Sephora Teardown

H O W S E P H O R A B U I LT A B E A U T Y E M P I R E
T O   S U R V I V E   T H E R E TA I L A P O C A LY P S E

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Sephora has captured the hearts of
millions of beauty shoppers and is
aggressively expanding across the
globe. We dive into how Sephora has
succeeded in today’s merciless retail
climate, highlighting key lessons
for retailers.
Imagine walking into a cosmetics store with racks of makeup,
shelves of perfumes, aisles of every beauty product imaginable —
but you can’t touch any of it.

Thanks to Sephora, beauty shoppers no longer have to face

this scenario. Founded in 1970 by Frenchman Dominique
Mandonnaud, Sephora pioneered the concept of try-before-
you-buy for cosmetics, which has been widely replicated
across beauty retail.

And during a time where the retail sector is struggling — with

almost 7,000 stores closing in the US in 2017 — Sephora is
flourishing. In terms of beauty sales, it is the No. 1 specialty
beauty retailer in the world.

How is this happening?

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Sephora’s story offers a number of key takeaways for retailers:

··Make digital an executive priority. Below, we’ll unpack

Sephora’s digital ambitions and how the company has worked
to achieve them.
··Enhance the physical store. Today, retail is all about the “offline
experience.” Sephora drives value from physical retail beyond
sales per square foot.
··Integrate in-store technologies to engage clients. Sephora
helps clients solve for specific consumer pain points, leveraging
augmented reality, facial scanning, and more.
·· Personalize product or service recommendations based on
customer data. Localizing data is key for reaching global
markets. Sephora uses personalization to attract and maintain
loyal customers.
··Build partnerships. Sephora leverages partnerships to support
and cultivate smaller brands that could serve as future
distribution partners or acquisition targets.
··Cultivate robust loyalty & rewards programs. Sephora
aligns itself with customers’ values through benefits
and rewards programs.

Below, we dive into these factors and others driving Sephora’s

growth, the company’s new digital initiatives, the competition and
challenges it faces, and where Sephora could go in the future.

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 Table of 1 Sephora & LVMH: How Sephora boosts its parent
company’s selective retailing strategy

contents 5 Sephora’s digital transformation

·· How Sephora’s corporate structure supports digital

·· Sephora innovation lab
·· Other digital initiatives
10 The offline experience: Sephora’s in-store retail tech

·· Current in-store technologies

·· Next iterations of Sephora’s in-store tech
21 Brand support & incubation

·· Sephora Accelerate
·· Kendo brand incubator
·· Sephora’s private label
26 Content, online communities, & influencer marketing

·· Influencer marketing
·· Exclusive product launches
·· Beauty insider program
31 Risks & competitors

39 Concluding thoughts

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Sephora & LVMH:
How Sephora boosts
its parent company’s
selective retailing strategy
It’s impossible to predict where Sephora is headed next without
first looking at the relationship between Sephora and its parent
company LVMH, a Paris-based luxury conglomerate.

LVMH originally acquired Sephora in 1997 to enhance its

distributorship of perfumes and beauty products. Sephora had
54 retail stores with nearly 1,500 employees at the time of its
acquisition, according to Business Wire.

Today, LVMH claims that the beauty giant has grown to

approximately 2,300 retail stores with 30,000 employees,
operating across 33 countries.

Sephora sits in LVMH’s Selective Retailing division, which aims

to “transform shopping into a unique experience” across beauty
retail (Sephora), travel retail (DFS and Starboard Cruise Services),
and department stores and food concepts (Le Bon Marché
Rive Gauche and La Grande Epicerie de Paris). These segments
focus on luxury products, in-store services, digitization,
and personalization.

Sephora is a strong revenue driver and a standout within

the division. According to a Q2’16 earnings call, Sephora
represented about 45% of LVMH’s business in the United States.
The conglomerate noted in its 2017 results that Sephora has
continued to gain market share, with particularly strong growth in
North America and Asia (partially enabled by LVMH’s acquisition
of Singapore-based beauty e-commerce platform Luxola in 2015).

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Additionally, Sephora is pursuing expansion of its online presence
in Scandinavia, Mexico, and the Middle East.

In terms of physical stores, it launched its first Germany-based

store in 2017. The company also began expansion in India at the
beginning of 2018, with plans to open 8 — 10 more stores in the
country over the next 3 — 4 years. Sephora has also expressed
interest in building out a location in New Zealand.

Source: LVMH 2017 Annual Results

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Today, Sephora offers a distribution funnel for LVMH perfumes
and cosmetics brands such as Givenchy, Yves Saint Laurent,
Fresh, and Benefit Cosmetics, as well as for brands incubated
in its beauty brand incubator Kendo (which we discuss
further below).

In fact, Sephora has been critiqued for dedicating the majority

of its store spaces to LVMH-owned brands over those of other
beauty conglomerates like Estée Lauder and L’Oréal.

Source: Wall Street Journal.

Though Sephora serves as a distribution channel for brands

in LVMH’s Perfumes & Cosmetics division, it remains largely
separate from its other sectors, including Fashion & Leather
Goods and Wines & Spirits.

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This could begin to shift with the advent of luxury e-commerce as
well as the need to ward off Amazon.

