Sephora: Behind the Scenes of the Beauty Behemoth
Sephora’s competitive advantage in the prestige beauty space stems from integrated business and operating models that support the company’s broader objective to enhance the customer experience at every touchpoint.
Business and Operating Model Alignment
Sephora is a prestige beauty retailer that captures value by selling prestige products at a price above cost to consumers both online and in-store. The company has developed a competitive advantage amongst its peer group (department stores and other specialty beauty retailers) by employing a business model that is wholly focused on a superior holistic customer experience(1). Sephora creates value with business strategies that address existing and anticipated consumer needs more effectively than competitors. The company’s operational model facilitates the successful implementation of those business strategies that support the broader mission- in this way, the operational model serves as a sort of subgroup of the business model. While specific financial data is not available for Sephora as an LVMH subsidiary, the firm’s double digit revenue growth and operational model investments point to a strategy designed to achieve business model objectives versus a cost savings(2).
Business/Operating Model Details
Business Strategy–Consistent Shopping Experience
Sephora offers a uniquely consistent shopping experience across its brick-and-mortar, web, and mobile platforms with access to over 200 prestige beauty brands across product categories (skincare, makeup, fragrance, hair, and beauty devices). Graphics, promotions, and featured products are aligned on all customer interfaces, allowing for seamless browsing and purchasing regardless of format.
Supporting Operational Strategy–Combined Marketing Efforts
Unlike its competitors, the digital and traditional marketing efforts at Sephora are organized under the same department, fueling collaborative decision making(3). In contrast, most peers historically operated online businesses in a silo, resulting in a disaggregated consumer experience with inconsistent discounts and product placement (e.g. a serum featured in-store may not be highlighted on the website; integrating the business units has proven challenging for most. The joint reporting structure of the Sephora marketing teams has granted the company a competitive advantage as consumers purchase across physical and digital platforms.
Business Strategy—Leveraging Size to Enhance Product Offerings
Sephora leverages its strong reputation to attract new brand partners, control its competitive environment and gain product exclusivity rights to offer best-in-class product curation for consumers. A partnership with Sephora is highly sought after by emerging prestige brands. Given demand for shelf space, Sephora is discerning regarding brand expansion and ruthless in discontinuing underperforming products. Protective of its image, Sephora dictates to whom its brand partners can sell to avoid association with lower-end stores. The company negotiates for exclusive “made for Sephora” products and exclusive “early rollout rights” for new brand product launches.
Supporting Operational Strategy—Physical Store Design
Sephora stores are constructed to facilitate the brand showcasing, product trial, and cross-brand purchasing that contribute to Sephora’s reputation and negotiating power within the industry. Stores are designed for a consumer-led retail experiences with large aisles for group shopping and self-explanatory shelves organized by brand, product, and color. Endcaps feature either testable products or digital interfaces where consumers can obtain personalized information on recommended products. In traditional retail outlets, customers travel from counter to counter to learn about products, but the Sephora store design encourages simultaneous product experimentation.
Business Strategy —Customer Service Across Platforms
Sephora offers a superior customer service experience both in-store and online. In-store, Sephora employees are reputed for their deep product knowledge across brands, providing immediate customer assistance. Sephora released two programs on its website to address customer needs around product retrieval in 2015(4). In the US, Sephora announced 48-hour shipping for domestic orders. In France, the company launched “Click and Pick Up” service where customers can pick up their on-line orders at a local store within two hours.
Supporting Operational Strategy—Employee Training
To support its in-store customer service, Sephora requires employees to attend Sephora University, a comprehensive induction program where employees are schooled in beauty science, Sephora products, the Sephora Attitude (customer focused sales approach) and the Sephora Management Style(5). While the data is not publicly available, I imagine the recent 48-hour US shipping initiative’s and “Click and Pick Up” program have been facilitated by enhancements to Sephora’s inventory management strategy- I assume local stores and warehouses must hold greater inventory volume to meet expedited delivery or pick up.
Business Strategy —Interactive Beauty Technology
Sephora invested in technological solutions to address customer demands for targeted product recommendations to drive sales. Partnering with Pantone, Sephora developed Color IQ, an in-store interface that scans skin pigmentation to identify precise color matches across makeup brands(6). Sephora acquired the software company Scentsa to create an in-store touchscreen interface to assist consumers with fragrance purchases.
Supporting Operational Strategy—Sephora Innovation Lab
The Innovation Lab develops and tests new shopping technologies and foster a culture of innovation development throughout the organization. The Lab is responsible for ideating, experimenting, learning, and launching new technologies to support Sephora’s business strategy of delivering interactive beauty technology to address consumer needs(7). Select current projects include:
- Pocket Contour- a virtual makeup artist application that provides personalized guidance on contouring, a growing trend in beauty
- Beacons- an in-store alert program for customers who want timely, personalized messages around birthday promotions, loyalty program updates, and in-store trainings
- “Sephora’s Winning Formula: Highly Relevant Personalized Data” (Forbes, 2014): http://www.forbes.com/sites/johnellett/2014/09/14/sephoras-winning-formula-highly-relevant-personalized-data/
- LVMH First Half 2015 Results (LVMH Releases, 2015): http://www.lvmh.com/investors/publications/
- “How Sephora Reorganized to Become a More Digital Brand” (HBR, 2014): https://hbr.org/2014/06/how-sephora-reorganized-to-become-a-more-digital-brand
- LVMH First Half 2015 Results (LVMH Releases, 2015): http://www.lvmh.com/investors/publications/
- Sephora Website: http://www.wearesephora.com/Home/Page/Id/9-the-sephora-university.sls
- “Sephora Expands Digitial Palette with Pantone Color Matching Technology” (Branchannel.com, 2012) http://brandchannel.com/2012/07/26/sephora-expands-digital-palette-with-pantone-color-matching-technology/
- “Sephora Bets on Big Digital Growth with Disruptive ‘Experiences’” (Forbes, 2015) http://www.forbes.com/sites/barbarathau/2015/03/06/sephora-grooms-digital-leaders-with-innovation-lab-debuts-mobile-experiences/
Student comments on Sephora: Behind the Scenes of the Beauty Behemoth
Great job, Baker’s Dozen! This is a really interesting example. You laid out the business and operating models quite clearly.
