A (0:00)

Foreign hello and welcome back to the Bare Face Podcast, a beauty business podcast hosted by me. My name is Lily twelve Tree. I am a a beauty analyst, computer science student and now co founder of Unfiltered, a new home for beauty research connecting beauty nerds to real reviews and beauty brands to real customer voice data. And in today's episode, we're going to be doing another company deep dive and attempting to tackle the beauty behemoth Sephora. Don't overthink it. Give something beautiful. Only at Sephora. Only at Sephora. Something beautiful of course you're likely familiar that they are owned now by luxury conglomerate LVMH and Sephora is one of their selective retailers. Although unless you're European, I doubt you've heard of the other ones. In 2024, Sephora generated almost 17 billion USD in worldwide sales and they only have plans to continue growing. Interestingly, they actually have a real focus on opening more locations in the uk, linking back to the episode we did on the British beauty battle and the fight over retailing there. But what I actually want to understand today is how on earth Sephora got here. How can one company have such a chokehold on an industry as large as beauty? And why do we associate this really old French company with being American and with very little legacy? And by learning about the history, I really want to understand how Sephora popularized this type of beauty retailing. What about department stores? Wasn't working in the first place because don't forget that before Sephora makeup sat behind glass where the dedicated sales rep trained on one brand and one brand alone. With Sephora came testers, self service, brand agnostic staff and a model that just would have felt insane 30 years ago. Anytime we've done an episode where we zoom in and look at one particular market or region, Sephora always makes its way into the story one way or another. And as we'll get to, the company has gone through so many versions and taken on different shapes and and sizes and this is a huge story. So much so that we're actually going to split it into two separate episodes. Today we're going to zero in on the history of the retailer and as always, it'll be broken down into three main parts. Part one of today's episode will focus on the kind of confusing founding story. We're going to begin by going back to the 60s to understand what was happening in the market to prompt a total reinvention of beauty retailing. I'll also make sure to note all of the common threads with that reinvention and a present day context because we're actually seeing a lot of links, which is really wild. This will take us up until the 2000s and then in part two we'll look to the birthplace of department stores. Spoiler. But Sephora's success at the scale that we know it today is closely tied to their big bet on America, although there were a lot of forces stacked against them. And then finally in part three, we will look at the last 15 years to really figure out how Sephora went from successful and big to having a full monopoly and control over the global beauty business, which will tie us really nicely into the start of the next episode. So then next time in the next episode we're going to understand Sephora's impact globally in a present day context. Where are they thriving, where are they struggling, and how the retailer really uses their power with the fact that they hold the fate of so many brands in their hands, how do they utilize that? What power does that give them? We'll also look at a few of the less sexy parts of their business, like retail data, how they use it, who has access to it, and understand how they're using it to continue taking over the world. As always, a series of images, reference graphs and visual aids will be created and put up on substack to help narrate this story. You can find them@bareface.substack.com and if you enjoyed the episode, be sure to give it a like follow wherever you're listening and share it with a friend. But without further ado, let's get stuck in I actually want to start the story 100 years ago, because back in the 20s there was a man named Malcolm McNair, an English literature graduate, Shakespeare scholar, and professor at the Harvard Business School. Being an academic up until pretty recently was one of the only ways you could get a true insight into companies, particularly getting your hands on things as juicy as sales data. Which is interesting because data is still to this day just about the most informative source of any company, which there's no surprises there. But Malcolm had been looking at department store data for 40 years by the late 60s, and he was considered a retail agent expert. And according to his New York Times obituary, he was best known for the method he helped develop in the 1920s for keeping track of a large retail store's inventory and calculating its profitability. Which is crazy, because I think we can assume that he would have been one of the first people to ever systemize something like this, making him extremely specialized. This is a clip from the BBC archives that follows a day in the life of running a department store in 1962. The department store is Jones and Co of Bristol and they're documenting the run up until Christmas. And you can really hear Malcolm McNair's strategy being implemented. Well, with a thousand staff and all these hundreds of thousands of pounds worth of stuff, we must have careful control, otherwise we could be in severe financial difficulties. Even the weather and various other things come to affect business. Even the Cuban crisis and the Chinese Indian problems can all have effect in suddenly taking away the buoyancy of trade. So we the statistical records that can highlight weekly or daily, in fact, and weekly and monthly the progress of our business. And Malcolm would go on to give lectures and regularly make predictions about the state of retail. And in the late 60s, his predictions for what was going to happen to retail started to get some attention because they were leaning on the side of concerning. He predicted that the day of a single large store is passed. And according to Malcolm, the implications were clear. The retail industry would evolve to prioritize regional store identity rather than local. And all of this is to say is that their founding story of Sephora is quite a blurry one. There are three to five people that could be credited as the founders of Sephora, but it was Malcolm that actually predicted this change in retail landscape. He was the one that actually saw this coming. Even though there were so many concerns and questions about why beauty retail had to be changed in the first place, it seemed to be working. Why would this this happened. And it took a second for Sephora as we know it today to really take off. But I thought it was just an interesting place to start with the fact that someone saw this happening way before it did. The story of Sephora, no matter who you credit the founding to, starts in the late 60s. And the now owners of Sephora LVMH credit a man named Dominique Manon Dowd, as they cite him to be the