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Professor Elie Ofek and Alison Berkley Wagonfeld, Executive Director of the HBS California Research Center, prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2011, 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1 -800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

E L I E O F E K

A L I S O N B E R K L E Y W A G O N F E L D

Sephora Direct: Investing in Social Media, Video, and Mobile

Julie Bornstein, senior vice president of Sephora Direct, glanced through Sephora USA Inc.’s (Sephora) latest set of social media metrics as she waited for the elevator in the lobby of her company’s headquarters in San Francisco, California. It was late in October of 2010, and she was heading up to the 32nd floor to meet with David Suliteanu, President and CEO of Sephora USA. Sephora was the largest prestige beauty specialty retailer in the world with nearly $2 billion of revenues from the company’s stores in U.S and Canada as well as the Sephora.com website. Started in Europe in 1969, the company entered the U.S. in 1998, selling a wide range of cosmetic, fragrance, hair, and skin care products. Sephora was known for its vibrant stores that encouraged trial and experimentation.

As Bornstein stepped out of the elevator into the black and white striped hallway, she thought about the upcoming budget meetings with Sephora’s parent company, Louis Vuitton and Moet Hennessy (LVMH). The Sephora Direct group was responsible for all of Sephora’s direct marketing and digital initiatives, including Sephora.com and the Sephora Beauty Insider loyalty program. In 2008, Bornstein’s team began to experiment on Facebook and with online videos, and in 2009 the team began making plans for mobile applications. By the summer of 2010 Suliteanu had authorized the creation of a new group within the Sephora Direct organization to focus on these new initiatives. Bornstein was hoping to double her budget in social media, video, and mobile for 2011, and she wanted Suliteanu to back up her requests for close to an additional $1 million dollars of funding. Suliteanu conveyed that he would support more funding if Sephora could “win” in this space, but it was up to Bornstein to determine what winning would look like for the company. Along those lines, Bornstein was contemplating how Sephora should measure the success of its digital efforts.

As Bornstein walked to Suliteanu’s office, she glanced again at the weekly metrics sheet. She noted the rapid growth of Sephora “fans” on Facebook and the thousands of recent downloads of Sephora’s new iPhone app. Bornstein felt good about the company’s efforts to date, but she knew more opportunities lay ahead. Just last week she and her team talked about expanding their mobile offering, participating in social shopping programs, creating more videos, and increasing presence on Twitter. They also had the opportunity to pitch a promotional program for a new Jennifer Aniston fragrance launch using a variety of new media platforms. Bornstein thought about all of the directions they could pursue, focusing both on how to have the biggest impact and how to measure

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that impact to support additional funding. But even with additional funds, her team had only limited time and energy to dedicate to each of these programs, so they had to choose carefully. The meeting with LVMH was in ten days, and Bornstein was eager to discuss her ideas with Suliteanu.

Company Background

History

Sephora was started in France by Dominique Mandonnaud in 1969 as a single perfume shop. In 1979 Mandonnaud expanded to several stores, which were designed so customers could try multiple brands in an “assisted self-service” environment. Mandonnaud’s retail concept represented a stark break from the traditional cosmetics retail model in which each prestige brand would commission its own sales representatives to push products onto shoppers, often in a department store setting at brand-dedicated counters. In 1993, Mandonnaud teamed up with investors to combine his stores with a perfume chain acquired from British retailer Boots PLC. Mandonnaud rebranded the combined set of stores under the Sephora name, derived from the Greek word for pretty (sephos) and the Biblical name Zipporah (Moses’ beautiful wife). Mandonnaud continued expanding the chain, and several years later Sephora operated 54 perfume stores throughout France, representing 8% of the total

French retail perfume market.1 Sephora attracted the attention of luxury product group LVMH, which bought the company for $262 million in 1997.

