They said it couldn’t be done.
Two decades after bursting onto the scene amid much industry skepticism, particularly in the U.S., Sephora has upended the status quo to become the leading global beauty retailer.
It has harnessed the prevailing forces of change more effectively than any of its competitors with a series of innovations, from ushering in the age of self-selection to nurturing the rise of the Indies to capitalizing early on the influence of digital and social media. As the ubiquitous black-and-white striped shops pop up in one country after another, Sephora has won the industry’s most sought-after audience, Millennials.
It is the Sephora generation.
“Sephora has changed the competitive environment,” says Hannah Symons, beauty and personal care analyst at Euromonitor. “Whereas before the luxury market was dominated by the big names of conglomerates like Estée Lauder, Sephora has given a platform to these small brands and they are growing just as fast, if not faster, than the heritage luxury brands.”
While the brands that Sephora champions may start small, its global platform is large—and ever growing. Aside from travel-retail operators, like Dufry and Duty Free Shoppers, or monobrand stores like MAC Cosmetics, Sephora stands alone as the only global beauty store among traditional brick-and-mortar rivals.
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“Sephora has the potential to be in every country on this planet,” says Chris de Lapuente, chief executive officer of the retailer, which started as an innovative perfumery chain established by Dominique Mandonnaud in 1993, and was acquired by LVMH Moët Hennessy Louis Vuitton in 1997. Back then, there were 54 stores in France, where Sephora had an 8 percent market share. Today, Sephora operates 2,379 stores around the world.
Speaking during a rare interview, de Lapuente acts as if he is only just getting started after five years on the job. He suggests that the list of targets could number “over a hundred. We are only in 33 countries,” he says. “The desire for prestige beauty is universal and our opportunity is to keep driving Sephora globally.”
De Lapuente’s vision is much broader than just opening stores, however. “The driving ambition is to create the most loved beauty—not retailer—community,” he says. “If we can be a place where people go to learn about beauty and to explore, to share ideas, to cocreate trends with our brand partners and then to do that all over the world—that would be fantastic.”
De Lapuente has a proven track record of achieving his goals. He notes that when he joined the company in 2011, the “dream” was to double the business. “The great news is that we have done that,” he says. “We are growing consistently at double digits. It’s not a one-year phenomena or quarter by quarter.” Industry sources calculate that Sephora’s total global sales are hovering around $8 billion to $9 billion. De Lapuente declines to comment on figures, but says the intent is to continue the momentum with double-digit topline sales increases, derived both from building market share and from opening new doors.
In the last few years, Sephora has opened 120 to 150 doors a year, a pace the ceo expects to maintain. “We aspire to be market leader in every market we do business in. We are already market leader in a number of them. In others we are the number two, closing the gap,” he says, adding that his goal is to be profitable “everywhere we operate. It’s not just leadership for the sake of leadership.”
Jean-Andre Rougeot, ceo of Benefit Cosmetics, which is also owned by LVMH, asserts that the retailer has made “a huge” global impact. “Sephora is the only brick-and-mortar retailer that is a worldwide presence and it’s not a small presence,” he says. “They are dominant in many, many markets, some of them Europe, America, more and more presence in Asia, especially strong in Southeast.”
While conceding that there are competitors scattered around the globe, like Ulta Beauty in the U.S. and Douglas in Europe, “from a global point of view, Sephora is just heads and shoulders above everybody else,” Rougeot says.
He also notes that Sephora’s business model seems to work in many markets, some of them less than inviting. “They are very aggressive in going into markets that are challenging,” Rougeot says. “They are in Malaysia, they just opened in Indonesia, they are in Thailand, Brazil, Mexico, Greece, Turkey. They are in places that are not obvious in terms of how to do business and [deal with] regulations.
“They are really forward-thinking in terms of global expansion and a lot of that is driven by Chris de Lapuente. He is a very global executive,” Rougeot says of the man who previously served at Procter & Gamble for 28 years, becoming the youngest president of the hair-care division. “For him, being in Indonesia is perfectly normal. But no other retailers think that way.”
