By  on April 6, 2007

In just shy of a decade, Sephora has transformed itself from an overseas underdog ­— albeit a glamorous one — into an 800-pound gorilla in the U.S. beauty marketplace.

Its evolution from the red-lipstick-wearing, black-glove-clad French purveyor of fragrance and cosmetics into a multichannel makeup mecca that stretches traditional beauty boundaries was hair-raising and thrilling, said a number of the company's past and present executives.

Sephora's rise was underpinned by its allegiance with emerging beauty brands that had slim prospects of gaining distribution in department stores. From the start, Sephora and the fledging beauty brand were kindred spirits. After all, soon after Sephora's arrival on U.S. soil, it received a lukewarm reception from the beauty establishment, including Estée Lauder and Lancôme. But their disinterest caused a happy accident, of sorts, as Sephora quickly established itself as a haven for the latest, undiscovered beauty offerings. Early adopters of the Sephora model included BeneFit Cosmetics, Stila, Philosophy and N.V. Perricone M.D. Sales indicate that beauty shoppers have welcomed the concept with open arms. Financial sources estimate the typical Sephora store generates $1,200 a square foot and that same-store sales grew by 25 percent last year, while the chain's sales volume surpassed $1 billion in 2006.

David Suliteanu, president and chief executive officer of Sephora USA, explained, "Our evolution very much mirrors that of a new brand. Our early days were filled with lots of changes, so it's easy for us to relate to a brand going through the early stages of growth. We've been there. If they don't do well, we don't do well and our team understands that."

Suliteanu, who took over the helm in 2000, acknowledged that the lack of department store brands helped pave Sephora's path to some extent, but clarified that the beauty chain's evolution would have happened with or without them.

"I think of this business as almost a person's DNA. So we would have turned out just as we did, and the reason is because of our connection with a younger consumer who is interested in what is new and different." He continued, "All we did over the years was listen to her. She wanted brands that weren't readily available elsewhere. And this is where we ended up. I think it was inevitable."Sephora's parent company, LVMH Moët Hennessy Louis Vuitton, purchased the French perfumery chain in 1997, less than one year after it gained worldwide attention by opening a glitzy megastore on Champs-Elysées in Paris. The bold move by LVMH chairman Bernard Arnault was quickly trumped by a splashy, no-holds-barred entry into the U.S. market.

The French concept entered the U.S. in 1997 and opened its first store in New York's SoHo neighborhood a year later. Within 18 months, the U.S. offshoot had opened 50 stores, said Suliteanu. The initial pace of expansion may have raised some eyebrows, acknowledged Suliteanu, but, he said, "In retrospect, it was an incredibly bold move because it signaled such commitment from LVMH."

Suliteanu recalled that when he arrived at Sephora, the company was young and "had gone through an incredible growth spurt. For several years thereafter, we slowed down the growth to focus on the operating model." Sephora has since picked up its pace of expansion, and plans to open about 40 doors this year, bringing its total number of units to more than 180 by yearend, said Suliteanu. "I don't know of a retailer being born without going through changes. But the customer was always with us," he added.

So, it seems, was the determined beauty entrepreneur. Through its stores, catalogue and Web site, Sephora has incubated a number of niche brands that have since attracted investors, gone public, been acquired and grown into formidable competitors.

For instance, last year, N.V. Perricone M.D. linked arms with private equity firm TSG Consumer Partners, Bare Escentuals went public and, in January, Doctor's Dermatologic Formula, or DDF, was acquired by Procter & Gamble.

Nicholas Perricone, M.D., recounted that his brand entered Sephora in the late Nineties to broaden its reach. "At that time, we needed to open more doors to get to our consumers." He added that his books and infomercials helped to drive a more mature shopper to Sephora. Perricone nodded to Sephora's in-store environment. "When you walk into a Sephora, you just want to buy something. That's great merchandising," he said.

Sephora has given other brands an international foothold. Bare Escentuals entered Sephora's U.S. doors in 2004, and gained ground in Sephora France in November. It has since rolled out to 16 doors there. During a February conference call with analysts, Bare Escentuals ceo Leslie Blodgett, said, "We are already the number-three cosmetic brand in our test locations. We are planning to continue the store rollout, and our goal is to be in the top 150 Sephora France stores by yearend."During a recent interview, Blodgett recalled that before Suliteanu's arrival, it was difficult for the beauty firm, which was sold via infomercial, to get Sephora's attention.

"It was a struggle to get face time because Bare Escentuals wasn't perceived as a prestige brand. Once David came on board, things changed," she said.

"Sephora is a trailblazer," she continued. "It doesn't look at the competition, and it takes brands that seemingly no one else will and turns them into stars."

Sephora would not comment on business terms, but industry sources said vendors may provide the beauty retailer a higher margin than department stores, which require added costs, such as marketing and sales support. It's a model, they suggested, that quickly becomes profitable for smaller firms and Sephora.

Shashi Batra, a former Sephora executive who is now president of N.V. Perricone M.D., explained that the Sephora selling point was a compelling one: The cost of doing business in a department store was prohibitive to small brands and robbed midsize brands of leverage. The Sephora model, on the other hand, excluded promotions — a key sales driver in department stores — and promised a level playing field for brands of all sizes. Sales associates would be trained across all brands, and be completely agnostic.

