SEPHORA_final.docx

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0 Report: Internationalization of Sephora
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SEPHORA
MGT2510 WrittenReport
Group 3
0862415 Chiu Nga Man (Carrie)
0861437 Chow Ming Wai (Jennifer)
0861734 Chung Ki Tat (Kitat)
0862549 Lee Wing Sze (Tania)
0862061 Ma Ning (Maning)
0860199 So Wing Ki (Jessica)
0861625 Sze Pang Ching (Alfred)
0860886 Wong Kei Ming (Florence)
0862855 Wong Yin Ting (Chinny)

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Content Page
1 Introduction .........................................................................................................3
2 Industrial Analysis...............................................................................................4
2.1 Current & forecast Market Value............................................................4
2.2 Market Share.............................................................................................5
3 Sephora..................................................................................................................6
3.1 Background information.........................................................................6
3.2 Core competence......................................................................................6
3.3 Reason for expansion...............................................................................6
4 Country Selection.................................................................................................8
4.1 Target market - Asia.................................................................................8
4.2 Country-Candidate selection..................................................................9
4.3 Finalizing Country Choice ..................................................................... 11
4.3.1 Demand............................................................................................ 11
4.3.2 Cost................................................................................................... 11
4.3.3 Risk measurement...........................................................................12
4.3.4 Competition.................................................................................13
4.3.5 Location form................................................................................. 14
4.4 City selection.......................................................................................... 16
4.4.1 City................................................................................................... 16
4.4.2 City chosen-reason .................................................................... 16
4.5 Overview of Cosmetic Industry in Taiwan...........................................17

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5 Strategy................................................................................................................ 19
5.1 Sephora’s Strategy Choice...................................................................... 19
5.2 Pressure for Cost Reduction.................................................................. 19
5.2.1 Direct Competition........................................................................20
5.2.2 Indirect Competition.....................................................................20
5.2.3 High Elasticity of Demand.............................................................21
5.2.4 Future cost pressure....................................................................21
5.3 Pressure for local responsiveness...........................................................21
5.4 Differentiation: Reduce Pressure for Cost Reduction.........................23
5.4.1 Introduction of Exclusive Brands .................................................23
5.4.2 Position at High-End Users.......................................................23
5.4.3 Introduction of Personalized Service...........................................24
5.5 Product Adaptation................................................................................25
6 Entry Mode .........................................................................................................26
6.1 Entry mode selection.............................................................................26
6.2 Advantages of WOS ...............................................................................28
6.3 Overcoming Drawbacks of WOS..........................................................28
6.4 Greeenfield or Brownfield? ...................................................................30
7 Conclusion...........................................................................................................31
8 Appendix.............................................................................................................32

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1 Introduction
Established in 1969 by Dominique Mandonnaud from France, Sephora is
acquired by Louis Vuitton Moët Hennessy (LVMH) in 19971. It has carried on as a
prestigious market leader for retailers in the European beauty industry.
Expanded to over 400 outlets in Europe, Sephora has taken over 15% of retailer’s
market share in beauty industry. It earns substantial revenue in Europe and the
US.
Prestigious brands are what LVMH aiming at when expanding its business
internationally in order to grasp as much market shares as it can. Supported by
the strong financial and vision backup from LVMH, the success of Sephora in
the high-end cosmetics industry in Europe and the US have proven Sephora an
opportune moment to expand its experienceall overthe world.
In this proposal, we would outline the cosmetics industry analysis and
Sephora’s core competence within such marketplace as well as to provide an
in-depth analysis on how Sephora should expand globally, the analysis for the
choice of location for expansion, international business strategy adopted and the
mode of entry are conducted. This proposal aims at providing a valuable analysis
for the internationalization of Sephora.
1 http://www.sephora.hk/index.php?act=viewDoc&docId=12

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2 Industrial Analysis
2.1 Current & forecast Market Value
The global cosmetics market grew by 4.6% in 2007 to reach a value of
$25billion. The compound annual growth rate (CAGR) of the market during
2003-2007 was 4.1%.
Figure 1. Global Make-Up Market Value: $billion, 2003-2007
The market is forecasted to grow continuously to reach a value of $30.9
billion, an increase of 23.7% from 2007. However, the predicted growth rate of
Global Cosmetics industry will decrease to 4.0% in 2012. This is because the
Europe and America cosmetics markets have already been saturated.