On a micro level, Sephora’s North American business presents a perfect blueprint for how it plans on winning as an omnichannel force around the world. “In the last few years, we had our eyes set on the opportunity of becoming number one in the U.S. market and we celebrated that this year,” says Calvin McDonald, ceo of the division, implying that Sephora has surpassed U.S. prestige beauty market leader Macy’s. “We don’t state it specifically,” he says, “but we believe we are number one. We have had that validated by multiple sources.”
A spokesperson for Macy’s could not be reached for comment.
The U.S. is Sephora’s biggest market, with industry sources estimating 2016 sales at $4.4 billion, generated by 344 freestanding Sephora units and 578 shops inside J.C. Penny stores. That includes the U.S. e-commerce business, which industry sources calculate at $1 billion a year. Meanwhile, Macy’s, which is in the process of trimming doors, has a beauty business generating $3.7 billion in annual sales, according to estimates by industry sources.
The volume for the whole Sephora Americas division has been estimated by sources at $5 billion and counting, when the Canadian, Mexican and Brazilian businesses are added to the U.S. business. Industry sources say that McDonald has set a goal of doubling the business to $10 billion by 2022. McDonald, de Lapuente and everyone else at Sephora declined to discuss sales results or projections.
De Lapuente’s vision of Sephora as a beauty community rather than retailer is apt in describing how Sephora established itself in the U.S. When the French-born perfumery chain arrived in the U.S. in 1998, it experienced resistance in persuading some dominant brands to come on board. So it took in fledgling Indie players, like Urban Decay and Benefit Cosmetics, which blossomed into major players over the last two decades. Now, as the digital revolution has lowered the barrier to entry, Sephora is again providing a platform for young brands, but this time with a global perspective and reach.
“It’s been the biggest revolutionary [development] out of anything that’s happened in the cosmetics business,” says Wende Zomnir, chief creative director and founding partner of Urban Decay. “They took this idea of self service and shoppability and they brought in Indie brands like ours.” Zomnir continues that, at the time, her department store business was struggling, admitting that she couldn’t compete with majors like Lancôme and Chanel, with their well-financed army of beauty advisers.
“I just had my little stand of lipstick,” she remembers. “All of a sudden, you put it into Sephora and it’s showcased, it’s on a gondola, it’s got equal billing. They nurtured Indie brands and turned that little tiny movement into something today. The little small brands that have been with them from the beginning are now big brands, and now there are all these other up-and-coming little brands that they have nurtured and brought along and they have sort of blown up the whole beauty space for the beauty customers. She’s got so many more choices now.”
Discovering and incubating Indies has since become an integral component of the Sephora worldview. “Necessity has turned into a powerful differentiator for them,” says Wendy Liebmann, ceo and chief shopper of WSL Strategic Retail. “It’s become a very powerful model because it’s driven by exclusivity and differentiation. It’s almost like having a good farm team in baseball,” she says.
Over the years, Sephora has built a multifaceted brand matrix, that includes but isn’t limited to the original Indies like Urban Decay and Smashbox. There are the majors, like Estée Lauder, Clinique, YSL and the LVMH stable of landmarks such as Dior; there are the proprietary Sephora brands, which it calls “exclusives,” and there are the new generation of fledgling Indies, like GlamGlow and Drunk Elephant.
While serving as a brand incubator, the retailer has simultaneously nurtured an audience. Zomnir remembers back when Urban Decay was getting started in 1996 and she would make her rounds of the magazines. “I was that crazy lady who wore too much makeup,” she recalls. “Now I walk into a Sephora and I am pale compared to the customer. They have made wearing makeup cool.”