founder of Sephora in 1969. Dominique is interesting because there's little information that's been publicized about him, but the most interesting thing that we found was that his family owned a perfume store chain. So he was exposed to the beauty retailing business all of his life. Dominique actually wanted to go in the opposite direction because perfume retailing in the 60s, it seems to him at least, just didn't make sense. Many women have wardrobes of fragrances to suit their moods and the occasion. Some women like to wear light, flowery scents in summer, more exotic ones in winter, while others prefer to be identified always by the same fragrance worn as a personal signature. So he wanted to open not a retail chain, but a perfumery called Shop 8. And he opened Shop 8 in 1969. Dominique wanted to be able to help women to try different fragrances before buying them. He wanted to give customers the opportunity to test them, put them on their skin and see how they wore. And also give this real play to beauty, I guess, like giving a customer the freedom to touch, try, smell and explore. Rather than this very prescriptive beauty buying experience that was popular at the time in the forms of a department store, you would discover a brand through a sales associate who had a very strong control over your experience of both the brand and the product. It seems like Dominique wanted shift beauty away from being this experience where a customer steps into a brand world and flipping that script so that a brand steps into a customer's world. Pretty much all beauty brands nowadays, when they market themselves, recognize that they're going to be sitting in your beauty cabinet alongside countless other products and brands. And I think the day that a skincare brand can acknowledge that you're not going to be using every single product from their lineup is when we will truly have a beauty industry and marketing landscape that makes sense. But brands are still aware of that in a present, present day concept. So it's easy to imagine now what wasn't working about department stores and truthfully, what they still lack today. But at the time, this wasn't quite so obvious. Interestingly, during the same period there was another French department store chain called, forgive me for my pronunciation, Le Nouvelle Gallaret, which later became a part of the now very popular Galeries Lafayette. And they had opened a stall called Society B H Y S on the Roulette de Parce in Paris in 1970. And they were doing something considered quite crazy as well. This idea of self service beauty, this battle is won on the front line. It's here that the customer has her last important contact with the store. To a large extent, a checker's actions determine whether a shopper will be back. It was again considered kind of a bizarre concept. But beauty already had high margins and it was a type of retailing that meant that they could have even higher margins thanks to the reduced staffing cost. It was a model quite similar to a pharmacy really, where you would have a specialist and a trained teller that could absolutely help someone should they need it. But it mostly enabled customers to browse and search of themselves. But in this period of the late 60s slash early 70s, it's not just France that we have to look at, we also have to look at the uk. There are kind of two stories running side by side in these two regions during this period, which is a little bit confusing, but I'll try my best to intertwine them for you. So while Dominique was running his perfumery and Societe was growing slowly in the uk, you had Boots, the British pharmacy that is still known and beloved today. They were slowly but surely starting take control of the pharmaceutical business in the country. In the late 60s, Booch purchased their only real major competitor, Timothy White and Taylor's, that had more than 600 branches. And they were quickly becoming a monopoly in the UK while also growing subsidiaries in countries like India, Pakistan, Nigeria, Italy. And they actually had a real intention in India in particular, which is interesting. But their biggest blessing was actually their r&d department because Boots, I did not know this, created Burefen aka Ibuprofen and they got it approved and selling in the uk. All of this to mention the fact that Boots had cash and they wanted to go global. In 1968 they reported sales of £212 million. £212 million in 1968 is worth just under 2 billion in 2025. So as they were looking at ways to reinvest their millions, they looked to their French neighbors. In 1970, they incorporated two manufacturing and wholesale chemists in Europe, which quickly became three. And although their European expansion was going to plan, board members started to get anxious, not about their performance, but their growth potential in the uk as the UK was still very much seen as the market that had the most potential. Their reasons for concern during this period were cited in their annual reports as firstly, the lack of prime retail locations, AKA they were running out of locations that had heavy foot traffic and then two neighborhood locations provided very little turnover. So they were still holding on to ibuprofen taking off. And by this point, 1973, the problem shareholders thought was diversification. The retail side was massive when compared to pharmaceutical operations overseas. So they wanted to keep expanding their retail footprint in specifically in the uk. But of course it's this same year that the UK joined the EU and had to abide by the European Economic Community Law, the eec. A law that prohibited Boots UK from going around trying to implement their corporate chemist retail chain acquisition model throughout Europe. They were only able to operate so many pharmacies. There are actually many laws like this globally where we have them here in Australia too. But this is essentially means that Boots couldn't expand in Europe the way they'd planned. They tried to acquire a couple more pharma companies like Glaxo Laboratories, the British pharmaceutical manufacturers, but that was stopped by the UK's Monopolies Commission. And if you're like, wow, what a great authority to have, well, yep, they closed in 2014, sick. But later that year, in 1973, Boots had way bigger fish to fry. Because 1973, November specifically there was an oil embargo. So the Organization of Arab Petroleum Exporting Countries, the oapc, which included the largest oil exporters in the world like Iraq, Saudi Arabia, Iran and Kuwait, enforced an oil embargo on the uk, the US and some other European countries at the time. And if you're wondering what this has to do with retail, kind of everything. Because the petroleum price hike in 73 crashed the stock market, it caused crazy inflation and negatively affected the world of retail quite intensely. As usual in such times, discretionary spending is the first thing to go, according to the retail historian Vicki Howard, who wrote a great book on the history of retail titled From Main street to Mall that impacted a lot of today's episode actually. She explained that with the car centric