu’s model for achieving his goal hasn’t wavered since he joined Sephora as president in 2000 from The Home Depot, where he was group president of diversified businesses. “Our business model is clear and based on four things,” he says. “We have always been about having an unbelievable selection of the best product—on the one hand, it’s comprehensive; on the other, it’s curated. The second pillar is people. It’s about a well-trained, caring and objective team, meaning unbiased.

“Third is the stores themselves,” he continues. “We’ve always been about interesting, fun and ever-changing stores, independent of the merchandise and people. And fourth is the ever-growing importance of the digital world,” Suliteanu concludes, pointing out that Sephora launched its e-commerce initiative in 1999 and today is the single biggest beauty door in the world.

While other retailers, from Macy’s to Dillard’s to CVS, have attempted to model the format, Suliteanu is clear that, in his mind, no one has been able to replicate it. “What you have is people who have taken bits and pieces of it,” he says.

“We introduced fragrance by alphabetizing. Within a period of time, that became the standard. We introduced beauty to go. Over a period of time, you saw that happening,” he says. “You see department stores literally carve out a piece of real estate and take a similar fixturing approach and add a few brands and they cut and paste that. But no one has attempted to take that whole model, all four pillars of it, and implement it.”

Moreover, based on the fundamental difference in mind-set between Sephora and traditional prestige retailers (Suliteanu, a Macy’s veteran, calls department stores “brand-centric” and Sephora “client-centric”), he seems pretty confident no one will. “Everything is designed to enhance the client experience—make it easier, more fun, more exciting—and derives from our basic business model that is not brand-centric,” he says.

“There are no islands. There are no counters. There is no commission. That is not the headset,” Suliteanu continues. “The headset is: What can we do that will excite and surprise our clients? And because we’re not brand-centric, there are no limits. We can pretty much do whatever we want.”

That bluntness is typical of Suliteanu, say those who work closely with him. “He’s very direct—a straight shooter,” says Ron Johnson, ceo of J.C. Penney. “You know exactly what he believes in, and that makes it easy to be a partner.”

One of Suliteanu’s driving beliefs is that beauty and retail aren’t fueled by newness, but by exciting the customer with unique brands and in-store experiences, like Beauty Studio. Talk to anyone on Sephora’s senior management team and the mantra is a single-minded focus on the consumer. “Nobody is complacent about keeping her loyal to us,” says Suliteanu. “She has lots of choices. We have to work very hard to continue to excite her. Passion for the client drives everything we do. If we stay true to that and keep her excited and happy, we are going to do very well.”

Suliteanu is so focused on keeping his customers happy, he created the Love Meter to measure Sephora’s like-to-love quota with shoppers.

Mary Herald, executive vice president of human resources and education, was charged with implementing the idea three years ago. “When David first came up with the idea, I said, ‘You’ve got to be kidding me,’ ” she remembers, laughing. “How do you measure love?” The solution she hit on was to ask consumers two questions: Do you love Sephora? Are we your number-one place to shop for beauty?

When Sephora first started measuring love about three years ago, it was at 35 percent, Herald says, a number that has risen today to 50. “What we found out is that when we talk to people, they love us more, and if we touch them and work with them and apply product, they really love us more,” says Herald. “It was so dramatically different when a client was engaged.

“The other thing we found out is samples [help boost it],” she continues. “They love us a lot when they get a sample.”

 

Vendors say Sephora’s singular focus on pleasing the client has created a cul- ture of experimentation that’s unusual for a retailer. “They’ve got guts,” says Beth DiNardo, global general manager of Smashbox Cosmetics. “David is really honest about what they’re doing well, what they’re not doing well. That sets up an ability to try things, fail, learn, move on to the next thing. They’re willing to put it out there.”

 

“They’re constantly looking at what’s selling, what’s not, redesigning areas,  creating the bestsellers, engaging the customer in different ways,” agrees Karen Grant, vice president and global industry analyst of The NPD Group.

At Sephora, the client experience starts with the brand mix and it adroitly turned an early liability—the resistance of many of prestige’s biggest players to sell to it—into an asset. A decade ago, Suliteanu and his team were forced to seek out indie brands, many of which have subsequently become well established. “Indirectly, that reluctance set us up to have a broader offering than we might have,” says Suliteanu, “and those early relationships have turned into prosperous partnerships.”