Despite LVMH’s high profile misstep with its eLuxury platform

back in 2009, the conglomerate could explore new ways to
build off Sephora’s technological capabilities in other LVMH
sectors — especially as luxury companies look to upgrade the
in-store experience.

On the tech front, LVMH has been particularly active over the
past year, building a multi-brand online shop, launching a $50M+
venture fund dedicated to emerging luxury brands, and starting a
Luxury & High-Tech program with Paris-based incubator Station F.

With increased technology investments and activity, LVMH could

leverage Sephora’s success to provide a model for how LVMH
could bridge offline and online retail for other LVMH-owned
luxury goods, such as watches, jewelry, wines & spirits, and more.

However, LVMH may not be quick to rush into such digitization,

given that Sephora’s brand is premium, but not explicitly luxury.

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Sephora’s digital
transformation
Sephora was an early e-commerce player when it launched its
first website in 1998.

According to a 2014 HBR interview with Sephora’s Former CMO

& Chief Digital Officer Julie Bornstein, the company’s original
website was mostly outsourced, and establishing in-house web
development was crucial to catapulting the company into a
digital future. The revamped website aimed to offer better visuals,
product information, and communication mechanisms for clients.

Source: Connoir and Wayback Machine

With its in-house team, Sephora has become more agile, easily
adapting its web and mobile platforms to meet customer needs.

While Sephora was a relatively late mobile adopter, only rolling out
its platform in 2010, mobile is crucial to helping Sephora clients
get the most out of their beauty shopping experience.

Sephora Virtual Artist (discussed further below) is one way the

company uses technology to solve the pain point of wanting to try
on makeup easily, without the mess.

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Mobile ultimately serves as an aide for beauty inspiration and
personalized experiences, bridging the gap between online and
in-store shopping.

However, Sephora would never have successfully executed its

early digital initiatives had it not made digital an executive priority.

Digital is embedded in Sephora’s

company structure
Sephora combined its traditional marketing and digital marketing
divisions in 2013. CMO and Chief Digital Officer Julie Bornstein
led the team, thus ensuring digital was concentrated in company
leadership.

I believe that if you’re going to be a

successful retailer — or business in
general — digital must be enmeshed
at the highest level
Julie Bornstein
FORMER CHIEF MARKETING OFFICER &
CHIEF DIGITAL OFFICER, SEPHORA

Last October, Sephora took an even bigger step towards digital

retail by merging its in-store and digital retail teams to create
one omni-retail department.

According to Sephora EVP of Omni Retail Mary Beth Laughton,

customers seek entertainment and aren’t consciously thinking
about channels. It’s up to retailers to make it as easy as possible
for customers to switch back and forth between mediums.

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According to Glossy, this shift has allowed Sephora to rethink its
omni-channel strategy and execute a number of improvements,
including:

·· Revamped customer profiles. with both in-store and online

data (e.g. online and in-store purchases, interactions with
beauty associates, etc.)
·· Redefined metrics based on consumer behavior. leading up to
a sale (e.g. number of customers who browsed online and
purchased in-store, etc.)
·· Blended benefits that integrate online and in-store loyalty perks
(e.g. personalized product recommendations based on what a
customer browsed online and in-store)
In addition, the newly formed team has a subgroup that focuses
on linking physical and digital retail experiences.

For example, after in-store makeovers, makeup artists now

download beauty products to a customer’s profile, which
customers can use to shop online or in-store. Additionally,
Sephora Virtual Artist users who try makeup on in the app
can purchase products online or locate them in stores.

Sephora innovation lab scouts retail

tech opportunities
The company’s US headquarters in San
Francisco — an unusual choice for a retailer —
offers proximity to Silicon Valley and a quick
turnaround time for digital initiatives.

San Francisco also houses the Sephora

Innovation Lab, launched in 2015 to help the
company explore technologies that could be
leveraged across web, mobile, and in-store to
create a more integrated shopping experience.

The lab is a testament to Sephora’s culture

of experimentation.

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Using a cross-functional team, the lab primarily scouts
technologies that help educate clients about products and
application techniques. According to Fast Company, the lab’s
launch coincided with the launch of several other digital initiatives,
including beacon technologies (enabling personalized alerts)
across Sephora stores, mobile Pocket Contour tutorials based on
user selfies, and Sephora Flash for free two-day shipping. More
recently, the Sephora Virtual Artist mobile app came out of the
Innovation Lab.

The lab also showcases the importance of timing when it comes

to integrating technology in retail.

According to senior director of Sephora’s Innovation Lab Johnna

Marcus, when Sephora decides to pass on certain technology,
it’s usually because the timing isn’t right (reported by L2). For
example, the Sephora To Go app initially launched in 2010, but
app features such as video and product scanning didn’t gain
traction until a few years later due Wi-Fi limitations.

Other digital initiatives

From its early adoption of Apple Pay to beacon testing, Sephora
has long partnered with big tech to serve its clientele. The
company has focused on a number of different digital initiatives
to stay ahead of the competition.

TARGETED ADVERTISING FOR PRODUCT DISCOVERY

Sephora has increased its big tech partnerships to boost targeted

advertising and personalized shopping experiences.