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Figure 2. Global Make-Up Market Value forecast: $billion, 2007-2012
2.2 Market Share
For the market share in 2007, Europe accounts for 41.4% while Asia-Pacific
accounts for 24.4% of the market’s values.
Figure 3 Global Make-up market segmentation by geographic
L’Oreal S.A. accounts for 23% of the Global market share. Together with P&G
and Estee Lauder, They occupy more than 40.7% of the market.
Figure 4. Global Make-Up Market Share, by company
It has been found that “Branding” is very important in cosmetics market as
we can see consumers can differentiate their products and brands from the others
and companies can retain customers’ loyalty to their brands.2
2 Data monitor, Global Make-up Industry Profile

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3 Sephora
3.1 Backgroundinformation
Sephora is a beauty-retailer found in France in 1969 and acquired by LVMH
in 1997. It is also a leading high-ended cosmetics retailer in Europe. The brand
image of Sephora is excellent in the view of western cosmetics consumers for its
high quality products and services. It has approximately 515 stores among 14
countries worldwide and has planned to open another 100 specialist stores in
China by 2010.
There are 3 kinds of sale channels for Sephora: Sephora Store, Sephora inside
JC Penney, Sephora website. Three professional technological systems, which are
employed in responsibilities of operation and supply chain management and
workforce management3 , lead a smooth operation in product delivery and
internal management.
3.2 Core competence
Sephora has a distinctive store design. It provides a broad range of product
categories with over 250 classic and emerging brands. Together with its private
label products, it becomes a “women playground” where women can buy
everything.
Apart from that, Sephora excels other cosmetics retailers by providing a
different customer service called Sephora Experience. The well-trained beauty
consultants present professional advice and make-up knowledge to customers.
Also, Sephora launched a client l
oyalty program by utilizing its customer database.
Customers received special products, exclusive information, and an all-access pass
to personalized beauty.
3.3 Reasonfor expansion
The above competences show the uniqueness and strengths of Sephora which
provide essential elements for Sephora to expand globally
. With LVMH as a parent to provide financial support and database pool,
Sephora can take this advantage and explore new overseas markets easier. Sephora
already had much experience in exploring new overseas markets4. These factors
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=35416675&site=bsi -live
3 The management systems areInovis, Infor WFM Workbrain and Red Prairie, the reference is
included in G. Entry Mode
4 http://www.sephora.com/international.jhtml, Sephora has been established stores in morethan 10

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would encourage Sephora to enter in a new market and to capture the market share.

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0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Asia-Pacific Europe America
Figure 5 Make-Up market growth rate , by area (CAGR)
4 Country Selection
4.1 Target market - Asia
The continent chosen is Asia.
From the forecasted growth rate from the previous part (Figure 2. Global
Make-Up Market Value forecast: $billion, 2007-2012), It’s notified that the global
cosmetics growth rate is decelerating. However, from the following chart, we can
see it is Europe and America’s market growth rate that are decelerating, but not
in the case of Asia-pacific region. In such case, to offset the effect of the declining
growth rate in these highly populated lands, the growth rate in the Asian market
must be considerably high.
Choosing Asia aligns with Sephora’s recent expansion strategy, which mainly
aims at expanding into some Asian emerging markets, like Malaysia, Singapore
and Thailand etc... As a result, expanding to Asia makes the most sense as our first
choice.