 

Today, Sephora sells about 200 brands and carries, on average, 8,000 stockkeeping units in store (13,000 online). Margarita Arriagada, senior vice president of merchandising, oversees the brand mix as well as the retailer’s all-powerful product curation,  from endcaps touting “Sephora’s Favorite Mascaras” (or eyeliners or primers or what-not) to “What’s Hot Now,” the monthly callout of six products that Sephora has deemed the standout launches of the period. Arriagada—a self-professed product junkie who laughingly notes her bathroom is so chock-full of beauty goodies she could charge admission—is in charge of choosing the products, a process during which she balances instinct and intuition. “We look for what’s buzzing in the market and what we anticipate is going to be hot,” Arriagada says. “We have to be credible, but we also look at how our client is weighing in. What is she loving in our assort- ment that we can leverage and amplify? And then we balance the mix with unique stories we think our clients will want to discover.” (When asked what categories she’s most excited about right now, Arriagada gives a shout-out to BB Creams and oils, both for the hair and face.)

“They are so not complacent,” says Grant of Sephora. “They lead in terms of innovation in the marketplace, as a lab for finding new brands and as a curator of brands and trends. Whether it’s the nail trend or plumpers or minerals, they are at the forefront of product trends, particularly in makeup.”

More recently, Sephora has evolved its role — from brand curator to brand creator—under the Sephora Originals umbrella, and is also dipping its toe into brand acquisition, as with Ole Henriksen skin care. In addition to a broad private-label makeup offering, there have been collaborations with OPI, Pantone, TV reality star and tattoo artist Kat Von D, and accessories designer Tarina Tarantino, among others. The in-house- developed designer fragrance Marchesa is launching now, and a Marc Jacobs makeup line is slated for a 2013 launch in the U.S.,
to be followed by a global rollout.

Sephora executives bat away the notion that such projects create undue competition with their vendors. “We’re in a unique position as retailers because we see the entire spectrum of the beauty industry,” says Suliteanu. “Our decisions about where to play are very much based on having that broad perspective.”

As an example, he cites the Marchesa launch, which he calls “a perfect example of doing something I’m not sure a big commercial fragrance company would take on.” “It’s hard for a big company to think small, and small can oftentimes be very big,” says Suliteanu, when asked why the project wouldn’t appeal to a big company. “Our primary business is retail, not wholesale. We don’t have a giant infrastructure to support, we don’t have huge R&D labs. Not everything we do has to be a 10 in terms of its commercial appeal, and therein lies the opportunity.”

Sephora has also partnered with Pantone—“They are the world authority on color. Isn’t it natural someone would work with them to develop a makeup line based on their insights and expertise?” says Suliteanu—on both a color line and the Sephora Plus Pantone Color IQ device. The tool reads the color of the user’s skin and is linked to a proprietary Pantone database that connects back to the entire shade range on offer at Sephora and recommends the foundations best suited to her skin tone.

No larger than a television remote control, the device epitomizes the marriage of product and in-store experience that Suliteanu believes is driving the business. While part of the customer experience centers around the sheer size of the brand selection, interactivity and play have become increasingly important.

Two recent such examples include Ready-Set-Polish, in-store manicure stations complete with video tutorials that enable a customer to execute her own specialty manicure in the middle of the floor, and the Fragrance Sensorium, a bar where scents are divided into four categories—Playful, Chic, Addictive and Casual. The manicure bar is an all-store idea that is currently being rolled out, while the Fragrance Sensorium, which grew out of a pop-up concept brought about by a partnership between Sephora and Firmenich last year, is being tested in New York City and Montreal. Then there’s the false-eyelash bar at Union Square, where shoppers can hold up wands with different lash styles affixed to the end to see how they’ll look in real life.

“What appeals to our customer is the ability for interactivity, to play and discover,” says Sharon Rothstein, senior vice president of marketing. “That sense of involvement is critical.”

She says this is particularly true in a category like fragrance, where undifferentiated marketing messages often drown out the core attributes of the product itself. “When we started the Sensorium work, it was based on the [period] when unit sales were down dramatically. If you look at fragrance marketing to consumers over a long period of time, it was remarkably similar,” she continues. “We were intrigued by the work Firmenich had done and thought there was a way to help reignite and reeducate consumers. We found that consumers were captivated by the chance to experience fragrance based on their own impressions, in an unbranded way.”