The company recently launched a campaign with Facebook’s

Collection ads in lieu of its normal holiday print catalog, in
order to enhance product discovery. Based on user preferences,
Facebook’s Collection ads serve variations of 70+ beauty
products underneath a sponsored video.

Digital investments are also helping Sephora expand to new

markets and localize consumers’ shopping experiences.

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In March 2018, Sephora launched a Europe-focused partnership
with Salesforce to help personalize the shopping experience
based on consumer preferences, using data on geographic
regions, customers’ previous purchases, cosmetic preferences,
and more. The partnership has also allowed Sephora to
customize its site experience with different languages and
currencies to enable a deeper level of personalization.

VOICE AS THE NEXT FRONTIER FOR BEAUTY BRANDS

With the increased traction of Alexa and Google Home, beauty

companies must master voice-based shopping to ensure their
brands remain top of mind for consumers.

In November 2017, Sephora launched its app on Google Assistant

with features to book beauty services, take quizzes, and listen to
influencer-curated beauty podcasts.

Beyond client entertainment and engagement, this also helps

Sephora gather data on consumer preferences.

The use of voice assistants … has turned

out to be more than just a fad. It’s paving
the way to a minor digital revolution, of
which Sephora wants to be a pioneer.
Anne-Véronique Baylac
CHIEF DIGITAL OFFICER
SEPHORA EUROPE AND MIDDLE EAST

Sephora will continue to expand Google Assistant

functionalities in 2018, especially as voice becomes
a key channel for consumers.

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3
The offline experience:
Sephora’s in-store retail tech
Sephora’s management team has made it clear that while digital
is a crucial part of the company’s strategy, it must serve Sephora’s
core purpose of unlocking its clients’ beauty potential.

Consumers are looking for retail stores to

be creative spaces. They are looking for
experiences. Digital is a critical element
in retail — however, it is not just for the
sake of adding new, cool technology. Our
intention is to help our clients.
Bridget Dolan
SVP OMNI EXPERIENCE & INNOVATION, SEPHORA

CURRENT IN-STORE TECHNOLOGIES

With that in mind, Sephora has pioneered a variety of in-store

technologies for beauty enthusiasts.

BEACON TECHNOLOGY OFFERS LOCATION-BASED CONTENT

While not a new offering, beacon technology allows Sephora’s

app to recognize when a user is in a store and then serve up
an in-store map, daily promotions, and the customer’s online
shopping cart and wish list. This allows for a more personalized
and engaging shopping experience.

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 Source: BuzzFeed News

For example, Sephora could send tailored offers to shoppers

spending time in a particular cosmetics section. This method,
however, is only possible if customers enable beacon
notifications on their phones.

SOCIAL SHOPPING PLATFORM FACILITATES

COLLABORATIVE BEAUTY BROWSING

Launched in 2014, Sephora’s Beauty Board

offers a Pinterest-like social media platform
where users can post, like, and tag different
looks and share them with Sephora’s
beauty community.

Users can post photos and filter through

trends and keywords to find specific looks.
The platform can also be seen in stores on
digital screens featuring shoppable content.

Sephora’s Beauty Board

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CHATBOT & IN-APP VOICE CONTROL ENABLES
CONVERSATIONAL COMMERCE

Sephora was the first beauty brand — and one of the first retailers
— to adopt chatbots for conversational commerce to spark more
natural-feeling communication between the store and its clients.

At Sephora, our goal with digital tools

and innovation is always to meet the
client where she already spends her time,
which is why the Messenger platform
capabilities appealed to us. We were
excited about combining ease and utility
for Sephora reservations — enabling our
clients to book a makeover with us in
seconds, just by messaging Sephora.
Mary Beth Laughton
EVP OMNI RETAIL, SEPHORA

In partnership with Facebook, Sephora launched Sephora

Assistant, a bot for Messenger, in November 2016 to help
clients easily book makeovers. According to Facebook, Sephora
Assistant achieved an 11% higher booking rate and cut 5 steps in
the traditional makeover booking process.

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Sephora Assistant chatbot and targeted advertisement for makeover booking

Beyond Sephora Assistant, the company partnered with

teen-focused messaging app Kik in 2016 to build a branded
chatbot to reach a younger demographic.

Sephora even experimented with a digital rewards program using

Kik Points, where users earned points by performing tasks such
as watching video ads. Users could then bid points for deluxe
samples of Benefit Cosmetics, which helped the company glean
insights on consumer behavior.

AUGMENTED REALITY ALLOWS VIRTUAL MAKEUP TRY-ON

Sephora leverages augmented reality for both in-store and

in-app makeup trials.

Sephora’s Innovation Lab tracked the augmented and virtual

reality space for a few years before launching its Virtual Artist
app in 2016.

The mobile app allows users to virtually try on makeup. The app
added augmented reality features — such as the ability to try on
lip colors and lashes — in 2017.

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Sephora Virtual Artist app

Notably, Sephora partnered with AI and AR app provider ModiFace

(recently acquired by L’Oréal) to launch both its mobile app and
in-store 3D augmented reality mirror.

In May 2018, Retail Dive reported that Sephora, along with Nike
and other retailers, would be beta testing virtual makeup try-on
with AR effects for Messenger.

FACIAL SCANNING HELPS BEAUTY SHOPPERS FIND

THE PERFECT COLOR MATCH

Finding the right foundation shade is a major pain point for

beauty shoppers.

