Estée Lauder, L'Oréal and others lose out on shelf space to the chain's own products

By Khadeeja Safdar and Sharon Terlep 

As Sephora has emerged as the hottest retailer in luxury beauty, cosmetics companies are increasingly losing out -- to Sephora.

The fast-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 stores.

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 Freida 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's luxury beauty site after it 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 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 02:47 ET (07:47 GMT)

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