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4.2 Country-Candidate selection
According to the vision of LVHM5 and the long-term expansion strategy of
Sephora, probing on a country for intensive expansion within that region is
preferred rather than focusing on a specific city for expansion. For that, country,
instead of city has been taken as the unit for location selection.
Next, we have to investigate which market in Asia is beneficial to our
business. As a start, we first list all Asian countries as our targets.
Then, we divided our candidates into 2 categories - developed and developing
countries. It is because we can see the potential in the countries in both
categories with developed countries high in market value and developing
countries high in market growth rate, and in order to strike a balance between the
two.
After that, we will narrow down the candidates by ruling out those
candidates that Sephora already had or will be having outlets there. Therefore, we
ruled out China, Japan, Malaysia, Thailand and Singapore from our list.
5 Louis Vuitton Moët Hennessy (LVMH)in Asia
http://en.oboulo.com/louis-vuitton-moet-hennessy-lvmh-in-asia-64689.html

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Finally, we chose those candidates that are fast-growing in cosmetic
industry6.
We also balanced both the market value and the forecasted growth rate to
finalize our 4 targets at the first stage of choosing candidates. Since we would
choose 4 final candidates in this stage, 2 from each category, we only need to
further investigate choosing which developing countries. Among the four, Vietnam
has the lowest forecasted growth rate, therefore it had been ruled out at the first
place. For the rest, India’s market value is far higher than the other two, it has to
be chosen. For Indonesia and Philippines, since their market values are similar
while the growth rate in Indonesia is 32.6%7 higher than that in Philippines.
Therefore, Philippines is eliminated
Our final candidates are: Taiwan, South Korea, India and Indonesia.
6 Asia-Pacific: Stepping Up the Pace P.3, Global Cosmetic Industry;Jan 2007; 175, 1;ABI/INFORMGlobal
7 Asia-Pacific: Stepping Up the Pace P.3, Global Cosmetic Industry;Jan 2007; 175, 1;ABI/INFORMGlobal

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4.3 Finalizing Country Choice
For the l
ocation choice criteria, we divided the factors into four categories:
demand, cost, risk measurement and competition. In each of the criteria, we will
choose the major factors for comparisons between the 4 candidates. The one
scoring the highest would be our country choice. We will discuss the importance
for each of the chosen factor; Supply factors are not compared as Sephora mainly
relies on import from other brand suppliers overseas.
4.3.1 Demand
First, there are 5 factors being included in the category “demand” – female
population8, age distribution9, the latest GDP (PPP) with its growth10, 2005-2010
cosmetics market growth and value11 and the specific country’s tourist arrival for
the year. The first three factors are for comparing the market size and purchasing
power of each country, since the main consumer groups for cosmetics products
are women within the age group of 15 to 64, it is crucial for us to know the size of
our target group, the citizens within this age group, in each proposed candidate.
Market growth and value help us to know how much potential the country
possesses for the company to develop in the future. Tourist arrivals are taken into
consideration as they are one of the most important sources of customers for
high-end cosmetics goods in each country, apart from domestic market demand.
4.3.2 Cost
Cost will be our next criteria to touch upon. It is vital for Sephora or any
8 Total female population (by country)
http://www.nationmaster.com/graph/peo_tot_pop_fem-people-total-population-female
9 Age structure(15-64years)females(2008)by country by CIAWorld Factbooks
http://www.nationmaster.com/graph/peo_age_str_1564_yea_fem-structure-15-64-years-females&date=2008
10 GDP Real Growth Rate (2007)by CIA World Factbooks
http://www.nationmaster.com/graph/eco_gdp_rea_gro_rat-economy-gdp-real-growth-rate
11 MOHIUDDIN, ORU "MARKETS DRIVECOLOR COSMETICS GROWTH." Global CosmeticIndustry 177.3 (2009):26-28. Business
SourceComplete. EBSCO. Web. 3Dec. 2009.
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=36826107&site=ehost-live