infrastructure, not just in the uk, but also the US and Europe at large, meant that people could no longer afford to even spare long drives to luxury department stores. The American automobile for so long, the symbol of America's wealth and extravagance, is dying. People can no longer afford to run cars that do 12 miles to the gallon. So it was walkable discount retail chains that really thrived in the 70s. I'm a comparative shopper and that's why I come back here. When you walk into the store, the merchandise hits you right in the eye. The embargo was lifted by 74, but by then the prices on daily goods had already risen by over 300. This was a really difficult period in terms of growth for Boots because they certainly weren't a discount retailer and they kept being blocked by the Monopolies Commission from being able to acquire more companies. So I want to read you an excerpt from their financial report of theirs from 1975 which says, and I quote, as many shareholders will know, the laws in the majority of the countries of the EEC do not permit the practice of dispensing and the sale of medicine from company owned multiple shops. There is no possibility therefore for Boots the Chemist, that's its like bigger formal name for Boots the Chemist to extend its present operations in continental Europe. Nevertheless, your board are unwilling to accept that there is no place for us as retailers in Europe outside the United Kingdom. And so, after considering various possibilities, we have engaged discussions with Nouvelle Galere, the perfume department store chain in France, about one of their subsidiary companies, Societe Bhys, which was formed to open an experimental shop in Paris under the name Sephora just three years ago. We believe that Sephora could prove a good starting point for a retail development in France, and we hope to reach agreement with Nouvelles Galeries and the minority shareholders to acquire 70% of BHYS, subject to the approvals of the relevant British and French authorities. Once these have been received, we plan to open further shops in order to extend the experiment. So in 1976ish, Boots buys Sephora, or at the time, Societe B H Y S. Because one thing to note that is very present throughout this story, that there's a lot of disagreement about when Sephora itself was founded, because the name itself has been linked to a lot of different people for the first time. But we found in the French company's registry that the business name Sephora was registered on 1 January 73, and the entity's activity was categorized as retail of beauty products and perfume, or it translated to that from French. So we're going to assume that when Boots acquired the chain, it was called Sephora. Random footnote, but honestly came up so many times through researching this. So when these two storylines merged, the British storyline and the French storyline to the point in which Boots bought Sephora, they really just acquired like a little French beauty store, which at the time was only operating five stores in 1983. But with all of that cash the Boots had on hand and couldn't put into their pharmaceutical business, they were able to pump the gas pedal on Sephora and expanded it to 13 stores in two years. And by 1985, they expanded it to 13 stores and the chain was actually operating at a loss because they were again spending so much on opening stores and all of the expenses that come with with investing and setting up a corporate facility in the country. But nonetheless, it was still growth in some form. So then by 1986, sales were up 78%, with seven new stores that opened that year, bringing the total to 20 stores the next calendar year. So 1987, Sephora achieved a further sales gain in excess of 50%. They opened another nine stores, bringing the total to 29. And then two years later, so 1989, they had 38 Sephora stores. They reported that profitability was improved despite really difficult conditions for the French retail industry in general. But hang on, what happened to our Perfumer friend Dominique, from the very, very, very start. What happened to him? Great question. He was still owning and operating and growing his perfumery, although it was not, not growing at the rate of Sephora. Dominic clearly saw Sephora as proof of his own potential. Once again, he wasn't a retailer, he was a perfumer. And this brand agnostic staff member that was still able to help you discover was something that he believed in really strongly. So Dominique went and raised a bunch of money from a private equity company known as a Storg, which is a firm mostly owned by a French based utility company, the Suez group. They bought 26% of shop 8. So what he used this cash for? And although it took a second, a good few years passed and the French retail market at this point was really struggling. But he used this cash as a sort of rocket fuel because he went and bought Sephora. Dominic had created this unique store concept that focused around fragrance and personal discovery during the same period that Les Nouvelle Galeries started Societe B H Y E. Yes. Still again unsure if Lei or Dominique actually created the name Sephora. But alas, both of them were refinding one another kind of all of these years later because they had truly been birthed at the same time in the same country. So this was kind of wild. It feels like a twins separated at birth type situation in a movie or something. But Boots had been reporting that Sephora was growing so quickly, going from five to 38 stores in just six years. And they even reported that they had improved this profitability. When I read this, I was kind of really confused. The big boss of Boots at the time told the press about this decision and I quote, that Sephora is profitable despite very difficult conditions and should remain so. But these are our only stores outside of the UK and they will not achieve our very ambitious targets for the near future. End quote. So despite all of the success they were having in France, despite all of this growth that they had had, the shareholders still saw their biggest potential in the UK. A wild decision obviously now, but that comes with 30 years of hindsight. So Dominique then merged Shop8 with Sephora to create something that looks a lot more like what you and I know as Sephora today. If 12 Shop 8 stores and 38 Sephora stores feels like a lot. I would agree with you, but really the major expansion phase for Sephora came between 1994 and 1995. After Shop 8 and Sephora were combined, we were able to dig up the early registration details of the holding company which timelined the store growth and you can really watch as Sephora became France's major perfume distribution network. They almost grew these tentacles of brand reach across France. And they had a really wild retail presence in all of the major French cities from Paris to Marseille to Lyon and Bordeaux. And they were mostly located in major shopping centers and premium commercial streets. And it's at this point that there has to be a part of the picture that we're not seeing, because in 1996, ish, all of their business documentation signals that