Sephora knew this back in 2012, and aimed to improve customer

experience through the launch of Color IQ in partnership with the
Pantone Color Institute.

Color IQ helps shoppers identify foundation and concealers that

match precisely match their skin tones. The beauty service scans
a customer’s skin and assigns it a Color IQ number. The number
can then be used in stores or applied to customers’ Beauty Insider
accounts in-app and online to personalize product assortment.

Color IQ is also being leveraged as a loyalty tool. Customers who

have had an in-store skin scan receive a follow-up email that lists
matching products based on the user’s foundation match and
color key.

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By locking a customer’s perfect color match to Sephora’s in-store
and online platforms, customers are more incentivized to
exclusively purchase foundation at Sephora.

SKINCARE IQ PERSONALIZES SKINCARE

RECOMMENDATIONS

Skincare has been a major revenue driver for Sephora, thanks

to high-momentum brands such as Drunk Elephant (Sephora’s
top-growing skincare brand in 2016).

This trend shows no sign of letting down, with skincare sales

surging higher than makeup sales, according to The NPD Group.

Sephora was ahead of the curve on skincare when it launched

its Skincare IQ platform in 2012.

Skincare IQ features a quiz that

searches Sephora’s vast array of
ingredients and formulations to
recommend matches for clients’
specific skincare concerns.

Down the road, Sephora could

apply scanning technology similar
to ColorIQ to enhance its skincare
analysis and further personalize the
service for clients.

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A patent filed by LVMH titled “Method to measure skin
elasticity and firmness,” granted in 2017, details a device that
measures skin elasticity and firmness before, during, and after
a cosmetic treatment.

FRAGRANCE IQ & INSTASCENT CREATE IN-STORE

SENSORY EXPERIENCES

In 2014, Sephora launched its Fragrance IQ system, where

shoppers answer a questionnaire on an in-store digital screen
to find a fragrance match based on perfume preferences
and lifestyle.

Sephora’s Fragrance IQ

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In 2015, Sephora furthered its fragrance technology by partnering
with cloud-based scent system Inhalió to develop InstaScent. The
sensory technology uses a dry air delivery system that lets users
explore fragrances emitted from a nozzle.

Users can now smell up to 18 scent families without needing to

try them on.

NEXT ITERATIONS OF SEPHORA’S IN-STORE TECH

If there’s one thing to know about Sephora, it’s that the company
doesn’t get complacent.

It hasn’t been easy, but Sephora has

moved to make digital as important as
the physical product in our stores. We
also try to think like customers — how
would I want to shop, what would make
my experience better, how do my kids’
interactions with technology predict the
future?
Julie Bornstein
FORMER CMO & CHIEF DIGITAL OFFICER, SEPHORA

Sephora will likely continue expanding its in-store technologies

for experiential retail through its Innovation Lab. Based on
current beauty trends, we could see Sephora explore some of
the following opportunities.

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BEAUTY DEVICES

Advances in IoT, artificial intelligence, and other technologies are

enabling the rise of a diverse array of beauty devices.

This market is expanding, with companies like Foreo, HiMirror, and

others offering an assortment of high tech beauty devices from
smart beauty mirrors to skin diagnostics platforms.

Sephora has been capitalizing on the trend through its various

beauty device offerings, targeting hair removal, facial cleansing
and steaming, light therapy for anti-aging, and more.

As at-home beauty devices become more popular, we can expect

Sephora to continue expanding its selection of beauty devices to
enable consumers’ connected beauty routines.

NEW USE CASES FOR AR AND AI

As companies increasingly leverage AR/VR for employee

training (as seen with Estée Lauder’s partnership with Perfect
Corp to launch an AR training program), Sephora could consider
expanding its AR technology to help train beauty associates on
new products, technologies, and makeup application tips.

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[Digital] is woven into While there was some question of whether Sephora would cease
working with ModiFace after its recent acquisition by L’Oréal,
the service model according to WWD, Sephora still plans to use ModiFace’s technol-
and all of our beauty ogy to power the Sephora Virtual Artist program in its app. The
company has even claimed that due to increased awareness of
advisors are trained AI and AR technologies from the ModiFace acquisition, Sephora’s
to feel equally app has seen greater engagement.

comfortable working With potential concerns over a competitor having access to

customer data, Sephora could eventually find a different partner
with our digital tools or even acquire a bigger AR/VR company to enhance its virtual
as they are with try-on capabilities.

brushes and FURTHER IN-STORE PERSONALIZATION

cotton swabs. As beauty devices and personalized cosmetics have gained

traction, as seen with L’Oréal’s foray into made-to-measure
— Deborah Yeh cosmetics with LTP and Custom D.O.S.E., Sephora could also take
SVP MARKETING & BRAND, advantage of the trend.
SEPHORA
Rather than suggest existing products, the company could look to
build cosmetics tailored to shoppers and their unique concerns,
from skincare to lip care and more.

Though Sephora hasn’t announced plans to pursue such an

initiative, this could be an area for the company to capitalize on,
thanks to increased consumer desire for personalized cosmetics.

BRINGING THE SEPHORA EXPERIENCE TO THE

DEPARTMENT STORE

Sephora has expanded its in-store beauty retail experience

beyond its proprietary stores.