A couple of thoughts:
1) Sephora is a unique example of a beauty retail concept that has extensive private label products. How do you think this will scale given its position in the broader LVMH organization, which includes a host of other beauty brands? Do you think it could eventually become a standalone brand? How would that impact its relationships with its suppliers?
2) It is remarkable that Sephora has no real direct comparables–the only one I can think of is Blue Mercury, which is significantly smaller in size. The only other “competitors” in terms of replaceable customer experiences are beauty departments in large department stores. Do you think there is room for a new entrant with a similar model?
3) I thought the Interactive Beauty Technology was especially interesting as a tool to drive sales among existing products. Its pigmentation reading technology reminded me of Mink, another product that aims to deliver high personalization in makeup choice, but does so by bypassing established brands. How do you think Sephora would view a product like Mink?
Thanks, HKrentzman- appreciate the comments! Below are some of my thoughts on your feedback
1) Sephora’s partnership with Marc Jacobs was the first time Sephora partnered with another LVMH subsidiary to expand its beauty line. Sephora already sells products under its Sephora Originals name. As you noted, Sephora is incredibly protective of its supplier-relationships. For a long time, department stores prevented brands carried on their beauty floors from entering Sephora (think Bobby Brown, Estee Lauder etc). So much of Sephora’s business model relies on its product mix so I do not think it will expand to become a beauty conglomerate. I believe this capability will continue to be used to facilitate strategic production partnerships
2) Sephora doesn’t have a direct competitor, but its peer group includes Ulta and Bluemercury. I do not think Ulta is a direct threat as it is slightly lower-end than Sephora. Bluemercury is better positioned to pose a competitive threat- acquired by Macys earlier this year, Bluemercury has seem tremendous store growth as it expands its brick and mortar presence. The customer value proposition is not identical- Bluemercury offers a smaller selection of brands on the high-end of prestige and offers beauty services at many locations- but it is the most likely to cause Sephora to respond competitively.
3) Sephora’s use of technology is to drive sales of its partner brands online and in-store. I do not think they would be supportive of an at-home DIY product that may divert sales from its partner brands. I can imagine Sephora carrying the product as a tween/teen gift for younger girls to experiment with at home.
Really interesting read and I appreciated the very clearly laid out flow.
I’m curious to see how Sephora evolves its operating and business models to address changes in the industry (e.g., personalization trend mentioned in the above comment, move away from brick-and-mortar stores). Based on your post, it seems that their Innovation Lab is hard at work thinking through these issues. Do you think they will be able to navigate challenges and sustain their double-digit growth?
I was reminded of Play! by Sephora – a new subscription box service that was launched to compete with Birchbox and other similar sample-based models. I do think Sephora is better positioned to differentiate in this area and create value (e.g., they can offer better samples based on their brand relationships vs startups like Birchbox), but I am not confident they can actually capture this value through increased online or in-store sales. I’d be curious to hear your thoughts on the subject.
Thanks, MM! Appreciate the comments!
To your first point, I am confident in Sephora’s ability to continue to sustain its outsized growth rate. Sephora has developed sufficient leverage with legacy and startup brands that I believe it will continue to anticipate and fulfill consumer needs. To your point, they are investing heavily in this effort through their formalized innovation efforts
To your second point regarding PLay!- there is a lot of discussion in the business community as to whether the subscription box model leads to real conversion, or if now that the model is so rampant and has lost much of its “newness allure”, its real value-add is in brand/product awareness. Sephora already offers many opportunities for product sampling- free with purchases in-store and on-line- so I imagine Play! will be used by the retailer to 1) asses consumer reactions to new products of existing brands before stocking inventory to carry in-store or on-line 2) experiment with new brands featured in-store and on-line, and 3) promote new product categories sold in-store and on-line (e.g. the recent growth of the prestige mask market)
Something I’ve always found fascinating about the cosmetics industry is how the success of individual products and product lines are materially varied across ethnic, cultural, and geographic lines, due to the nature of the products as semi-consumables and the differences in how various cosmetics look and feel on different skin types/tones. I understand why consistency of experience is an asset to Sephora in terms of building brand recognition and universalizing how consumers experience the store, but do you think they would be more successful if they tailored their product offerings, marketing efforts, and sales force training materials according to where a given store is located and/or the clientele to whom that location primarily caters? This might build even stronger brand loyalty because customers would perceive a heightened sense of luxury due to the custom and personalized nature of their visit to Sephora.