A rendering of Sephora at Kohl's.

Sephora and Kohl’s Corp. are teaming up in a bid to be the leaders in accessible prestige beauty.

The beauty specialty store and off-mall retailer have signed a long-term strategic partnership that calls for the opening of 850 Sephora at Kohl’s shops-in-shop over the next three years.

The move marks an escalation in the increasingly fierce battlefield of prestige beauty, and comes just three weeks after Ulta Beauty unveiled a deal with Target to open 100 shop-in-shops in the second half of 2021.

Sephora and Ulta Beauty have transformed beauty’s retail landscape in the U.S. over the last decade, and have been locked in a war to win the hearts, minds and wallets of the aspirational consumer. Sephora was an early leader, but Ulta has gained ground quickly, and today, the two are neck-and-neck in the U.S.: Ulta is the bigger “brick-and-mortar” player, with 26.7 percent market share, according to Euromonitor. Sephora, which only sells prestige beauty, ranks third on the list, with 14.9 percent market share, after Bath & Body Works. But in the prestige beauty world, Sephora remains the largest player, having edged out Macy’s Inc.

The scope of the Sephora and Kohl’s partnership is much larger than the Target-Ulta deal. Initial plans call for 200 locations to open in fall 2021, with at least 850 doors by 2023. The shops-in-shop will measure 2,500 square feet, more than double that of Ulta at Target, and will feature more than 100 brands. Sephora at Kohl’s will also launch online at kohls.com in the same time period. Initial terms call for a 10-year deal.

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For Sephora, the partnership is an expedient way to fill in the biggest gap in its real estate strategy — off-mall locations, where Ulta dominates. “From a Sephora point of view and a brand partner point of view, this is an efficient way to reach 850 new stores and 65 million to 70 million new consumers,” said Jean-André Rougeot, chief executive officer of Sephora Americas. “Kohl’s is beautifully located — over 90 percent off-mall — so it offers great convenience and access to consumers. It has everything we need to expand our reach and market share.”

For Kohl’s, it could finally be the key to cracking a category — beauty — that the retailer has historically struggled in. “We are significantly underrepresented in beauty,” said Michelle Gass, ceo of Kohl’s. “We serve 65 million consumers, 70 percent of whom are women. Our beauty business is up 40 percent in the last few years, albeit off a low base. They are telling us they want beauty.”

Neither executive would discuss projected sales, but Gass did say, “We are invested in each other’s success. This will be a big business — financially accretive to each business.”

“If you take 850 stores and multiply by X million — it is a lot of money,” said Rougeot, “a lot of market share for Sephora.”

Both executives noted that Kohl’s and Sephora have very little overlap in stores and consumer bases. Sephora will be better able to access suburban shoppers, while Kohl’s expects to gain relevance with Gen Z and younger Millennials.

“We are making a giant leap in terms of reach and access,” said Rougeot. “We’ve talked about our real estate strategy before of growing our stores in suburbia, but that takes time. This allows us to jump several years.”

Pre-pandemic, Sephora revealed its intentions to open 100 non-mall stores this year. In August, Rougeot said that number would be closer to 40, with more to come in 2021. Now plans call for 60 to 70 doors to open next year at most.

“We will continue to open new doors, but the Kohl’s partnership leads us to rethink our real estate strategy in terms of how many,” said Rougeot.

Another aspect of the business that will change is Sephora’s existing relationship with J.C. Penney, which started in 2006. Prior to that retailer filing for bankruptcy, Sephora had 615 locations inside Penney’s. In May, after a legal tussle, Sephora reaffirmed its partnership, but Rougeot said the company will now wind down the relationship.

“We had a great relationship with J.C. Penney for many years, but in the last two to three years JCP has changed,” he said. “We will slowly wind down our relationship in the next couple of years in the same time that we are ramping up with Kohl’s.”

Beauty industry insiders have been speculating that Sephora has been in talks with various retailers to expand its purview. When asked why Kohl’s, and if Sephora had considered other retailers, Rougeot said, “For the last year or so, we have been thinking hard and there were two big questions — one is reach and the other is prestige look and feel. We want an environment that respects and reflects the Sephora brand and our brand partners, that provides the prestige experience in the right way with the right space and the right staff.

“In our industry, look and feel is critical,” he continued. “If you are being merchandised between the bananas and the toilet paper, that is not an experience consumers want.”

For its part, Kohl’s has been aggressively transforming its brand landscape to become more relevant with Millennial consumers and fulfill its mission of becoming “the must trusted retailer for the active and casual lifestyle,” Gass said, noting the retailer has signed deals with brands including Nike, Adidas and Levi’s. “Sephora is a key part of elevating our beauty experience and overall store experience and bringing aspiration and accessibility together.”

The Sephora shops will be located at the front of the store, with Kohl’s exiting underperforming brands and categories to make space for the new installation. Moreover, for doors that have two front entrances, as many Kohl’s stores do, one entrance will feature Sephora branding. “There will be no mistaking that signage from a distance,” Gass said. “You will see all of the cues of the Sephora brand and right in front of you will be this stunning store.”

Still, as one prestige brand executive noted, when it comes to both Target and Kohl’s being suitable environments for prestige brands, “the jury is still out.”

Rougeot posited that brands will quickly come on board as they better understand the nature of the opportunity, adding that Sephora’s success in developing brands will be a key differentiator in helping the retailer win the war for the aspirational beauty customer, both in-store and online.

“We have a unique tool in our toolbox — we are a brand incubator. We build brands all the time. Tatcha, Drunk Elephant, Fenty, Youth to the People — I could go on,” he said. “We have dozens of exclusive brands that have been incubated in Sephora and this is what people are looking for.

“I can’t tell you how many people want to buy these and now we have reach. Now I can compete: I don’t have one hand tied behind my back,” Rougeot continued.

Sephora at Kohl’s will have about 85 percent of the stockkeeping units of a freestanding Sephora, and be fully staffed with Sephora-trained Kohl’s employees. As the retail landscape shifts dramatically in a post-pandemic world, Rougeot said that will be the key to maintaining the prestige factor.

“Prestige is about look and feel and experience,” he said. “At the end of the day, retail has changed — we have to meet the customer. You can’t just wait at the top of the mountain for the customer to come to you.”

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