JCPenney’s partnership with Sephora has been an anchor for

JCPenney’s physical retail experience. Though the department
store plans to downsize its retail footprint, it still plans to open
approximately 30 more Sephora shops inside JCPenney stores
this year.

Frequently cited in JCPenney earnings transcripts, the Sephora

partnership has been a huge driver of in-store visits and sales for
the department store. According to Fortune, 2016 annual sales
per square foot in Sephora shops in JCPenney were between
$500 and $600 — more than 3x the JCPenney average.

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According to CB Insights’ Earnings Transcripts tool, JCPenney
has mentioned Sephora on its earnings calls 234 times since
2008. Notably, this is significantly more mentions than the 139
times LVMH mentioned Sephora over the same period.

With plans to open 30 more Sephora shops in 2018, JCPenney

is leveraging Sephora’s beauty retail model for in-store customer
engagement during a time when department stores are struggling
to remain relevant.

Sephora in JCPenney

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4
Brand support & incubation
Nabbing shelf space in Sephora, amidst its vast product
assortment of 300+ brands, equates to hitting the jackpot for
up-and-coming beauty brands. A quick Google search shows
hundreds of articles and forums full of beauty brand executives
and cosmetic formulators seeking tips for selling into Sephora.

Sephora’s beauty retail model relies on both partnering with and

incubating beauty brands. The company has a few engines to
support its ever-expanding product assortment, including:

·· Sephora Accelerate, which supports smaller beauty brands that

could potentially be sold in Sephora stores
·· Kendo, which incubates proprietary brands to distribute
in Sephora
·· Sephora Collection, Sephora’s private label line
We dive into all three initiatives below.

SEPHORA ACCELERATE SUPPORTS FEMALE

ENTREPRENEURS, SCOUTS UP-AND-COMING BRANDS

Sephora Accelerate — which is part of the company’s larger social

impact initiative, Sephora Stands — launched its first cohort in
2016 to help empower female beauty entrepreneurs, who are still
largely underrepresented in the industry.

The company offers nominal funding for 8 –10 selected startups,

which then participate in a week-long beauty boot camp featuring
workshops, events, and mentorship opportunities, culminating in
a final Demo Day.

Not only does this allow Sephora to support female entrepre-

neurs; it also helps the company scout out high-momentum
brands that Sephora could distribute.

Though not all brands make it onto Sephora’s shelves (to date,
only organic skincare brand LXMI, essential oils company Vitruvi,
and ethical fragrance brand The 7 Virtues have done so), the
company offers participants ongoing mentorship and networking
opportunities.

Participating companies can also receive funding from Sephora

to help their brands grow. For example, Sephora Accelerate
loaned castor oil-based beauty brand Kreyol Essence $50K in
2017 to help it prepare for distribution at Whole Foods.

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Sephora recently announced its 2018 cohort, which taps into
many current beauty trends, including:

·· Personalized skincare (Proven)

·· Inclusive beauty (Mented Cosmetics)
·· Cannabis-based beauty (Ho Karan)
·· Hardware devices for at-home cosmetics (BeautyMix)

KENDO INCUBATES GLOBAL BEAUTY BRANDS

Sephora doesn’t only support indie beauty brands: it also

incubates a number of well-known brands through its beauty
brand incubator Kendo.

Kendo was started by former Sephora Americas CEO David

Suliteanu in 2010 and is now part of LVMH’s Perfumes &
Cosmetics groups. Kendo incubates brands such as Fenty Beauty,
Kat Von D, Marc Jacobs, and Bite Beauty, which are sold in
Sephora and other outposts.

Kendo aims to turn these brands into global beauty powerhouses.

Notably, the launch of Fenty Beauty by Rihanna in September
2017 triggered an industry-wide shift towards inclusive beauty
products for a diverse array of skin tones.

Further areas of exploration for Kendo could include expanding

its assortment of inclusive beauty brands or even men’s grooming,
given the momentum in these areas.

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SEPHORA’S PRIVATE LABEL AIMS TO SIMPLIFY BEAUTY
SHOPPERS’ EXPERIENCES

Sephora’s private label (launched circa 2002) plays a key role in

attracting shoppers and controlling pricing and inventory.

Sephora Collection is Sephora’s most affordable line, with a range

of nearly 500 products including makeup, skincare, fragrance,
beauty tools, and more.

The company rebranded Sephora Collection in 2016, reviving

the private label to become more millennial-friendly and have a
better-defined scope.

Now, Sephora positions the brand as a sort of a gateway drug to

introduce novice beauty shoppers to its collection, with the idea
that they could eventually graduate to premium brands.

With the slogan “Beauty Uncomplicated,” Sephora Collection

aims to simplify the potentially overwhelming beauty shopping
experience, making it more affordable and approachable.

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The lady at the counter Sephora’s product discovery features invite clients to let Sephora
guide them through the shopping experience. Shoppers can easily
has been replaced by customize product recommendations by very specific criteria,
hundreds of people such as product type, finish, and longevity.

on YouTube. There The feature’s use of natural, straightforward language makes

decision-making very easy for makeup novices. After all, it seems
are more voices. And more effective to ask shoppers what results they want, rather
we are trying to cut than trying to gauge specific products or ingredients they’re
looking for.
through the confusion.
Sephora Collection also caters to customers who want to curate
— Deborah Yeh recommendations by more specific criteria. Upon searching
SVP MARKETING & BRAND, “Sephora Collection” within the mobile app, users can filter by cri-
SEPHORA teria including age range, beauty benefits, concerns, formulation,
price, and more.