they were gearing up to go public like that is how well the business was doing. Being able to prove such strong growth potential and profitability came with a lot of power. And instead of going public and having a really great payday, they decided, decided to sell the company and have a fucking major payday instead. They sold the company to a not yet prestigious, but fairly large family company called lvmh. A couple of years before the transaction, a young man named Bernard Arnault had been working with Moet Hennessy president Elaine Chevalier to form Louis Vuitton Moet Hennessy, or lvmh. He had been working at his father's civil engineering firm and with some loose changed, decided to buy the French atelier Christian Dior. Dior was struggling at the time and Bernard had earned the nickname Terminator by laying off 9,000 workers in attempts to turn the business around. What Bernard really wanted was a vertical integration strategy, which usually refers to when a business controls multiple, if not all layers of its operations and production from top to bottom. So someone who sources their own materials from their own production plants, designs and manufactures their own clothes, and then controls the logistics and supply chain. That is the concept of a fully integrated company. There are partially integrated companies that control one or multiple layers of the business's operations. This is the Cotys of the world who own everything for specifically the beauty part of a certain business. But Bernard really wanted this vertical integration mostly as a for mergers and acquisitions. Instead of building your own product or establishing a distribution line, which can be costly, you can simply acquire one. But where Bernard really had his sights set was the US way more than Asia, even though Asia was growing really quickly, which of course Dominique had flagged because that's where his international expansion plans were really fixated on. But this next part is really believable. So remember how there were those forces and regulators in the EU and UK that were prohibiting companies from becoming monopolies? In the US you kind of had the opposite. You had these regulations which were encouraging something known as merger mania. Throughout the 80s and Bernard of course saw that and realized that that is an environment in which he could expand more, more and more and more until he had all of this capital take over the world. Foreshadowing. But Sephora really was Bernard's winning lottery ticket because even though he had these luxury fashion brands which of course had high margins, beauty was higher margins. Hence the expansion of so many of those luxury brands having beauty lines. But if he could vertically integrate, if he could also own the distribution through Sephora, then that's a model that he could expand more than any beauty retailer had before. And better yet is that no one was really doing this self service model in the US yet. Questions? Private conversations at cvs. Your pharmacist will talk with you with one to one look, Gail, don't worry, this is happening to lots of kids. Really. I see it all the time. You had Walmart and CVS that were offering budget beauty and it was an antidote to department stores with again the hands on sales associates. But you still couldn't test products in a Walmart or CVS. Bernard's plans was to open 200 branches of Sephora in the US within 5 years years and attract customers with the promise of getting to try products without being bothered by sales associate again. This really a regional concept that Dominique had around play. Beauty is play. And LVMH had also begun investing in the Internet which is crazy. And they launched sephora.com, which went hand in hand with the launch of New York's Rockefeller center complex megastore that Sephora launched into. And from really early on on. It's really evident that Bernard had lofty ambitions. He wanted not only Sephora to be the biggest beauty retailer in the U.S. but he wanted Sephora.com to be the number one online cosmetics retailer. That's a dream that he had in the late 90s. LVMH's power in a present day context is mega sus. But you can't deny that they have consistently had this ability to move with consumer interest and react to customer voice. Because I will link you on substack to a web archival capture of their 1997 website. I genuinely had no idea websites were a thing in the 90s. But it's pretty much all black with the Sephora s that we still know today in the center with some blurred images of black and white kind of people, figures and a fish where they're like blurred as though in motion. And it's still quite reminiscent of this fragrance world that brands today try and create and lure you into more more. Again, just a note of how early they were, how willing they were to attempt to try and change something that hadn't been questioned in so long. The beauty retailing experience, the beauty buying experience was so prescriptive, pretty much internationally, because the thing about department stores as well in the US it was so closely tied to mall culture. What are you guys doing at the mall today? Shopping and looking for boys. Same. Which comes first? Looking for boys. Looking for boys. Every day? Practically every day. Yep, practically. Definitely every week. How come? Cuz it's fun hanging out here. There's cute guys. There's a lot of cute guys. A lot of our friends hang out. That the fact that anyone thought that a French perfumery slash perfume retail chain could rock up in the US US and completely rewire that is honestly absurd. So to recap, Sephora opens their first US store at 555 Broadway in New York City on July 17, 1998. They then launch sephora.com in October of 1999. And then we get to 1999 and this streak of what feels like perfect decision after perfect decision starts to look a lot less Perfect. And in 1999, Cedric Ducrow, director of Diamart, a consulting firm specializing in distribution, told a French financial publication that this Sephora style retail model concept is developing a lot in the United States. It's called retailtainment. He's just combined the words retail and entertainment. But he said that in the majority of cases, this model is a failure. Only a few very large stores, the flagships of the main brands, can afford this kind of investment without hoping to be profitable in the short term. He went on to talk about Sephora's megastore opening on the main strip in Paris, the Champ d', Elys, where he said it shouldn't break even for at least another eight years. This kind of concept can hardly be exported outside of capital cities. Neither Galeries Lafayette nor Printemps are likely to transform their provincial stores. The percentage of customers interested in this offer is actually very small. What Cedric is referring to in that quote is this lure of what was dubbed retailtainment, or what's more commonly referred to now as experiential retail. I wanted to reference this quote, just to point out that now in the story, it's really easy to look in retrospect all of these years later and just see this winning streak. And it can