U.S. Expansion

Under LVMH’s ownership, Sephora expanded beyond perfume into other cosmetics and opened its first U.S. store in New York City in 1998. For the first few years, Sephora had difficulty getting products from Clinique, Estee Lauder, and Prescriptives, which were owned by Estee Lauder Companies and comprised 44% of the prestige beauty market in 1999.2 These companies perceived Sephora as a niche player and would not distribute to Sephora stores located near department stores carrying the same lines. According to William Lauder, president of Clinique Laboratories and a board member of Estee Lauder Cos, “People will continue to shop at department stores because they offer

trained salespeople who are knowledgeable about each brand.”3

Given the reaction by some of the established brands, Sephora relied on less well-known brands to fill its shelves, and the company built relationships with hundreds of small cosmetic manufacturers. Sephora encouraged customers to try products in the stores, and multiple brands of similar product categories (e.g., lipsticks, eye shadow) were placed side-by-side to encourage experimentation. Sephora hired non-commissioned employees to guide consumers and answer questions, and over time, these employees were trained on all the different products.

All Sephora stores had a similar “look and feel” with black, white, and red as the dominant color theme for walls and displays, and employees (“cast members”) dressed in these colors as well. (See Exhibit 1 for store photos.) The stores played a combination of pop and alternative music that contributed to creating a fun, party atmosphere. The company attracted younger, hipper customers (referred to as “clients”) than department stores. Suliteanu explained, “We told young women that it was OK to come in and try on make-up without buying anything. This was a new concept for cosmetic retailers, and it allowed us to grow the pie with customers who had never shopped for cosmetics before.” Within several years of opening stores in the U.S., the bigger prestige cosmetic companies such as Estee Lauder and Clinique started supplying product to all Sephora stores. Suliteanu noted, “Over the years, the large public cosmetic companies like L’Oreal and Lauder have become much bigger supporters as our brand has grown both in size and credibility.”

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Sephora USA in 2010

By 2010, Sephora had nearly 1,000 stores in 23 countries, of which 450 were in the U.S. and Canada. Sephora had a retail presence in 36 states, with the majority of the stores in metropolitan areas and shopping malls. In 2006, Sephora entered into a retail partnership with JC Penney (a large chain of mid-range American department stores) in which Sephora became the exclusive beauty retailer inside JC Penney department stores. Approximately 200 of Sephora’s U.S. stores were located within a JC Penney location. The company’s headquarters were located in San Francisco where Bornstein managed a team of 75, organized into seven functional areas: customer relationship management, social media, acquisition and retention marketing, analytics, e-commerce, dotcom merchandising, and the company’s call center. “Traditional” marketing and merchandising was run by Sharon Rothstein, senior vice president of marketing, who was based in Sephora’s offices in New York City. (See Exhibit 2 for management biographies.)

Sephora offered 288 brands, representing over 20,000 products, ranging from classic lines such as Lancome and Clinique to emerging brands such as Urban Decay and Too Faced. Sephora’s products were considered prestige brands, which were perceived as more upscale than the mass market brands (e.g., Revlon, Maybelline) found at drug stores and supermarkets. Sephora carried nearly every large prestige brand except for Chanel and MAC Cosmetics. Sephora’s pricing was often identical to that of department stores because U.S. beauty retailers tended to price prestige products at the manufacturer suggested retail price (MSRP). Promotions typically involved offering samples rather than discounting, although Sephora did offer two discount events each year to its loyalty card holders. Sephora also carried a host of private label products in nearly every category, some of which were priced below the prestige brands. Sephora’s target market in 2010 was 25-35 year old women, many of whom “grew up” with the company. Bornstein noted, “This age group had an aspirational element, as the teenage girls looked up to this cohort and older women wanted to look 25-35 again.”

Competitive Landscape

The U.S. beauty and personal care market was approximately $58.9 billion in 2009.4 Sephora primarily competed with department stores such as Macy’s and Nordstrom as well as single brand prestige beauty stores (e.g., MAC Cosmetics) and multi-brand specialty stores (e.g., ULTA Beauty). ULTA was the closest competitor to Sephora, as it operated nearly 400 retail stores in the U.S. Most of ULTA’s stores were in “off-mall” locations (i.e., strip malls with 8-10 stores and easy parking), and included a full-service salon. The ULTA chain was started in the 1990s with an emphasis on discounted mass-market products, but the company added several prestige lines during the 2000s and positioned itself as a “beauty superstore” by the end of the decade boasting 21,000 products. In 2009, ULTA reached sales of $1.2 billion with $40 million of net income; analysts estimated 18% revenue growth for 2010 over 2009.5 ULTA introduced an updated e-commerce site (ulta.com) in

2008, and had seven million members in its customer loyalty program in 2009.6 ULTA did not have a distinct mobile offering in 2010. Bornstein described ULTA as a “fast follower” of Sephora. According to Karen Grant at NPD research, “The two chains go head to head among 25- to 34-year-olds, 29 percent of whom shop at Ulta, 30 percent at Sephora.”7 (See Exhibit 3 for an article about ULTA.)