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Sephora has also promoted Sephora Collection in millenni-
al-friendly environments like Coachella, where it was the music
festival’s official beauty sponsor this year. Sephora offered
free hair and makeup touch-ups and festival-inspired looks for
Coachella-goers in a Wi-Fi-enabled, air-conditioned tent.

Sephora tent at Coachella 2018

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5
Content, online communities,
& influencer marketing
Beauty aficionados, especially those who download Sephora’s
app, are some of the most loyal customers.

In an industry where trends change faster than the blink of an eye,

fresh content is crucial to keeping customers engaged and up to
date on the latest beauty trends.

Daily content and location-based messages promote limited

edition products, deals, and educational materials for shoppers,
with the aim of enticing users into Sephora stores.

According to SVP of marketing & brand Deborah Yeh, it’s all about
fostering a two-way conversation between Sephora and clients.
This could take the form of promoting social media events with
brand founders online, or other live social media events.

In Los Angeles in December 2016, Sephora launched an in-house

content studio that offers services for photo shoots, video
production, and more. According to Glossy, this allowed Sephora
to produce nearly 400 videos in 2017 — 90% more social media
videos than the year before. Yeh also notes that Sephora’s social
strategy consists of three pillars:

·· Teaching: Guiding clients through their beauty questions

·· Humor: Employing a humorous, relatable voice on
social channels
·· Community: Fostering community to help clients engage
with Sephora and each other

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 Increasingly When it comes to beauty content, Sephora often lets products
speak for themselves. Beauty being a sensory-driven experience,
consumers want mobile and online content highlights visuals whenever possible.
pictures over words … SEPHORA’S INFLUENCER MARKETING STRATEGY FOCUSES
if you look at our site, ON AUTHENTICITY

we lean far further Influencers have become essential to distributing beauty content
to a wide audience.
toward visually-led
At the same time, influencer engagement has become an
merchandising increasingly tricky space for brands to navigate.
than the more According to Nandini Joshi, VP of e-commerce, marketing, and
editorial skew of customer innovation at Sephora SEA/AU, Sephora must balance
nurturing influencers’ creative talent to cultivate authentic voices
our competitors. while also recognizing that influencers aren’t employees and
— Ian Rogers can’t be treated as such.

CHIEF DIGITAL OFFICER, LVMH Sephora’s influencer marketing strategy goes beyond just tracking
influencer-generated traffic, considering factors like influencer
brand equity and social sentiment for a more holistic view.

Additionally, Sephora has revamped its influencer marketing

strategy to focus on long-term influencer relationships instead
of working with influencers on an ad-hoc basis.

According to Glossy, Sephora’s influencer marketing

program consists of brand ambassadors complemented
by “micro-influencers.”

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For 2018, influencers are focusing on promoting Sephora
Collection’s latest lipstick launch #LIPSTORIES with monthly
themed digital content, including a six-part podcast co-created
with Girlboss Media to advertise the line.

Beyond paid influencers, Sephora has harnessed the power of

using its own employees as influencer marketers, similar to
efforts by companies like L’Oréal and Glossier, among others.
For example, Sephora’s Holiday 2017 campaign featured its own
employees instead of professional models.

EXCLUSIVE PRODUCT LAUNCHES CREATE HYPE

Building anticipation — whether through influencers, Beauty

Insider sales, or distributing new beauty brands — is something
Sephora does extremely well.

The limited-edition mentality allows Sephora to commission

exclusive product launches from popular beauty brands.

In March 2018, Sephora partnered with 6 of its best-selling

brands, including Urban Decay, Tarte, and Pat McGrath, for “First
at Sephora,” which exclusively launched these new products in
Sephora’s stores.

For initiatives like these, digital content is crucial to creating buzz.

Custom educational content across multiple social media

channels accompanied the release of these products to make
them even more of a must-have for Sephora shoppers.

Sephora reported high engagement rates with videos around

these exclusive products, with a seven-day organic performance
that was 224% above Sephora’s average views, according
to Glossy.

Not only can exclusive product

launches build hype; they
can also serve as a tool to
ward off against competition
like Amazon.

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BEAUTY INSIDER PROGRAM CULTIVATES DEEP LOYALTY

Influencers and exclusive cosmetics contribute to a “beauty

FOMO culture” where consumers just have to get their hands on
the latest beauty products as soon as possible.

For these ultra-dedicated beauty shoppers, loyalty programs

reward such purchasing behavior.

Sephora’s Beauty Insider program is one of the most well-known

rewards marketing programs across retail and e-commerce.
Unlike Ulta Beauty’s rewards program, where points can
immediately be applied towards purchases to entice budget
shoppers, Sephora’s loyalty program isn’t as focused on helping
clients save money.

Instead, being a Sephora Beauty Insider is more about being part

of an elite beauty community, with access to exclusive launches
and deals.