make Sephora's decisions feel almost obvious because they'd all eventuated into some level of success, whether that be growth or profit. But there were so many people that couldn't understand what it was they were doing and this concern was, was justified. The proof wasn't in the pudding, if that's even the saying. Because for a number of years like in 2001, LVMH's Selective Retailing division, which now consisted of Sephora and DFS, had been accumulating losses for three years. At the, at this point LVMH decided to slow down the opening of Sephora stores, going against their big wild ambitions. Because of course in the early 2000s you had the September 11 attacks, the DOT com bubble burst and Sephora weren't the best position for the Chinese beauty boom. And quite frankly the business looked a little grim, particularly as they started to lose their control over the European market. Because while they had focused on international growth, they, they had become quite comfortable in their home market. There was a new competitor that started to emerge. Marion out was a French perfumery and was quickly growing into the number two biggest fragrance store in Europe spot right underneath Sephora. And they were trying to catch up to Sephora through a rampant mergers and acquisitions focused in Europe. Of course Sephora was aware of this, but they were still pretty confident in their units US targeted strategy and they really focused on under 30 year olds who hadn't developed any loyalty to department stores yet. So they wanted to hop on young trendy brands like Hard Candy, Benefit Cosmetics and Stiller. They acquired all of these brands in the early 2000s but this didn't quite do it either. By 2003, LVMH dropped almost all of those very same brands. They sold Hard Candy and Urban Decay. Interestingly, they hung on to Benefit Cost Cosmetics. But they also went on to shed more weight throughout the LVMH business. They sold minority shares of their auction house. They also sold Michael Kors in 2003 as well. They seem to be refocusing and we have to give credit where credit is due because Sephora were very willing to try just about everything. I couldn't find the exact date that Sephora launched Sephora Collection, but there's records of in 2002, the lip gloss mania that sweep throughout the US. Sephora Collection was selling one lip gloss every, every minute. This is the first instance of a model that we've seen rinse and repeated by so many big prestige retailers now where what they do is they launch a cheaper brand under the same name as the retailer. They can do that of course, because they have such improved margins because it's like vertically integrated and they own all of the distribution. But the real genius comes from the fact that they can sell products. It's in 2004 that they really doubled down on Sephora Owned Products, aka their vertical offering, so they can position themselves as a budget player while still drafting off of the prestige of the brands they sit alongside. Genius. We have this in Australia with Mecca's Mecca Cosmetica skincare line. Mecca also have Mecca Max, which is their like affordable beauty line. And of course Sephora has had Sephora Collection since the early 2000s and has been performing since the early 2000s with that lip gloss selling like crazy. In 2002, Sephora seemed to be tired from losing out to pharmacies and drugstores. So they launched a few other brands under the Sephora umbrella that were no longer beauty versions of luxury brands that lvmh. And at this point the retailer was selling more than 2,000 products and they were trying to hop on as many trends as possible, really. Interestingly, in an effort to target 8 to 12 year olds through Sephora girls, that has a crazy similarity to what we're seeing now in 2025 with this Sephora Kids phenomenon, where young kids are going into these really prestige retailers and leaving behind a very literal mess, but also buying products at price points that you just never would have expected for a cohort of kids that don't even have their money yet. So it's interesting to just footnote here. In 2005, Sephora already saw a market amongst children. I found that really interesting. But by March 8th of 2005, they opened their 100th store in the US in Massachusetts, which you might be like. I thought you said they were slowing down their growth. I thought you said they were slowing down their store expansion strategy because things weren't going how they had planned. That's true. They'd hoped to have 200 stores by 2005. So 100 felt small. But of course that is still a very significant amount of square footage or square meterage in a country they'd only been operating in for six years. But because they had less money to play with than what they were anticipating, but they still wanted to grow to that 200 store number. Sephora in 2006 actually launched into a department store chain called JCPenney. This is a model that I'm sure you've seen before. Again, to give a parallel to. Here in Australia we have mini Mecca stores that are inside bigger Maya stores. And it's kind of interesting when a retailer runs a section of a beauty retailer in a way. For example, if you walked into a JCPenney beauty section, which is usually on the ground floor, they would be a part of that department store layout, which was specifically Sephora. Sephora was selling brands that didn't have their own booths within that department store, which is a model that confuses me because there's so much double handling that I just imagine the margins must have been horrendous. A beauty brand already has to give up so much when it comes to margin by going into a retailer as big as Sephora that going into a department department store I imagine would just undercut that again. And what's interesting about this Sephora Insider JCPenney model, which I couldn't find, was whether that difference was absorbed by the brand or by Sephora. But anyway, although Sephora's expansion into the US looked a lot different than what they had anticipated and planned, it was still proving to be much easier than Europe, which was continuing to be difficult. In March 2006, the French competition Authority fined Sephora and in fairness, a bunch of other retailers for price fixing infractions dating all the way from 1997 to 2000. What is price fixing infractions? Quite great question. Price fixing infractions are when competing businesses secretly agree on prices or pricing arrangements to avoid competing with each other. For example, this is a complete hypothetical. But imagine Sephora and the French perfumery Marinal that was growing quickly in France. Imagine they secretly agree that no perfumes will be sold under $80. No what the brand. Normally Sephora might want to run a sale and sell perfumes for $70 to win over customers and Marion out and Sephora would have to compete with each other on price. But when this price fixing infraction thing happens, both retailers promise not to undercut each other. This means that customers lose out on discounts and prices are artificially high. So these two competitors are colluding instead of