Beauty Social Influencers

In terms of the structure of the value chain, you mentioned that, previously, it was, pretty much, brand, department store, consumer, whereas now we have the brands and many different smaller brands that are now getting direct DTC distribution via online. Also, there's currently new incubators popping up. So how do you see the major changes in the value chain for beauty today.

The value chain has shifted dramatically. The department stores are all anchored in malls, which are experiencing traffic flight. So traffic in the malls is down considerably. Therefore, the traffic in the department stores is down considerably, and beauty is an impulse item that depends on traffic, which comes through those malls and stores. Sephora's largest stores are in cities, like downtown San Francisco or New York City, which makes up almost 25% of the total North American Sephora sales. It’s a walk-in walk-out. Ulta was not a prestige player, 10 years ago. They were mostly mass; they had prestige fragrances, but they didn’t have a prestige cosmetic line. So it was mass cosmetics, prestige fragrances, and then services. But they built 10,000 square foot stores in malls where you could drive up, park, and have the convenience of being able to walk in and walk out, without going to a mall.

Over the last five or six years, they've been very aggressively going after prestige brands, allowing the prestige brands to have little mini boutiques inside their stores and to staff those mini boutiques. They have a different philosophy around building their prestige side of their floor, and they're becoming a major contender. So the consumer and the way the consumer interacts with the brands have changed through social media and influencers where they can buy their products, either D2C or through a Sephora or an Ulta, that has very convenient ways of shopping. Everything has changed in the last ten years dramatically, even more dramatically in the last four or five, because of the social media flash influencer model and not having to have big advertising budgets or big capex budgets to build big counters and department stores.

Do you think the retailers are really innovating, as well, now because they can be closer to the customer and allow these new indie brands and startup brands to actually get scale or encourage innovation on their end?

Absolutely. Sephora has its own accelerator program. They were, to my knowledge, the first to start a beauty-only accelerator. It began in 2015, with eight in the cohort. This accelerator started, from their point of view, as a corporate social responsibility program. They hired a young lady from Google that was in social responsibility to establish this program. It was not meant to be a commercial program, but to give back. They were looking at the fact that most of their employees are female, and most of their consumers are female. So how can we, as a beauty retailer, give back to that community? They saw that there were a lot of female entrepreneurs that were struggling to get up and running. Thus, they started the Sephora Accelerate. Sephora Stem is the name of the umbrella and Sephora Accelerate is in this particular program.

They run a boot camp every April, where they choose candidates out of hundreds. The criteria are based on: Is this a product that fills a need, that has white space? Is it a tech app or something that we think is going to enhance the consumer experience? Is it a service that we think is going to enhance the consumer experience?

Sephora starts with the boot camp for a week in San Francisco, exposing them to Sephora marketing: the sales team, the supply chain, the operations team, and every facet of the business. They then pair the candidates up with a mentor from Sephora, who help them hone their pitch. They do a pitch day, usually about three months later, allowing them to come back to San Francisco and pitch the local San Francisco VCs. Now there's a lot of private equity guys to fly in for this, to see who is in the cohort and what kind of ideas are coming out of there. They also have a $250,000 fund that they set up through a bank in San Francisco that the entrepreneurs can take loans from. It's kind of all-encompassing and it's now global. It used to be just North America, but they currently take candidates globally.