While the brand lineup is continuously evolving, the single-minded focus on engaging and educating the consumer has stayed constant. If anything, Sephora executives today seem even more aggressive about it than they did 20 years ago. “We truly focus 100 percent behind the client and how do we grow this incredible category that we compete in,” says McDonald, describing the strategies of the Americas division. “Our purpose all along has been to inspire fearlessness [in customers, merchants and brand founders].” The company’s new vision, he says, “is to create unbiased experiential retail through teach, inspire, play,” a new merchandising approach with the acronym TIP that utilizes the store’s policy of heavy sampling, instruction and experimentation.
McDonald ticks off four “game changers” on how Sephora plans on bringing its concept of experiential retail to life. The first tenet revolves around the stores of the future, which have a merchandising strategy called Beauty TIP Workshop. The real estate strategy encompasses stores large and small, driven by location. “We see an opportunity for a neighborhood store in highly dense areas where shop sizes are smaller and we arguably would not be able to put in a full-assorted Sephora location,” McDonald says, asserting, “This has nothing to do with competition.”
That appears to be a tacit reference to arch-rivals like Ulta Beauty and Bluemercury, which over the past few years have been making significant inroads into the market. “Ulta is obviously competing within this category,” he says, when asked about the competition. “We have a very unique differentiated voice within prestige. We think that the value that we bring to prestige in growing prestige, in building and developing brands, is very unique and healthy to the category.”
McDonald says that “70 percent of growth happening in total prestige beauty is happening at Sephora. We are driving this category,” he adds, and says the decision to open smaller stores is aimed at servicing existing customers, rather than attracting new ones. “We think that a 2,000-square-foot urban studio that’s penetrating a deep, highly dense neighborhood would complement our stand-alone flagship stores, where it really becomes a spoke and a hub,” he says, noting the product assortment will center on edited skin care and color cosmetics with high-touch service. The first such store is due to open on Newbury Street in Boston in the middle of next year.
At the other end of the spectrum are the flagships that are opening in major cities. For example, a new flagship that will open on 34th Street in Manhattan will measure 10,000 square feet and a new Fifth Avenue unit will be 9,000 square feet, both set to open in February; meanwhile, a 9,000-square-foot store just opened on Michigan Avenue in Chicago. The retailer is also looking for a location in Times Square, McDonald says.
There also are intensification strategies at play. Take Toronto, Canada, where some stores were expanded and other locations were opened which resulted in “the strongest fleet of Sephora stores in the world right now,” says McDonald. “In two years, we have doubled our business there.” Sephora is the number-one prestige beauty retailer in Canada.
Whether large or small, the goal for all stores is uniform: to create a beauty destination where customers can “play and learn, which allows us to demystify what’s happening in beauty and insert ourselves into the conversation with our clients,” says McDonald.
The third key differentiator is the “mobile-first mentality” that opened the door to innovations like the virtual artist and virtual try-on that are part of McDonald’s teach, inspire, play philosophy. The fourth game changer is to make the beauty business personal with clienteling, both in-store and online. “It’s what’s happening with our local assortment, our approach to intensification in marketing as well as looking at how product personalization is evolving,” McDonald says.
Making the beauty business personal is at the crux of how Sephora approaches its relationship with customers. “Yes, we transact with him or her, but it’s not how we think of the relationship, it’s not how we build our business and it’s definitely not where we solely invest,” says McDonald. “We invest in loyalty with our client more than any other retailer.”
Cedric Prouvé, group president of international at the Estée Lauder Cos. Inc. has seen stores all over world, and agrees that the loyalty Sephora engenders is unparalleled. “They have a great ecosystem between what they offer in-store, what they offer online and the loyalty system, which is very powerful. It is not just a simple point program,” he says. “It’s something that connects with social media where people give ratings and reviews and they get special treatment. When people are in the ecosystem they tend to stay.”
Combined with Sephora’s investment in sampling and an environment that encourages experimentation, the lure for Millennials is irresistible. “People can play with the products. They want the element of discovery. They can create the excitement,” Prouvé says. “There’s a lot of creating trends, creating product movement.”