competing, which is considered illegal cartel conduct that harms consumers and markets competition. Although Sephora's share of the fine totalled approximately 9.4 million, they appealed and took the case to a higher court. The Paris Court of Appeal canceled the fine because the authorities had taken too long to complete the case, which is wild. But the back and forth didn't stop there. The higher court kept re examining the ruling with reversals and further legal reviews dragging on until 2010. It was huge because it became a major long running legal battle involving some of the biggest beauty retailers and brands in France. So although Sephora managed to overturn this on a technicality, it affirmed what Bernard had already thought about Europe, which was that it wasn't worth all of his time, money and energy because these consumer protections were too strong and therefore it wasn't where he saw his focus and money best spent. Which is wild, but of course really helps attribute to how they were able to to gain such power by finding the places they could more or less bend the rules. Not even bend the rules, because that would imply that there are rules that they are changing. But the US was so focused during this period of time on scaling its economy on big business. So it just really lent favor to what Bernard wanted to do with Sephora. So how do you win the customer loyalty if you can't cheat like that that well, you make a loyalty card, which is pretty on the nose. But the French perfumery chain Marienard launched a loyalty card back in 2003 and according to their business reports, the strategy was to, and I quote, make it an extremely selective marketing tool to increase its customer's average basket, which is still lower than that of its main competitor. This way they could entice customers to spend more by offering improved discount discounts and bonuses. But in the storyline that we're following for Sephora, we're still in 2007, which is when Sephora launched their Beauty Insider program, which followed very much the same model. Sephora's exclusive rewards for rouje members include sponsored trips with cosmetic brands to New York City or Los Angeles. And some members have even spent more than $35,000 to rack up enough points to redeem on such trips. That include 2008. They launched reviews and ratings on sephora.com for every product. More proof of how early this company was on just about everything and their ability to keep up with the zeitgeist, which I just cannot reiterate and understate enough. And it's here in 2008 where their winning streak really starts up again. After what they considered a pretty slow 9ish years entry into the US because they took a bet on none other than the Middle East. They were one of the first, first big beauty players to expand there. And they launched the Middle east in 2007. They opened their first store in Bahrain's CEIF Mall on January 7, 2007, followed by another in the Festival City in the UAE also in 2007, about two months later. And if you remember back to the last episode of this podcast on the Middle east and how we looked at the Dubai shopping Festival and how it was that one event that really proved be to not only to the City itself. That retail was how they were going to inject cash into their economy and also entice tourism. That festival turned into a city. They literally called it the Dubai Festival City Mall, which opened in 2007. And that was how Sephora launched into the UAE. I think the craziest part about this period of time is that on one hand, Sephora were a pretty huge company, but they were operating like a startup throughout the 2000s. They just made bet after bet, and I'm sure there's some that we're missing that failed and there are many more in their future which we'll get to. But they were so right about the Middle east, because then in December 2008, so like 18 months after they launched into the Festival City Mall, they opened a location in the Dubai Mall, which quickly became their highest performing store in the world. And it's interesting because while they were growing internationally and expanding into new country after new country, their power in Europe and specifically in their home country country of France really started to slip. They were quickly losing market share to French perfumery Marionale, but they didn't seem to care. From all of my reading about the company, it seems around this time period that they really began to shed their French identity. While it was never really built into the core like visuals or perception of the Sephora brand, there was still some presence of French sensibility and French legitimacy and power because France really is the birthplace of beauty and they had this European authority. Really, it was their huge scale, awareness and their global expansion that spoke more to new customers than this French legacy. And that made sense. Sephora as a retailer didn't need to depend on heritage the same way Dior did. The idea of a global shop, the experience of retail and entertainment, that as an identity for Sephora, the Sephora brand was worth a heck of a lot more. Of course, then comes the 2008 financial crisis, and understandably, discretionary spending was the first to go. And the retail world took a pretty hard hit. According to the National Retail Federation, retail sales fell 3.6% in 2009. I thought it would be a lot more than that. So it seems like there was still a decent amount of spending, but everyone was trading down, which is of course interesting because it meant a huge hit for the broader LVMH business being luxury goods, but because of the lipstick effect, which is of course the economic phenomenon where consumers purchase more small and affordable luxury goods like cosmetics during economic downturns to provide a sense of comfort and indulgence, it seems like when they were trading down, they were still spending at places like Sephora. So LVMH still won out with the financial downturn around the world. And we're looking at how luxury goods makers like Bulgari, the legendary Italian jewelry maker, are coping. The company's CEO has said that the current environment is the worst that he's seen since after September 11th. And many companies in this booming sector have suddenly seen things shift very quickly. All the luxury brands per se cover so many different segments by now that you know they have clients of course among the wealthiest people, but also in the, in the the middle class. So the middle class will be affected for sure and also the upper class will be affected. In his 2009 LVMH report, Bernard sounded pretty unfazed. He recognized that globally it was a challenging time. LVMH had suffered in 2008 and was starting to recover just a little by 2009. But nonetheless he was sticking to his growth strategy. Despite discount stores still winning, he decided to play the long game, insisting that it's important to keep the luxury dream alive and hoping that aspirational identity around luxury would eventually ramp up post this revenue crisis. And from what we could find, academics seem to agree. Daniel Langer, a luxury strategy