We may never buy cosmetics the same way again. Before, consumers flocked to brick-and-mortar stores, such as Sephora, to try on different foundations and eyeshadows and to seek the advice of experienced makeup artists. However, the growing adoption of internet and smart phones, increases in per capita income, and convenience demands are driving consumers out of malls and onto websites. In fact, the online perfume and cosmetics sales industry is forecast to grow at an average annual rate of 13.9% each year to $13.9 billion by 20211. In contrast, close to a third of all malls in the United States are slated to close in the next few years2.
In the face of this rapidly changing environment, Sephora is finding ways to attract and retain consumers and differentiate themselves from other competitors in the space. There is one challenge though. Online cosmetics shoppers lack the ability to physically try on makeup they want to purchase. To bridge this gap, the Company launched the Sephora Visual Artist application in partnership with technology company ModiFace earlier this year3. The new app applies ModiFace’s portfolio of skin and facial recognition technology to consumer photos and allows users to swipe through various shades of lipstick and false lashes4. In essence, users are able to “try-on” different products. As the user swipes through colors, the product name, brand, and price are shown on a banner at the top of the screen, encouraging the user to purchase items they like. To supplement this exploratory functionality, the app also includes a learning module. Users can experience step-by-step makeup application instructions for various looks using the same uploaded photo.
Sephora’s augmented reality may bring this strategic initiative further mainstream in the makeup industry and drive sales for the brand. According to Bridget Dolan, Vice President of Sephora’s Innovation Lab, “this is a significant expansion because we are adding elements that we know will help empower and educate our clients’ purchase making decisions, and they’re done in a way that is fun and engaging.”5 With over 9.5 million followers on Instagram and 14.9 million on Facebook, Sephora has an opportunity to engage these users and increase adoption of the application. In addition to increasing sales through its website, Sephora may see a decrease in the number of product returns as customers already know what the item will look like. Further, the app can help the Company gather more data points on product sales to better determine the right inventory levels and keep ahead of trends.
While Sephora has a first mover advantage with this technology, it must find ways to increase the stickiness of its customer experience. Michael Porter states, “as with the internet itself, smart, connected products reflect a whole new set of technological possibilities that have emerged. But the rules of competition and competitive advantage remain the same.6” Like its brick-and-mortar stores, how does Sephora prevent users from trying on products in the Virtual Artist and then subsequently purchasing from another online competitor?
Looking forward, there are several initiatives that Sephora can implement to create sticky and recurring customer relationships. Sephora already collects data through its loyalty programs and purchases. It can leverage this data to push relevant new product notifications to its mobile users. The Company can also bolster its private label Sephora Collection product portfolio and include them in the Virtual Artist application, thereby getting consumers to purchase from Sephora versus other competitors. Sephora can also offer promotions and specials to consumers who use the Virtual Artist and incentivize them purchase the recommended products. Lastly, the Virtual Artist app only offers lipstick and eyelash products. As the technology improves, Sephora should continue to add new products such as foundation, blush, bronzers, and eyeshadows. By having a full suite of makeup or a complete look, the user may be more inclined to purchase via one click versus searching multiple pages on another competitor’s website.
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 Britanny Cater, “Online Perfume and Cosmetics Sales in the US,” IBISWorld Industry Report (April 2016), IBISWorld, http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=5090, accessed November 2016.
 Time, “A Third of American Malls Will Close Soon,” http://time.com/money/4327632/shopping-malls-closing/, accessed November 2016.
 Luxury Daily, “Sephora Wields AI for New Wave Shopping Experiences, Innovating in Personalization,” https://www.luxurydaily.com/sephora-wields-ai-for-new-wave-shopping-experiences-innovating-in-personalization/, accessed November 2016.
 Luxury Daily, “Sephora Accelerates AR, AI Sales Tactics with New Products, Features,” https://www.luxurydaily.com/sephora-accelerates-ar-ai-sales-tactics-with-new-products-features/, accessed November 2016.
 Michael E. Porter and James E. Heppelmann, “Spotlight on Managing the Internet of Things, How Smart, Connected Products are Transforming Competition,” Harvard Business Review (November 2014), 8.