Feeding into this elite community mindset, multiple tiers have

proven to be a successful strategy for Sephora’s Beauty Insider
Program. Tiers include:

·· Insider (free)
·· VIB (shoppers who spend $350+ in a calendar year)
·· Rouge (reserved for shoppers who rack up $1,000+ in
purchases within a year)
Other Beauty Insider features include personalized product
recommendations and beauty services.

Beauty services such as free skincare classes or makeover

services align with Sephora’s ethos of luxury and prestige beauty.

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Additionally, the platform offers tons of community features
to help shoppers forge personal connections with like-minded
beauty enthusiasts and build loyalty to Sephora.

With Sephora’s newly combined in-store and digital teams,

merged in-store and online perks are all about inspiring greater
customer loyalty and keeping Sephora shoppers coming back
for more.

The power of using … data to better

appeal to her at every touchpoint and
understand her in a deeper way enables
us to create these experiences that she
cares about across our channels. Loyalty
is a data-driven ecosystem, so that’s
hugely powerful.
Mary Beth Laughton
EVP OMNI RETAIL, SEPHORA

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6
Risks & competitors
The beauty industry is having a big moment right now, thanks to
the better-for-you-movement and the rise of clean beauty, among
other factors.

This signals increased competition for Sephora.

Below we outline some of Sephora’s main competitors, from

established incumbents to smaller up-and-coming players.

ULTA & OTHER BEAUTY RETAILERS BRIDGE PRESTIGE

BEAUTY WITH MASS APPEAL

Ulta Beauty is Sephora’s most obvious — and arguable,

fiercest — competitor.

Though often compared to Sephora, Ulta has historically offered

a different value proposition, focusing on a wider assortment of
beauty brands that combines both drugstore and prestige
products. The retailer relies on salon services to bring in
customers and increase loyalty.

And Ulta is growing. The company’s e-commerce grew more than

60% in 2017, and it increased its share in the prestige beauty
category from less than 8% in 2013 to over 13% in 2016.
According to Euromonitor, Ulta is now the biggest specialty
beauty retailer in the United States.

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And it’s starting to threaten Sephora’s dominance in
prestige beauty.

Recently, Ulta brought in Chanel Beauty, signaling the Chanel’s

desire to connect with a younger demographic. Additionally,
Deciem’s cult skincare brand The Ordinary is reportedly leaving
Sephora for Ulta, due to payment issues.

Other competing beauty retailers include Macy’s-owned

Bluemercury and Manzanita Capital-owned Space NK, which
focus more on the neighborhood beauty store segment. While
they also make luxury beauty offerings, these players have a
much smaller physical and digital footprint than Sephora.

CLEAN BEAUTY RETAILERS TARGET CONSUMER DEMAND

FOR BETTER-FOR-YOU BEAUTY PRODUCTS

Clean and green is all the rage in beauty today.

Niche retailers focusing on the natural and organic beauty

segment have exploded in recent years. CAP Beauty, the
Detox Market, Credo Beauty, Cos Bar, and others are targeting
consumers that want more transparency on their products,
ingredient sourcing practices, and more.

These niche retailers are expanding their physical

retail footprint and could eventually gain market
share over Sephora as consumer preferences veer
towards natural and organic beauty.

Sephora was an early recognizer of consumer

demand for natural brands and today has an
expansive natural beauty assortment featuring
on-trend brands such as RMS, Tata Harper,
Herbivore Botanicals, and others.

While Sephora offers many natural products, its

stores are by no means devoted only to clean beauty brands.
Going forward, Sephora may continue placing a greater emphasis
on its clean beauty assortment as this trend continues to grow.

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As digestion and gut health also rise as a beauty and wellness
trend, Sephora has launched an inner beauty category featuring
probiotics, collagen, and other supplements by brands such as
HUM Nutrition, The Beauty Chef, and others.

E-COMMERCE PLAYERS TRY TO EAT SEPHORA’S LUNCH

Sephora has been able to “Amazon-proof” its stores through a

combination of its prestige beauty emphasis, tech-enabled offline
experiences, beauty services, loyalty programs, and more.

But it’s no secret that Amazon’s been attempting to make strides

into luxury beauty.

LVMH hasn’t historically considered Amazon a competitor to

Sephora (at least according to a Q2’17 earnings call, when
LVMH noted that Sephora is ahead of peers such as Macy’s and
Amazon in both online and in-store perfumes and cosmetics
distribution in the US).

But this will likely change as Amazon more aggressively pursues

luxury beauty shoppers.

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Compared to Sephora’s fierce competition for shelf space,
Amazon’s low barrier to entry is incentivizing up-and-coming
luxury beauty brands to distribute on Amazon.

In fact, Amazon just announced that it will launch an Indie Beauty

Shop within its Marketplace this June.

And with free two-day shipping on Prime, Amazon encourages

replenishment shopping.

Sephora responded to this threat early on in 2015 with the

launch of its own Prime-like shipping service. A Sephora Flash
membership allows Sephora shoppers to pay $10 for free,
unlimited two-day shipping service for a year’s worth of
beauty products.

In addition to offering competing products and distribution

channels, Amazon, with its recent foray in AR technology,
could also offer a service similar to Sephora Virtual Artist,
where Amazon shoppers could use an AR app to try
on makeup.