Sephora garners much of its consumer insight from its Beauty Insider customer-loyalty program, which multiple vendors praise as being the best in retail. The cross-channel program awards users one “pretty point” for every dollar they spend; those who spend $350 a year or more achieve VIB (Very Important Beauty Insider) status. Rewards range from free products to exclusive classes to early access when products launch. Whereas in the traditional department store model, the timing of client reward programs such as gift-with-purchase is con- trolled by the store, at Sephora, the Beauty Insider program allows the customer to choose how, when and where she wants to use her points. “It’s trying to leverage personalization and offering different clients in different segments the right offers for them,” says Julie Bornstein, senior vice president of digital, whose purview includes Beauty Insider.

 

 

Sephora has become adept at gathering information at a granular level and leveraging it, for both its own benefit and that of its vendors. “They give us a ton of data that we use to create and edit our assortment and for the Beauty Insider offerings,” says Maureen Kelly, founder and ceo of Tarte. “They’ll say, ‘We did a self-tanner sample and the feedback we got was that there wasn’t enough in the packet to do both your arms and legs. This is how many ounces it was, so when you’re doing yours, take that into consideration.’ So where we may have made the same mistake, they share information so we can avoid it,” she says. “That’s unusual for a retailer.”

 

Tarte launched in 14 Sephora doors in 2003, and was in full door distribution in five years. Suliteanu still attends market meetings and has been instrumental in the growth of the brand. Kelly recalls a meeting about seven years ago when she was reviewing line sheets with him. “He said to me, ‘You have an ingredient story no other brand has. You should be calling this out on your packaging, your Web site, your gondola.’ ” It wasn’t until David called it out that I realized I should be educating the consumer about this,” she continues. “In hindsight, it sounds so obvious, but it was a true turning point.  He helped reposition the company and the way I thought about it.”

 

From all accounts, even with the growth of the company and his domain, Suliteanu remains equally as involved today. “He still digs in at the fundamental level of the business,” says Wende Zomnir, cofounder and creative director of Urban Decay. “He always asks me to think bigger than I maybe would have, to think about things in terms of: How do we make something that’s a hit even bigger? How do we build a million-dollar item? He is definitely a challenger.”

 

That trait will doubtless be in full force as Suliteanu and his team work to achieve their goal of being number one in the U.S. To do so, they’ll need to strengthen Sephora’s skin-care and fragrance businesses considerably. Sources estimate that color cosmetics accounts for just over half of Sephora’s sales in North America, a figure on which executives refused to comment. Suliteanu calls the development of skin care a three-step “journey,” consisting of improving the area’s curation via merchandising techniques like Sephora’s Favorites; launching Skincare IQ, an in-store and online diagnostic tool that helps consumers navigate through the sku selection, and better storytelling for the category overall. “In contrast to makeup, which has a lot of brand identity and visual excitement, skin care comes across as somewhat monochromatic,” says Suliteanu. “It’s about making the experience more interactive—infusing the department with more visual interest, more storytelling, a little bit less emphasis on product only. That you will see happen. Not just yet.”

 

Skincare IQ launched in late August in the Columbus Circle store, and manifests Suliteanu’s vision of how technology can drive sales. “In the beauty world, most people have interpreted technology as video. Our vision is where you use it to enhance the consumer shopping experience,” he says, ticking off three apps that are currently cascading into Sephora’s full door count. They are: mobile points of sale, which enables sales associates, known as cast members in Sephora’s nomenclature, to make sales transactions anywhere in the store; the Sephora Plus Pantone Color IQ device, and Skincare IQ.

 

Skincare IQ took three years to develop and became feasible based on work done for the relaunch of sephora.com in April, 2012. “The Web site is built around the core principle that all 13,000 sku’s online are tagged with up to 25 attributes, to create an intelligent and flexible database,” says Bornstein. “It takes humans with knowledge to look at a product and understand it well enough to make sure that we attribute them correctly. With the first versions of Skincare IQ, there were user interface issues and a question around the legitimacy of the product recommendations.”

Once the database was in place, the team was able to apply it to Skincare IQ as well as other projects, and it is continually refining it. “As we started rebuilding sephora.com, the focus was to build something that has tremendous flexibility and intelligence at the core so that you can change locations and interfaces and devices and create a useful consumer experience,” says Bornstein.

