By Khadeeja Safdar and Sharon Terlep
As Sephora has emerged as the hottest retailer in luxury beauty,
cosmetics companies increasingly are losing out -- to Sephora.
The rapidly growing beauty chain has been on a tear, opening new
stores and increasing sales, a welcome alternative venue for
companies such as Estée Lauder Cos. and L'Oréal SA as department
stores lose traffic and close locations.
But unlike retailers Macy's Inc. or Saks Fifth Avenue, Sephora
and its owner, French luxury conglomerate LVMH Moët Hennessy Louis
Vuitton SE, have emerged as a competitor -- launching a stream of
new beauty brands. LVMH-owned Marc Jacobs Beauty and Make Up For
Ever are sold at Sephora stores alongside Estée Lauder's Smashbox
and L'Oreal's Urban Decay.
In the core makeup area of a Sephora store, LVMH's beauty brands
can take up nearly half of the shelf space. Yet, Sephora's parent
manufactures only 15 beauty brands compared with more than 200 the
retailer can carry at any given time.
Every brand in Sephora "must earn its place," said Artemis
Patrick, a merchandising executive at Sephora. "What our assortment
includes is determined by the client based on what she buys and
seeks out."
The situation puts high-end cosmetic brands in a conundrum. Many
are becoming increasingly dependent on Sephora for sales growth,
but are faced with shrinking shelf space at the retailer as LVMH
makes room for its own new brands. That is pressuring them to find
alternative distribution channels.
To sell at Sephora, which has more than 2,300 stores around the
world, brands can pay more than 60% from each sale, a higher rate
than at most department stores and specialty retailers, according
to people familiar with the matter, although many department stores
layer on separate charges for labor and other costs.
"The pressure is there, and it's growing. That's why Estée
Lauder is trying to retail its own products," said Ali Dibadj, an
analyst at Bernstein Research.
Beauty brands are trying to grab more of the distribution
themselves. Estée Lauder has touted its own website and doubled
down on its MAC Cosmetics stores, while L'Oréal has opened
free-standing stores for its popular Urban Decay brand.
More beauty companies also are selling their high-end brands on
the same shelves as cheaper alternatives in Ulta Salon Cosmetics
& Fragrance Inc. -- a practice once considered taboo for fear
it would cheapen their luxury products.
Estée Lauder CEO Fabrizio Freda recently said he had no
reservations about competition from LVMH brands. "Sephora is a
winning channel. They are doing a great job with consumers," he
said.
Capitalizing on other channels isn't always easy because Sephora
has required that some brands sell their hottest products at its
stores only.
Sunday Riley, founder of the eponymous skin-care brand, was
thrilled when the company's Luna facial oil became a hot
seller.
As part of the deal to get on Sephora shelves, Sunday Riley
agreed to give the company exclusive rights to new products.
"When it became a huge hit, our other retailers wanted to pick
it up and we couldn't let them," Ms. Riley said. "It caused a lot
of problems because our other retailers were getting discouraged
and weren't willing to support our other products."
Eventually, she negotiated with Sephora that it would give up
exclusivity after six months for new products.
In other cases, Sephora has tried to limit distribution. The
retailer requested Nars Cosmetics, owned by Japan's Shiseido Co.,
to remove its products from Amazon.com's luxury beauty site after
it was launched in 2013 and the beauty brand obliged, according to
a person involved in the discussions.
Some brands have backed away from Sephora. Chanel, LVMH's major
rival, discontinued the sale of its makeup products at the
retailer's U.S. stores about a decade ago, though it continues to
sell perfumes. Frederic
Fekkai, a hair-care brand, was eliminated from Sephora a few
years ago when it broadened its distribution to mass retailers,
said people familiar with the matter.
Launching new beauty brands is an important part of LVMH's
growth strategy, said former executives, despite the competition it
creates with rivals. LVMH's product-development arm, Kendo, was
part of Sephora until 2014 when it was spun off. That unit
currently has five brands, all of which sell at Sephora, and it
plans to launch more.
For years, Kendo had access to the retailer's sales data, giving
insight into fast-growing niches, according to people familiar with
the matter. Those insights are still used by Sephora to launch
products for its own private-label line, Sephora Collection, these
people said.
The entry-level prices of Sephora's private-label line are meant
to attract new customers, who then trade up to other brands,
according to a Sephora spokeswoman. And although Sephora doesn't
provide sales data to other brands, the retailer shares feedback to
"enable them to refine their assortments," Ms. Patrick said.
Revlon Inc. Chief Executive Fabian Garcia, when asked if Sephora
is a heavy-handed partner, paused. "As a matter of practice, I will
never say a customer is heavy-handed," Mr. Garcia said. "But I will
say they are assertive."
Write to Khadeeja Safdar at khadeeja.safdar@wsj.com and Sharon
Terlep at sharon.terlep@wsj.com
(END) Dow Jones Newswires
January 09, 2017 11:22 ET (16:22 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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