Beyond Amazon, luxury retailers like Net-a-Porter could also

threaten Sephora’s dominance in the prestige beauty category.

Net-a-Porter’s beauty sales have grown 10x since its 2013 launch,
with beauty becoming an increasingly important category and
revenue driver for the company.

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In fact, Net-a-Porter’s beauty section looks remarkably similar to
Sephora’s website.

Beyond its beauty traction, Yoox Net-a-Porter’s recent launch of

an online high-end jewelry platform could propel LVMH to use
Sephora’s model as inspiration for e-commerce initiatives across
its other luxury goods divisions.

RETAILERS EXPERIMENT WITH BEAUTY

SUBSCRIPTION MODELS

Beauty subscription box competitors like Birchbox and Ipsy are

also worth noting.

However, hedge fund investor Viking Global Investors just bought

majority ownership of struggling Birchbox, sparking concerns
over the efficacy of the beauty subscription box model.

Ipsy has been more successful in monetizing certain aspects of

its business. According to Fast Company, Ipsy not only makes
money from its subscription boxes, but also from influencer-
generated advertising revenue and from brands whose products
are featured in Ipsy’s monthly boxes.

Retailers such as Walmart, Macy’s, and others have also launched

their own beauty boxes in efforts to engage customers.

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Sephora released its own subscription box in 2015, but with a
twist. For $10 a month, Play! By Sephora (only available in the US)
aims to embed an experience within a monthly subscription box
by combining products, beauty guides, video content, and passes
to visit Sephora stores for tutorials and events.

The box aims to engage customers via online and offline content
and drive them to Sephora stores, which differentiates the product
from traditional e-commerce subscription boxes. Despite some
mixed reviews, feedback on Play! has been generally positive on
Sephora’s Beauty Insider forums.

FASHION RETAILERS FORAY INTO BEAUTY

Apparel retailers are capitalizing on beauty to complement their

existing offerings and directly compete with beauty retailers
like Sephora. Stores such as Anthropologie, Urban Outfitters,
Madewell, and others have forayed into beauty offerings to
enhance their stores.

For example, Forever 21 launched dedicated beauty store Riley

Rose, which pairs beauty products and home goods in a Sephora-
like environment, while Free People offers a host of cosmetics
and wellness-focused products.

By catering to millennials and Gen Z beauty shoppers, these

retailers could begin chipping away at Sephora’s market share.

With beauty’s high margins and low barriers to entry, we will likely
see more retailers enter beauty and aim to compete with Sephora.

TRADITIONAL BRICK-AND-MORTAR RETAILERS PURSUE

BEAUTY SHOPPERS

Brick-and-mortar retailers are also beginning to compete with

beauty retailers by offering cosmetics at a more affordable price
point than most Sephora-distributed brands.

Target in particular has been making big strides in beauty.

Since 2017, Target has boosted its selection of natural beauty
products, including a partnership with Glow Recipe to develop a
private-label K-Beauty line, in efforts to become a one-stop-shop
for affordable cosmetics.

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The company also recently brought in eight new cosmetics
brands geared towards women of color, and just announced its
second cohort of 10 beauty startups in its mini beauty accelerator
Target Takeoff.

In addition to supporting startups, Target is also redesigning its

stores to make its beauty section look more like Sephora, with an
open floor plan to encourage beauty browsing with features like
brighter lighting and self-service counters.

Walmart is similarly upping its beauty presence to attract a more

affluent audience.

The retailer has revamped its beauty offerings with a $5 beauty

box, the upcoming launch of its online-only premium beauty brand
Co Squared, and increased partnerships with beauty and personal
care brands for distribution in Walmart stores.

NEW STORE FORMATS TO WARD OFF THE

RETAIL APOCALYPSE

Offering customers engaging retail experiences is crucial if

Sephora wants to avoid missteps taken by other retailers.

To do so, Sephora has been experimenting with smaller

store formats.

These stores, dubbed “Sephora Studios,” are designed to blend

into local neighborhoods to complement, not replace, the bigger
store formats.

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First launched in Boston and with a most recent store opening
in Hoboken, New Jersey, these Sephora Studios aim to foster
personalized connections between customers and beauty
associates. These new formats exclude certain elements such as
cash registers, allowing associates to process payments on their
phones for a more seamless experience.

Sephora Studio in Boston

This model could even target replenisher shoppers and combat

Amazon’s online luxury beauty business, while also catering to
consumers seeking a more intimate shopping experience.

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7
Concluding thoughts
Sephora has proven the value of its model not just for beauty
retail, but for retail at large.

At the heart of Sephora’s strategy, every technology, experience,

and product goes beyond simply delighting customers to
solve specific consumer pain points, from finding the perfect
foundation color match to seamlessly booking beauty services.

While Sephora has pioneered a future of tech-enabled retail, it

does face sizable competition with personal care conglomerates,
niche clean beauty retailers, big box retailers, apparel retailers,
and others capitalizing on beauty’s high margins. And of course,
retailers always face the looming threat of Amazon.

If Sephora can keep its laser customer focus, pace of innovation,

and guiding principles of testing, iterating, and learning, the
beauty trailblazer could stay ahead of the curve and continue
to push boundaries across cosmetics retail.

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