 

Industry insiders say that same level of interconnectivity will be needed at the store level to truly increase cross-category productivity, a must if Sephora is to become number one. “In a department store, you’re training on all three classifications—makeup, skin care and fragrance,” says one executive who requested anonymity due to a company policy that prohibits employees from speaking to the media. “At Sephora, you have color people, fragrance people and skin-care people. They get no advantage in terms of cross-selling because the color people aren’t going to take someone who came in for mascara and sell them eye cream. They are wildly successful, but if they were to figure out how to do the inter-sell—get the customer from color to skin care, skin care to color, color to fragrance—they’d be even more successful.”

Solidifying a strong position in skin care will also help diversify the customer base, say analysts. While Sephora has done a superb job of attracting younger consumers—its average customer age is said to be 28, versus 45 for a department store—some say that, as the consumer ages, she tends to migrate to department stores. “Sephora gets a younger consumer involved in prestige beauty in a very meaningful way,” says Thia Breen, president of North America for the Estée Lauder Cos.

“We’ve always talked about how a younger consumer starts out in mass and then how does she cross the bridge into department stores. Sephora allows us to introduce her in a fun and meaningful way to our brands. What we also know is that this customer graduates into a department store world as she gets older and starts to shop for herself, her husband, her kids.”

Strengthening the productivity of the Sephora units inside J.C. Penney will also help propel Sephora to its market share goal. Currently, there are about 370 doors, with an average size of 2,000 square feet, versus 5,500 square feet for a freestanding Sephora; over the last couple of years, Sephora has opened about 75 J.C. Penney stores a year, a pace that Suliteanu expects to continue next year.

 

In the U.S., J.C. Penney has about 1,100 doors, and is itself undergoing a massive reinvention under Johnson. The ceo calls his vision a specialty department store, and it centers on drawing con- sumers in with nationally recognized brands rather than frequent price cuts and promotions. While Penney’s business has thus far suffered in the short term, the strength of the Sephora business is a reason for optimism. “Sephora was our first part- nership and it has proven out our business model,” says Johnson of the deal that was signed in 2006 by Penney’s then ceo Myron “Mike” Ullman.

“We’ve got a long runway, because people are still discovering that we have Sephora inside of JCP. The way to optimize the business is to deliver this great experience and to add more offerings to our lineup,” Johnson continues. “We carry a strong lineup, but every time we can add something new, it’s another thing for customers to try and to use.”

Industry insiders say the recent implementa- tion of the Beauty Insider program at Sephora in Penney’s is also critical to growth. One executive estimates that the average productivity of a Sephora inside J.C. Penney is about 25 to 30 percent that of a regular door, but expects the figure to increase substantially.

 

Suliteanu refused to comment on the figure, but he is bullish about the busi- ness. Very. “Historically, J.C. Penney’s had only dabbled in the beauty category,” he says, “and the fact that we were essentially given the keys to the kingdom— a thousand stores, many billions of dollars in opportunity—that is an amazing and unique opportunity.” Those same superlatives surface when Suliteanu talks about South America,where he is overseeing Sephora’s expansion into Mexico, currently at five doors, and Brazil, where the first door opened in July at São Paulo’s JK Iguatemi mall and five more are expected by the end of the year.

 

Sephora tracks store openings by measuring sales in the first three days, and though, at 3,500 square feet, the São Paulo store is far from the largest, it beat the previous record by 50 percent, according to Suliteanu. “What makes this market so amazing is the productivity,” he says, “partly because the consumer is so ready, partly because there are so many of them and partly because the prices are so high. The opportunity to achieve record dollar-per-square-foot figures is there.”

 

Moreover, the absence of department stores creates a playing field extremely favorable to Sephora. Says Suliteanu: “There is the opportunity we would normally have, and then you tack on the opportunity that would normally be occupied by department stores, and you say to yourself, ‘It’s big.’”

 

For many, it’s that global reach that solidifies Sephora’s power both in the U.S. and abroad. With 873 stores in Europe (including Russia) and 151 in Asia and the Middle East, along with the growth that Suliteanu has spearheaded in North and South America, the idea of total world domination moves from the realm of cliché into actuality. “Sephora is the first global beauty retailer,” says a veteran industry executive. “The long-term power of Sephora is that it itself is a powerful brand which sells, creates and reinforces a variety of brands. That is truly unique.”

 

 

 

 

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