professor at Pepperdine University, argues that the most important time to maintain a luxury brand identity is during a period of crisis. Markets of luxury products are less crisis prone than non luxury markets due to the appropriate value creation, which becomes even more important during a crisis. According to Daniel, some major brands managed to become even stronger in 2008 because they prioritized their values and offered redefined product lines and provided personalized services rather than just shifting to meet the moment. What global expansion really did for Sephora was it allowed them to reduce their risk e because it meant that they could play into different markets at different times. And even more than that, they could anticipate and expect for that to happen. It's this almost casual like ah, damn. Europe and the US took a hit in the worst financial crisis in history. Let's look at China then. And according to LVMH's 2010 annual report, Sephora had nearly 100 stores in China by the end of that year, around 40 between Shanghai and Beijing. And then they had 276 across North America. So the US and Canada. And then they also had 20 in the middle East. And then they had also successfully opened a flagship at the Marina Bay Sands. So while other retailers were trying to get market share, they were really diversifying their offering. So when things like 2008 happened, they could kind of balance this seesaw by leaning into different facets of the business. In 2010, they aligned with the Zeitgeist once again by launching both a mobile app. And then they started to take social media really seriously. They launched Beauty Talk, which was an online community platform which served as their proprietary social platform which they wanted to use to foster like a deepened and enriched consumer engagement. So it had like Q and A forms and content separate from mainstream social media. But in saying that their Facebook page also in 2010 already had 900,000 fans, which is crazy because again, it's 2010, most brands weren't even on social media. And this digital focus was credited quite frequently to Sephora's ability to go back to being number one in France. Because by being digitally native and focusing on these less validated and these newer types of distribution and brand awareness and things that other legacy players, for example, like their biggest competitor in France, Marianau, had, it hadn't really looked at yet. For lvmh, luxury was still their bread and butter. But Sephora wasn't about luxury. It was about aspiration within reach. Aspiration that was still attainable even if it was really expensive. And crazily. Again, this can be linked back to Malcolm McNair's prediction about retail from way back in the 60s where he anticipated this global beauty store, where he said, and I quote, consumers would also be younger and more hedonistic as society grew increasingly affluent, meaning that department stores would have to change their traditional merchandising tactics. Reflecting his industry's anti government stance, McNair also cautioned against increased regulation. In many ways it feels like Bernard Arnault read McNair's work and just followed it to a T because he went after places that had a lot less government interference and they also focused on this younger demographic that other retailers didn't see any interest in. What Sephora's digital shift and digital focus did even more than just afford them interest of this younger generation, it also safeguarded them from the retail death that we witnessed in the 2010s. There were many reports that predicted once the financial crisis wore off, people would return to stores. But in the US you had of course Blockbuster, Sears and Barneys, who all documented serious, serious struggle, and even J.C. penney, who of course Sephor had placed big bets on a decade prior in 2010, it was their last year of reported positive income. Particularly retailers in the middle that were neither high nor low found themselves, you know, in distress. What shopping, online, birthed was this direct to consumer model, a model that would break down all of these barriers to creating and selling a beauty brand. Previously you needed capital, regulatory knowledge, manufacturing connections. But the move online removed all of these factors and it meant that you could launch essentially a vertically integrated brand in your living room because you could market it on social media, you could do the distribution yourself because people were Open to buying D2C buying direct from a brand on a website, something that was unimaginable during peak mall culture. And then the way that Sephora reacted to this is really interesting because of course they'd done vertically integrated product before in many ways. They had Sephora Collection, which was their version of this. They had their own distribution, they had their own own retail. And Sephora Collection was the way that they could really hone in on those really, really high margins. But as the consumer was shifting in 2010 and it started to look really different, Sephora created Kendo, their very own incubator. Oh. At Kendo we formulate beauty brands. We have a portfolio of six brands currently in the beauty industry. You have to be a risk taker to win. The ability to be on top of the trends is really the difference between being successful and being average. We love a Kendo to be first. This was an idea that was led by the then CEO of Sephora in the Americas. The concept was to build out their own indie brands that didn't appear to the naked eye when you're walking through Sephora to be affiliated with Sephora at all. They wanted to to create their own brands that they could nurture. This is a model that was really different to Sephora Collection, which was this budget vertical solution. Sephora knew the customers that were coming in their doors better than anyone. So why not use their resources that extended beyond retail and distribution? But what they now understood about branding, marketing, pr, formulation, manufacturing and all of this expertise to get younger brands off of the ground. This dynamic was essentially a direct 180 to Bernard's perspectives 20 years prior in the 90s where he spoke constantly about how it was cheaper for him to go and buy a luxury brand that had a customer and for him to just tidy up and then scale the business. He saw that as cheaper than creating a brand from scratch. But through Sephora, they learned that beauty looked very, very different to luxury fashion. No one cared that Sephora was fren and that it was old, because what they cared about instead was innovation, newness, trend. A model that meant the very opposite. It made more sense to start a bunch of indie brands and see which ones would be a success rather than waiting for indie brands to scale and then acquiring them. It's very akin to early stage venture capitalist sort of approach. And the Kendo timeline is a touch confusing because the incubator was created in 2010 by Sephora as a division to incubate and grow indie brands. And then in 2014 Kendo became independent from Sephora and then was