How can Sephora navigate its challenges in China?

On January 25, LVMH Group released its full-year 2023 results, with Sephora's performance shining in the financial report, achieving another record-breaking year in terms of sales and profits. The momentum was particularly strong in North America, Europe, and the Middle East. However, the performance in China was not mentioned in the financial report.

On January 19, Chen Bing, the General Manager of Sephora Greater China, formally stepped down for personal reasons. During the transition period, Alia Gogi, the President of Sephora Asia, will directly manage the business in Greater China. In fact, there were rumors within the industry as early as July last year that LVMH was planning to find new leadership for Sephora in the Chinese market. Looking back even further, in January 2023, Sephora closed its Tmall overseas flagship store that had been in operation for three years due to adjustments in cross-border channel strategies.

Although the LVMH Group's financial report did not disclose Sephora's specific performance in the Chinese market, the financial reports of Shanghai Jahwa, which holds shares in Sephora China, revealed that Sephora's performance in China was not satisfactory, with a decline in revenue and a net loss of 190 million yuan in 2022. So, what happened to Sephora in China and how can Sephora navigate its challenges in the market?

1. Awkward positioning and limited advantage in product selection

Sephora's positioning in China is obviously a high-end cosmetics retail brand. Both its positioning and the higher entry-level prices have posted a high basket size. Moreover, the inherent "high-end" and "boutique" store image has invisibly raised the consumption threshold for entering the store. Therefore, both the store traffic and the expandable market are limited. At the same time, although the core target audience is young and middle-aged, sophisticated and fashionable beauty pioneers, Sephora's product selection in China has always had limited appeal for them. Currently, Sephora China's brand pool includes more than 200 brands, with about 50% of sales coming from renowned international brands such as brands from LVMH and Estée Lauder, and about 35% to 40% coming from exclusively introduced brands. The sales of Sephora's own-brand products account for 10% to 15%. Sephora's exclusive brand resources and unique product selection ability, once a killer feature in its global market, are less effective in the face of diverse and convenient retail channels in China. For example, global luxury skincare brand TATCHA officially entered Sephora in April 2023, but as early as 2020, it opened a Tmall international flagship store and an official store on Little Red Book; high-end makeup brand Hourglass also established a counter in Sephora in 2022 along with other online sales channels.

Looking overseas, Sephora retains its "uniqueness" and "niche" due to the relatively "slower pace" of e-commerce and channel development. Popular brands on Instagram in recent years, such as Rare Beauty, Drunk Elephant, and Glossier, have made their exclusive debut in Sephora, attracting North American teenagers to visit Sephora. Brands like Farmacy and Murad are also representative exclusive brands nurtured by Sephora overseas. In comparison, Sephora China's portfolio lacks novelty and youthful vitality for beauty-conscious consumers who are passionate about discovering niche brands. Under the trend of Chinese local brands, Sephora also attempted to break through by collaborating with domestic brands. In June 2022, Sephora launched the "Made in China Shining Plan," announcing its support for five local premium beauty brands to become representatives of high-end beauty brands with sales exceeding 100 million yuan within three years. But these brands comparatively lack cost-effectiveness and thus difficult to build the scale.

In short, those who can afford it do not necessarily have to buy at Sephora, while those who cannot afford it avoid going to the store. The "exclusive brands" are not really "exclusive." Sephora has not found a suitable positioning in terms of consumer groups and product selection, both of which contribute to its underwhelming performance in the Chinese market.

2. Retail experience have to be upgraded

As of the end of December 2023, Sephora has opened a total of 341 offline stores in 100 cities across mainland China, covering most provinces, autonomous regions, and municipalities directly under the central government. It has also started to focus on exploring the development opportunities in the third- and fourth-tier markets. Online, Sephora has established its presence on its official website, official app, WeChat mini-program, JD.com, and Tmall flagship store. In 2020 and 2021, it also launched stores on Douyin (TikTok) and entered Meituan Flash Purchase and JD Daojia, thus establishing an omnichannel retail distribution. However, the brands sold by Sephora's competitors have also been establishing their own omnichannel layouts, from e-commerce and live-streaming to emerging content social platforms and O2O (online-to-offline). The formidable rivals Sephora faces have evolved from Tmall and JD.com to top KOLs like Li Jiaqi, and most recently, to the popular brand self-broadcasting rooms on Douyin. In a highly diverse retail landscape in China, Sephora's limited brand recognition has made it difficult for it to become consumers' preferred purchasing channel.

What's more, The essence of physical retail lies in the in-store experience. The experience and service provided by people cannot be replaced or solved by the wide range of channel touchpoints. On social platforms, there are numerous comments from internet users expressing dissatisfaction with the pressure of being followed by BAs in the store and complaints about poor in-store experiences, lack of freebies, and poor design of the membership system, which affects Sephora's store visitation rate and conversion rate after visits. At the same time, offline beauty retail stores in China have reached new heights in terms of in-store experiences. Local beauty concept stores such as Harmay and Haydon, with their unique aesthetics and creative designs for each store, strategic locations in trendy business districts, as well as online topics and interactions, constantly attract customers. Additionally, the combination of coffee/tea beverages, warehouse-style displays, pet-friendly designs, relaxed and casual store atmospheres, and even interactive experiences like handing out lollipops upon entry all contribute to a personalized and youthful retail experience, far outshining Sephora's standardized stores and somewhat monotonous in-store experiences. Faced with more vibrant and youthful competitors, Sephora's standardized stores and in-store experiences seem relatively dull, just like its black and white color scheme.

After the epidemic, high-end beauty brands have also been involved in offline channels, using independent spaces and visual expressions to convey the brand's essence. Through more controllable in-store beauty advisors, they provide consumers with professional and sufficient brand services and consultations, which Sephora also fails to deliver.

3. Emphasis on brand promotion, and conversion, while neglecting to cultivate consumer mindshare

Sephora started its digital transformation early and has always tried to connect public and private domain traffic. Since 2020, it has established enterprise WeChat and built a private domain community with over 4.8 million people. It attracts customers through community and friend circle operations during major promotions and festivals, scheduled WeChat messages, SMS, and phone calls for activation. However, some consumers find it annoying because the communication mainly revolves around discounts and promotion information, inevitably lacking valuable content such as product usage tutorials, and product recommendations.

On social media, it has official accounts on platforms such as Little Red Book, Douyin, and Weibo where young people gather, the content mainly consists of brand TVC, event promotion, and interactive sweepstakes. There is very little introduction to its new and niche brands or product systems, let alone valuable beauty and skincare tips provided to consumers. As a result, a professional beauty retail brand has not formed a professional beauty content matrix. Whether in the public or private domain, its excessive focus on conversion has resulted in a lack of consumer mindshare.

In terms of brand promotion, as early as December 2022, Sephora announced Xin Zhilei as its brand ambassador. However, even with Xin Zhilei's recent popularity due to the new TV series, there haven't been many marketing actions from Sephora to leverage this opportunity and enhance its marketing influence.

Conclusion

In conclusion, LVMH has been making frequent moves in the Chinese beauty market, revealing their ambitions in this market. Both LVMH Group and Sephora undoubtedly have high expectations for China. However, to reverse the current decline of Sephora in China, it will take great efforts in brand positioning, product selection, in-store retail experience, and marketing capabilities to continuously find the right place in the Chinese market.