Sephora also competed with several large online merchants such as Amazon.com and Beauty.com, as well as hundreds of smaller sites. Two newer online companies included Birchbox, which delivered a curated box of samples to consumers each month in return for a monthly membership fee of $10, as well as Gilt Groupe, one of several growing companies that offered a limited set of luxury products at deep discounts during a short time window (known as “flash sales”). Sephora.com was the largest online prestige beauty website, capturing roughly 30% of the U.S. online market.

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Sephora’s Marketing Plan

Shortly after Rothstein arrived at Sephora in 2009, she worked with Bornstein to build a marketing plan for 2010. Key elements of the 2010 marketing mix included: store window merchandising, 32- page print catalogs sent to a portion of Sephora’s Beauty Insiders three times a year, print advertising in magazines, a few direct mail pieces sent to Beauty Insiders, two major sales/promotions (one in April and one during the holiday season), and free gifts for Beauty Insiders. Rothstein and Bornstein talked regularly to coordinate messages, particularly around “animation” themes for the windows and Sephora’s homepage. Rothstein explained, “Animations are one of the most important components of our marketing mix, they represent themes that form the basis of how we build our calendar. Our store window designs and site homepage bring our stores to life. Our CEO believes that our marketing image should start with the store experience, both offline and online.” (See Exhibit 4 for sample store window designs and print ads.)

In addition, Sephora spent millions on online search advertising (e.g., Google AdWords) by buying thousands of keywords for brands, products, and beauty related terms. Search advertising represented the single largest component of Sephora’s marketing budget and was the largest source of new traffic to the Sephora website. Sephora was also looking into purchasing more online display advertising on sites such as Facebook. Email marketing to Beauty Insiders was also a key element of the marketing mix, and although the emails were not particularly expensive to send, Sephora spent millions on the entire Beauty Insider program. The 2010 plan had a modest amount of money (just shy of $1 million, representing under 5% of the total marketing budget) designated for social media, mobile and video, and those were the categories Bornstein hoped to double in funding in 2011. (See Exhibit 5 for a breakdown of total media spending.)

Sephora Direct – Sephora.com and Beauty Insider

Sephora.com

Sephora.com was launched in 1999 with 100 brands, and within several months expanded to include all of the brands sold at any of the Sephora stores. The e-commerce site grew quickly into a sizeable business for Sephora, and it was projected to generate 15-20% of Sephora USA sales in 2010. The company appreciated the growth in online sales, as Sephora.com offered higher margins than a typical store due to lower overhead costs.

Approximately 3 million unique visitors came to the site each month, making Sephora one of the top 50 retail sites in the U.S. According to Comscore, on average in 2010, Sephora.com had 310,000 visits each day, and 11 page views per visit. The Sephora website offered sophisticated search functionality along with details about every product the company sold. (See Exhibit 6 for Sephora.com trends from 2000-2010 and data about online beauty shoppers.) Sephora encouraged site visitors to purchase online by offering free shipping for orders over $50 and three free samples with every order. Suliteanu summarized, “Our web presence became an important part of our strategy. Our young clientele were going online and we needed to be there. The Sephora brand had been primarily about the physical experience, but we started to see the importance of the Internet as a forum where our customers could discover and learn.”

Sephora Beauty Insider Program

Sephora USA introduced its Beauty Insider customer loyalty program in 2007. Suliteanu explained the rationale, “We wanted to know more about our customers, so we thought it would be helpful to

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introduce a CRM [customer relationship management] program. Most of these programs were set up around discounts, but our goal was to build our program around perks. We offered free samples to our Beauty Insiders and gave them “first looks” at new products. The program exploded and we had millions of sign-ups within the first year.”

Clients were invited to join the Beauty Insider program when they made a purchase in the store or online, and all that was required was an email address, although clients were also asked for their birthdays. Bornstein commented, “Our store cast members [employees] get great training, and they really believe in this program. I’ve been in many stores and I have never seen a client buy anything without being asked to join our Beauty Insider program.” Sephora offered one point for each $1 spent in stores or online. Clients could redeem points for a free gift at 100 and again at 500 points. Some opted to hold their points, hoping to redeem thousands of points for bigger gifts in the future.