acquired by lvmh, which is the owner of Sephora. But no matter who owned it, it was during this period that the shift really started happening with the beauty shopper, because online shopping meant that people were no longer hanging out at the mall. Beauty and shopping in general was becoming less of a social activity and more of a sport. Particular post this financial crisis, it became more about bang for buck and value over brand allure, which has really direct parallels to what we're seeing in 2025 post Covid but I detail all of this to draw your attention to the fact that retailers now had a new job. They were now tasked with actually incentivizing customers to go in stores. Fashion's night out came as a result of the crisis. People aren't feeling good about about themselves. People are worried about their jobs. So therefore people aren't consuming. The economy's not working. What can we do as an industry to stimulate interest, to make it okay to buy again? To connect the dots and point out that when someone does make a purchase, it's actually good for the local economy, which was really difficult because of course retailers were spending huge amounts on leases, particularly when you're in big malls, as Sephora was and still is. So they were forced to get on the online bandwagon. And Sears in the States was one of the first places to include innovations like barcodes in its catalogs and order online pickup services. Sephora eventually joined as well, where their app had featured functionalities like barcode scanning, and it was synced with their Beauty Insider program, which allowed you to wish list items, find stores, see product ratings and reviews, and have this real omnichannel experience. You wanted to incentivize people to go in store and shop in store, but without isolating your digitally native customers. The omnichannel idea is to just be everywhere your customers are, which more or less feels obvious and implied, but in the early 2010s there was this divisiveness between an online retailer and a brick and mortar retailer. And the ones that really succeeded, the Sephoras of the world were the ones that did everything. During the 2012 holiday season, Sephora saw 167% increase in mobile orders and a 75% rise in mobile traffic. So in 2013, we saw Sephora roll out a bunch of different ideas and experiment, really. So they had a color iq, color matching technology, which first went into stores to help people match concealer and lipstick to their exact skin tone. But then it eventually made its way online too. It was really digital efforts that made up most of Sephora's business for all of the 2010s, although each market started to react really differently for, for example, more culture has a much stronger story and continues to this day in 2025 has a much stronger allure in the Middle east than it did the States. So Sephora launched online shopping in the UAE, but not until 2016. And what is really interesting about this 2010s period is it's really here that we start to see this idea of personalized beauty. YouTube was growing really quickly, and it started this massive education wave that meant consumers were now walking into stores or buying products with so much more understanding of what they were and how they could use them than they had previously. And although at the time it had a really heavy focus on makeup over other categories like hair care and skincare, it did start this kind of 3.0 beauty retail model. You went from 1.0, which is the department store that had brand specific staff that would control your discovery, which is what our friend Dominique, at the very, very start of this story, that's what he was wanted to shake up, which then created Beauty Retail 2.0, where you would walk into a store and the staff would help facilitate your discovery across many different brands and help you touch, feel, compare and play. But they were still the ones putting the foundation on your skin. You would walk into Sephora, someone would come up to you and help answer all of the things that you didn't know, or maybe even sit you down in a makeup chair and show you products on your skin. 3.0 was a customer walking in three those doors, knowing what they want. They had done the research on formulations, they had done the comparisons in price. They were walking in ready to purchase something. And it was a real shift in power where the customer at least thought they knew more than the sales associate whether or not they were right or wrong. And that pretty much brings us to 2016, which is going to be the end of today's episode. Because if you've been a beauty fan or beauty user or customer for long enough, or maybe you've worked in this industry for a while, you'll know that in 2016 it's a pretty pivotal point in beauty's history and kind of everything changes. It's frequently referenced online as being like the epitome of beauty culture and the beauty community. But the next decade ish takes us to 2025, of course the present day, and that in itself, that decade needs its own episode because when we go deep enough it gives us a really good depiction of what all of this means for brands today. It's this period that Sephora became one of the only beauty companies in the world to investing in technology. This is where they really advance their data capabilities and it really impacted their business as well as it kind of gives us a indicator of where they're heading and the future of beauty shopping and what all of this means for brands that are operating in the space and in this world. So please be sure to come back in two weeks time, not next Wednesday, but the one after. If you enjoyed today's episode, please do me a favor and share it with a friend or someone you want work with. Follow the podcast wherever you're listening and be sure to give it a rating because it actually does so much more for the algorithm than I ever realized prior to launching into the world of audio. As always, you can head to bareface.substack.com and you can get access to the full breakdown of all of the keynotes from today's episode so you can re reference all of the interesting bits. We always try and accompany these episodes with as many graphics, graphs and stats as we can to make them as valuable as possible. When you join the substack, you'll get a notification every time an episode goes live and on the weeks that we don't publish. We're also now resurrecting the reports where we take a trend or a discussion that's happening in the beauty industry and we set out to write several pieces of code to self source data that you can't find anywhere else and then deliver all the key takeaways and outline exactly how it impacts you right into your inbox. Today's episode had a lot of heavy research and shifting through old business files and that was done by the very clever dua. And everything in terms of audio from the mixing and editing and mastering was done by the wonderful Kelsey Menzies. So big shout out and thank you to those too. But other than that, I'll see you in two weeks for the second half of the Story of Sephora. Have a great week weekend and goodbye for.