Then there is the task of winning over customers. Several observers praise Sephora’s talent for melding the digital with the concrete to operate as an agile omniretailer and form a seamless relationship with shoppers. “Customers don’t just want to buy in-shop or don’t just want to buy online,” says de Lapuente. “I use the acronym ATAWAD—Any Time, Anywhere, Any Device. You want to shop on a mobile phone, you want to shop on a tablet, you want to go into the store to see what’s new, to have services? It’s all about building a magical relationship with our clients that we earn their trust and that we’re available to them when they want to engage with us.”
That approach transcends the U.S. “The strategy is for every country to have an omnichannel approach,” says de Lapuente. “Most of the countries do have an omnichannel, a digital e-commerce platform. The markets learn from each other. The e-commerce business in the U.S. is the biggest, most evolved e-commerce market in the world, so everyone learns from what the U.S. doing.”
Euromonitor’s Symons agrees that Sephora’s strength is its digital engagement. “Every brand now has a huge digital marketing budget but the way that Sephora does it is different,” she says. “It’s a very customer-centric model, so they look at what their consumers need and they build digital initiatives around that to make life easier for the consumer. They are not just throwing in touch screens for no reason. They look at the consumer first and then digital second. Their mobile app is one of the most successful apps in retail, not only for purchases but they link it to the store experience.”
She adds that instead of leaving it up to customers get their product information while using their phones in the store, Sephora provides it. “They have thousands of product reviews,” Symons says. “There is one product that is a Kat Von D lipstick that has had something like 8,000 reviews, which for one product is quite momentous, really.”
Sephora’s signature design may be ubiquitous as the chain winds around the world, but the product assortment is not. Sephora arrived in the U.S. as a classic French perfumery then gradually morphed into an American makeup store. The company does not provide a breakdown, but market sources estimate that 60 percent or more of the turnover of the U.S. stores is makeup, more than 20 percent is skin care, fragrance is 10 percent and hair care maybe 4 percent.
While Sephora America dominates in makeup, McDonald has been building up other parts of the assortment, mainly fragrance, a market that he sees as mismanaged. “Fragrance is too broadly distributed; it has lost its prestige nature,” he says. “Price is a primary driver of how and why clients buy.”
His solution has been to differentiate Sephora’s assortment and drop some broadly distributed brands “that are big volume but really don’t offer a unique point of difference.” Instead, Sephora is focusing on more niche brands like Atelier Cologne, and the story behind the scents. For example, in the new Chicago store, Sephora opened a fragrance studio, complete with a Fragrance IQ diagnostic questionnaire, combined with InstaScent tryout technology.
“We are trying to find our path in fragrance,” McDonald says. “It’s harder because of the state of the category but we are seeing good early results. I would rather have a healthy, unique, differentiated fragrance business than an unhealthy, broadly distributed assortment, where the client is thinking discount, discount, discount.”
Differentiated brands in every category are a key driver. Over the years, market observers have questioned whether well-established, sometimes venerated brands, can keep up with fast-growing Indies driven by social media in an assortment punctuated by red-hot items. Can a landmark brand compete with Anastasia on Instagram, they ask.
“Even these broadly distributed luxury brands with a wonderful history have to find their path in social if they want to be relevant moving forward,” McDonald says, citing YSL and Tom Ford as two brands “that are really figuring out how to replicate or leverage the success of social for their brands in an authentic way. They have to keep tweaking and playing at it. I am convinced that brands can absolutely compete, it will just be different than the brands that are like an Anastasia or Kat Von D that are strongly linked to a founder that has the ability to have a different voice. But they can. Others are doing it and proving it and everybody must.”
Sephora also has been grooming its younger customers to think more about skin care, firstly with fun brands, like Drunk Elephant and K Beauty, and also with classes. “One of our most successful classes is a skin-care class,” McDonald says. “We have it set up for teaching younger Millennials the benefits of skin care early and we also have a class that talks about maturing skin and how to work with that.”