To drive the point home, Batra and his colleagues at the time reminded beauty vendors that in 1980, the typical department store did a healthy business in furniture, bedding, housewares, electronics and hardware. By the late Nineties, those categories faced steep competition from specialty chains including Ikea, Bed Bath & Beyond, Pottery Barn, Best Buy and The Home Depot. The same shift, they forecasted, could happen within the beauty market.

Batra, along with Steve Bock, was tapped from Saks Fifth Avenue in 1997 to establish Sephora's U.S. office in San Francisco, where LVMH's retail subsidiary, DFS Group, was located. He recalled, "Steve and I spent six to nine months pounding the pavement, talking to every friend and every brand we know." The pair told potential vendors, "Sephora will be a force to be reckoned with," said Batra, noting that they envisioned the retailer could grow to a 500-store chain.Shortly after its arrival in San Francisco, Sephora planted its flag in a number of tony real estate markets, including SoHo, Times Square and Rockefeller Center in New York, and South Beach in Miami.

The three-level, 20,000-square-foot store in Rockefeller Center, which opened in 1999 to serve as Sephora's U.S. flagship, symbolized LVMH's bravado. But by 2002, it became a symbol of Sephora's troubles. Several people close to the situation said the rent for Rockefeller space was nearly double store sales. At the time of the store closure, industry sources said Sephora had expected the flagship to generate $20 million in annual sales, but that the unit's volume was trending at $15 million in 2002. Even before the flagship shut its doors, acquisition rumors were abundant.

Sephora shifted gears and moved forward by focusing on smaller, more productive formats. A former Sephora executive commented that there are two ways to approach expansion: slow or fast. "We chose fast, and I think it was the right decision," said the former executive. "It was hair-raising, but you could never do what Sephora did and not make mistakes. It's simply not possible. Arnault had the money and the wherewithal to fix them."

Betsy Olum, senior vice president of marketing at Sephora, who joined the company as a consultant in 1997, said the beauty retailer learned how to assimilate to the U.S. market. She noted, "When Sephora first came to the U.S., it was more theatrical. The business in Europe was predominantly fragrance. It quickly became evident that, because the U.S. mix had a high penetration of skin care and makeup, we needed to have highly trained sales associates."

Today, Sephora's most pressing challenge is rolling out a host of brands chain-wide while retaining ample space to merchandise and test emerging newcomers.

It's a balancing act, said Suliteanu, that has existed since the beginning. "Part of being consumer-centric is developing a consistent product mix, and that pushes us to develop long-term relationships. That's one objective. The other objective, which is somewhat conflicting, is creating room for innovation. Our clients demand newness. We are very conscious of both [objectives]."That push for consistency has not been embraced by all brands. The Estée Lauder Cos.-owned Bobbi Brown recently decided to exit Sephora rather than roll out chain-wide. It has since set up shop in Blue Mercury beauty boutiques.

Dan Brestle, the Estée Lauder Cos. chief operating officer, said that, because the brand is tied to the professional makeup artist Bobbi Brown, it would be difficult to grow the line without its own makeup artists.

The Estée Lauder Cos. distributes fragrances and its Clinique brand, which is rolling out chain-wide — save for the J.C. Penney units — to Sephora.

Brestle recalled that Sephora's original plan was to open stores in malls, where many of the beauty firm's brands were already well distributed. In his view, specialty chains and department stores can peacefully coexist and thrive. He clarified that, where Lauder is concerned, "there are specialty stores and then there are mall-based specialty stores. The stores in malls are in direct competition with department stores."

Suliteanu said Sephora has a good relationship with most of the major beauty firms. "We've gotten to know each other. Where it makes sense for us to do business, we do." He's quick to add that Sephora's ultimate goal is partnership. "There are times when partnership doesn't work both ways….I would say all of our top brands believe partnership is a 50-50 proposition."

In the last year, Sephora has expanded that view to include retailers, namely J.C. Penney and the Home Shopping Network. Referring to the deals, Suliteanu said: "We are consumer-centric. We are interested in any idea that allows us to speak to a broader audience." He qualified the statement by adding that it was critically important for the retailer to re-create the Sephora experience in Penney's and on HSN.

That focus has prompted Sephora's cautious pace. The beauty retailer set up shop in five Penney's doors last year and recently opened nine more. There is more in the pipeline, but Suliteanu would not divulge details, except to say: "At this point, we are committed to a consistent series of openings, which, by the end of the year, will give us a sizable number of stores to learn from."A year ago, Sephora also aligned itself with Klinger Advanced Aesthetics in a deal that included clearing room for the skin care line Cosmedicine and opening a side-by-side retail concept in NorthPark Center in North Park, Tex. The adjacent unit allows the pair to funnel clients back and forth from Klinger's service-driven spa concept to Sephora. At the time of its opening, Suliteanu referred to the retail pairing with Klinger as a "prototype," suggesting there were more to come. At a recent meeting, he said Cosmedicine is a core skin care brand and Sephora has installed Klinger's skin diagnosis device, Skin Physical, in 13 Sephora doors, but he would not comment on whether there were plans for another side-by-side concept. "We are pleased with the partnership," he declared.

When asked what Sephora will look like in a decade, Suliteanu said, "You should be able to open your eyes and know you're in a Sephora. We have no idea what the trends will be then, but whatever they are, we'll be there."

He added, "There is no playbook for us. We write the book as we go. Within Sephora at any given time, there is a tremendous amount of experimentation. We are constantly testing. Our bias is, 'If you're not sure, just try it.'"

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