Beauty Insiders typically received emails from Sephora once or twice a week, and a special offer on their birthday. Customers who spent more than $350 in a year were designated Very Important Beauty Insiders, also referred to as VIBs. VIBs were invited to special events at stores, received “deluxe” gifts and were given early access to products. VIBs were identified with a small icon when they posted questions or answers on the Sephora.com website.

By 2010, 15 million customers had signed up for the program; with 9 million considered “active members” (purchasing something from Sephora in the last 12 months). Approximately 80% of Sephora’s sales came from Beauty Insiders. Bornstein commented: “One of the reasons the program works so well is that the beauty category lends itself to sampling, and our clients love to experience new products! We also make it really easy to join, and our clients see quick benefits. The program gives us a way to communicate frequently with our clients using our low cost email platform.”

Sephora Direct - Social Media

Ratings and Reviews

Sephora’s initial forays into social media began by enabling users to post product ratings and reviews on Sephora.com. In early 2008, Bornstein pushed to add this feature to the company’s website even though there was internal concern about the implications of negative reviews. The direct team believed it was worth the risk because clients were asking for the feature, and research had shown that most people went online to rave about products rather than complain. In addition, the direct team believed that ratings and reviews could lead to desirable outcomes: improving site conversion from shoppers to buyers by providing confidence in a product’s results, increasing traffic from online search results, keeping clients for longer durations on the site, reducing returns, lowering call center visits, and encouraging repeat visits. Moreover, other e-commerce sites such as Amazon.com already had active review boards, and some of Sephora’s customers were posting reviews on these sites for products they had bought at Sephora.

Sephora contracted with a third party to build software that could be integrated into Sephora’s website, and in September 2008, Sephora opened its ratings and reviews boards. The company publicized this new feature by emailing its Beauty Insiders, and within 24 hours Sephora had 32,000 ratings and reviews posted. Bridget Dolan, vice president of direct, recalled:

We were not sure what to expect when we opened the doors, and we were a little concerned that making reviewers sign in to our site would create a barrier to usage. However, within 24 hours we were flooded. Our clients were dying to talk with us and each other. Our

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third party contractor, Bazaarvoice, said they had never seen a response like this before. At first we thought we would need to read all the reviews before they went up on the site, but then we realized that would take months. We ultimately decided that our readers would let us know if there was an inappropriate review posted. So we did some basic electronic screening for inappropriate language and then let the reviews go up as written.

By September 2010 there were over 1 million product reviews posted, with an average rating of 4.2 stars (out of five). Dolan commented, “Some popular products have over 10,000 reviews. Initially I was surprised when someone wanted to write the 10,001th review, but I’ve learned that our clients love to share their personal experiences, particularly with a product they are passionate about.”

Facebook

Sephora’s experience with ratings and reviews gave the company confidence to expand its presence in other areas of social media. By late 2009, consumer behavior online had shifted, with 16%

of all online time spent with social media,8 representing exponential growth in a category that was practically nonexistent just three years earlier. Facebook was the largest and fastest growing social media site with over 500 million worldwide users and 53% reach in the U.S. in February 2010. In late 2008 Sephora created a Facebook “fan page” for its clients who wanted to follow Sephora and communicate with the company and each other online. Cathy Choi, director of social media, moderated the page and used Facebook’s tools to add graphics and links. (See Exhibit 7 for representative postings on Sephora’s Facebook page.) Choi commented:

From the beginning, our clients were spending hours on our Facebook page, talking to each other and sharing their passion for make-up. We found that our clients were also talking directly to us through Facebook and they expected answers. Initially Julie, Bridget and I were spending our evenings and weekends reading all the posts and responding, until we formally pulled in some help from Sephora’s call center support team. When clients asked questions about products, we often let other Facebook members answer. Sometimes we feel like we are playing the role of party hostess. We have super-users who are constantly responding to others, and we occasionally send them surprise gifts or emails to say “thanks.” Many of the super-users are also our VIBs, and spend thousands of dollars at Sephora each year.