That raises the question of how can assortments be harmonized around the globe—or maybe not. “We have one global strategy. The way that it gets cascaded into each region depends on the market developments there,” says de Lapuente. “The U.S. is very makeup driven, Europe is very fragrance driven and Asia is very skin-care driven. Rather than expecting everyone to grow every category at the same level, it depends on what is the size of the category and what are the opportunities.”
But he adds, “Of the three [categories] globally today, we see makeup growing the fastest. So all regions are working with their brand partners on creating winning plans in makeup.” De Lapuente stresses the entrepreneurial nature of the setup. “We actually run a very decentralized global operation,” he says.
Decentralized or not, the company maintains that it is the only prestige beauty retailer operating in every continent except Africa. “Another opportunity for the future,” notes de Lapuente. As large as it is, Sephora is still absent in four key markets: the U.K., South Korea, Germany and Japan (although Sephora had tried once, only to pull out).
De Lapuente was careful not to reveal his expansion plans, but sources in the market have speculated that Sephora may enter Britain next year.
In addition to the U.S. and Canada, Sephora is also gaining ground in France, its second-biggest market. “The market is down, flat at best,” he says. “We are growing midsingle digits and we’re growing e-commerce, double digit.” He adds that the e-commerce market in France is significantly underdeveloped versus the U.S. “There’s clear opportunity there.”
In China, “we are growing ahead of department stores,” de Lapuente says, cautioning the boom of e-commerce makes the market challenging, with the phenomenon of Alibaba and Tmall. Sephora operates 209 stores across 73 Chinese cities—at 25 openings a year—”and we have been building the business up steadily. We feel we have got a good model. We have our own e-commerce platform and that business is growing very strongly.”
Anne-Veronique Bruel, president of Sephora Asia who is taking over the Fresh brand, says, “China is our biggest market in Asia, and we have seen strong growth since midyear. We take this as a hint of a rebound in the market. We have seen fantastic growth in the makeup category, and in the new cities where we have opened.”
Turning to Singapore, she says the market “has delivered a great turnaround this year, driven by the addition of new, edgy and differentiated brands, and an improvement in our in-store experience.”
De Lapuente notes, “Malaysia has been opened and is going extremely well.” Sephora is in its second year in Australia and planning to have seven stores operating by the end of this year with more on the way next year. De Lapuente admits that “we had a public relations incident at launch, which was relatively minor, and since then all of our stores are progressing well ahead of expectation.”
Turning to Russia, he says, “We are growing very strongly, double digits, despite the economic crisis. In Italy, we are growing well ahead of the market. In Spain, we are growing significantly ahead of the market. In Turkey, Czech, Poland—across the whole of Europe—we are growing well ahead of the market and growing market share.
“In the Middle East, we are the market leader,” he says. “Our business in the Emirates is very healthy.”
In the Americas, the Mexican venture, which began five years ago, could triple in size over the next few years, McDonald says, admittedly after “a bumpy start.” The Brazilian market is “complicated and challenging,” he says. “Once we stabilize, it will be a platform to leverage into additional markets in South America. But the potential and the opportunity to double the business is really going to come out of the output of us playing with vision and delivering upon it.”
As the leader of the Sephora team, de Lapuente is keen on building a cadre of entrepreneurs. “I am very passionate about building organizations, creating a culture of people winning together…not about just winning in one country or one function, but how do we win altogether across Sephora,” he says. “We are a global organization, but our local leaders have a huge ownership for their businesses and that is quite special.”
In de Lapuente’s worldview, empowering his team translates directly to engaging consumers. “I’d like to be remembered for developing a fantastic winning culture, a business that’s fast, entrepreneurial and very customer focused,” he says. “A lot of companies talk about how the client is the boss. I’d like to think that we live it. If the customer has a great experience, they will reward us with their loyalty.”
When asked to compare his experiences as a global president at P&G and the boss at Sephora, he picked the latter. De Lapuente, who began the interview describing himself as “a very passionate brand builder,” ended the session, with “I find the retail approach just more entrepreneurial. I have freedom to run…to lead our business, and I find that very empowering.”
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