Dolan added:

We try to respond to questions directed to us, and we read all the client complaints and feedback. Clients use Facebook to let us know when we are out of products or if they had a bad experience at a store. Once we did an in-store promotional event and ran out of the tote bag give-aways. Our clients were not shy about using Facebook to express their frustration and it gave us a chance to respond in real-time to make it right! It is critical that we monitor our page carefully, or spammers can take over. Consumers can tell when a company’s Facebook page is actively managed, and we are very careful about maintaining a consistent tone in our postings.

By late 2009 Sephora attracted over 300,000 fans to its Facebook page. The Facebook page also served as a forum for Sephora to do consumer research and get client feedback. In addition, early on, Sephora ran contests and occasionally offered promotions such as: “become a Facebook fan and get 10% off your next purchase.” The company introduced a “Sephora Claus” sweepstakes for the 2009 holiday season that granted a product wish each day to one Sephora fan. Over 50,000 clients shared their wishes virally during the one month sweepstakes. Sephora tracked sales among contest entrants (through the use of a promotion code) and estimated the Sephora Claus program influenced over $1 million of sales. The sweepstakes also resulted in Sephora gift purchases from friends and relatives

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who could see the Sephora “wish list” of each entrant. Dolan estimated that Sephora incurred approximately $50,000 of direct costs to run the promotion, as well as staff time from various departments. The prizes were donated by brands that Sephora carried.

Sephora expanded its Facebook presence throughout 2010 and had nearly 900,000 fans by September 2010. (See Exhibit 8 for fan growth). One industry analyst valued each Facebook fan at $3.60 based on the average number of messages a typical fan received and comparing that to the amount of paid online impressions needed to reach the consumer with the same number of

messages.9 Sephora teamed up with Facebook to participate in the launch of a new Facebook feature that allowed people to indicate what they “like” by clicking a “thumbs up” icon, and Sephora tracked its “likes” as a way to indicate client engagement. Bornstein’s team constantly sought out fresh content and asked questions designed to elicit response. For example, Sephora posed questions such as “What color nail polish are you wearing right now?” and “Chocolate or Mascara, if you had to choose one, which would you give up?”, many of which generated thousands of Facebook “likes” and comments. Bornstein’s team was planning a new Facebook promotion for the holiday season in 2010 that had the potential to spread virally while also influencing sales. (See Exhibit 9 for excerpts from a recent Sephora weekly dashboard highlighting client engagement on Facebook.)

Beauty Talk

Although the Sephora Direct team was pleased with its ability to engage with clients on Facebook, Bornstein, Dolan, and Choi expressed frustration with the lack of archival capacity on the platform. Dolan commented, “We find that clients ask the same questions over and over again, and there is not an easy way to save and query responses. Facebook is all about ‘recency’—posts appear in the order they were logged.” In addition, it was difficult to ask potentially embarrassing questions on Facebook because there was no way to mask a client’s identity. Dolan described, “If a client has a question about acne or wrinkles, would she really want that question broadcast on Facebook under her real name?” Sephora did a survey in 2009 and found that 24% of respondents said they would be “very interested” in a central place to ask beauty questions of other Sephora shoppers on Sephora.com.

Consequently, the Sephora direct team decided to build its own question and answer forum with strong search functionality. The vision was to have a safe and private environment where clients could anonymously ask personal questions and get quick responses from Sephora experts or other members of the Sephora community. Dolan explained, “We asked ourselves, ‘How can we make a more organized version of Facebook? How can we help users add more context to their questions?’”

Sephora contracted with a third party to design the Q&A engine as part of the Sephora.com website, and it was launched as a beta site called Beauty Talk in September 2010. With a few weeks of data, the Q&A forum showed promise, but it raised additional questions about the appropriate role of Sephora employees in moderating the discussion and answering questions. Dolan explained, “We struggle with finding the right balance between letting the clients share their own answers versus providing an expert Sephora opinion that could be perceived as biased.”

Facebook did not make it easy to recognize “superusers” who answered a lot of questions. In contrast, Sephora encouraged Beauty Talk members to respond to queries by creating a “leaderboard” with 35 different levels. Users who posted frequently had a symbol identifying them as a “beauty master” or “beauty maven”, while newer users might have a symbol labeling them as a “newcomer.” VIB clients had a “VIB” symbol next to their names. Dolan explained:

We found that our active responders like the recognition, and that was difficult to do on Facebook. We suspect that about 200 superusers will contribute the vast majority of the content

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