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company to succeed as it has a great effect on profit margin and revenue. As
previously mentioned, Sephora takes import as its major product source, so we
added extra concern for import-related charges, plus the possible value-added tax
in some countries for retailing, all these summed up as “duties payable” for the
ease of comparison. Moreover, infrastructure plays an important role for the cost
of products as it will affect transportation cost greatly. However, since it is hard for
us to compare how efficient a country’s transportation network is, we refer to the
infrastructure ranking with ratings provided by the International Institute for
Management Development World Competitiveness Online 12 to show their
difference in efficiency. Lastly in these criteria we have the minimum capital as a
percentage of GNI provided by the World Development Indicator13. We exchange
the amount into US dollar for better comparison. It is important in a way that it
specifies how involved Sephora is into this country and the level of risk of
investing into the country.
4.3.3 Riskmeasurement
The third criterion is risk measurement and the factors we considered are property
right protection (property rights index)14, repatriation easiness, government control
15and political stability16. As we can see, the weighing scores of political stability as
well as government control are the highest. We believe that when there are riots or
political instabilities, chances for people to buy luxury goods will be lowered.
Decrease of demand will absolutely affect sales. Thus companies must carefully
consider the political situation when they make any location choice. What is more, if
12 InfrastructurerankingfromIMD international
http://www.nationmaster.com/graph/eco_inf-economy-infrastructure#source
13 Min. Capital(%GNI) http://www.doingbusiness.org/ExploreTopics/StartingBusiness/
14 Property Rights Index by the Heritage Foundation and the Wall streetJournal
http://www.globalpropertyguide.com/Asia/property-rights-index/
15 Easeof doing business index by country (2006) by World Development Indicator database
http://www.nationmaster.com/graph/eco_eas_of_doi_bus_ind-economy-ease-doing-business-i
ndex&date=2006
Economic Freedom Index by the Heritage Foundation
http://www.nationmaster.com/graph/eco_eco_fre-economy-economic-freedom
16 Government Corruption (2005) by Transparency Council
http://www.nationmaster.com/graph/gov_cor-government-corruption

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the government control is very strict, companies may need to spend extra cost for the
sake of dealing with any restrictions they face and thus get into the market. Property
right protection is also important to companies as weak protection will lead to
decrease of R&D and other investment incentives. That’s why we compared the
property rights index among different countries based on the Global Property Guide to
see which country is the most suitable one for Sephora. We also included repatriation
easiness as a crucial factor because the more repatriation difficulties they face the
lower incentives they have to take part in the market. As a result, we rank for the risk
measurement among these four countries to see which one faces the fewest risks in
their investment.
4.3.4 Competition
Last but not least, we take possible competition faced by Sephora into account as
well. As what has mentioned above, import is Sephora’s major product source, it
imports many cosmetics brands from different countries for its customers in a bid to
satisfy different wants. In other words, Sephora acts as a retailer. That’s why possible
direct competitors it faces will be other big retailers like Cosmed and Watson’s in
Taiwan, Mandom in Indonesia…etc and indirect competitors will be those companies
which only sell their own brand products such as Skin Food in South Korea, DHC in
Taiwan, L’Oreal and so on. Moreover, as indirect competitors are somehow an
unavoidable competition, we focus mainly on the direct competitions instead of the
indirect ones. That’s why we didn’t give any weighing score to those indirect
competitors in different countries. Also, it should be clarified that we didn’t give any
ranking to this category as we believe that there are numerous possible competitors
may be faced by Sephora and it is impossible for us to list them all here. Therefore in
order not to be biased, we didn’t do any ranking in this part.
According to the above analysis, we find that among these 4 countries, Taiwan
get the highest score. And that will be the country we suggest for Sephora to take part
in.

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4.3.5 Locationform
Figure 6 Location form - Demand
Figure 7 Location form-Cost

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Figure 8 Location form-Risk Management
Figure 9 Location form-Competition
* CPI corruption in the public sector rating (0=highly corrupt to 10=highly
clean)
** Ease of doing business index (1=most business-friendly regulations) +
The Heritage Foundation Economic Freedom Index
***2009 Infrastructure ranking from International Institute for
Management Development World Competitiveness Online
**** Exchange rate as at 23/11/2009 from hk.finance.yahoo.com

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4.4 City selection
4.4.1 City
After Taiwan was chosen as our country for Sephora to expand, Taipei is
selected as our final location to start within Taiwan.
With in Taipei, Taipei metropolitan area is chosen as our city location. Taipei
metropolitan area includes Taipei City, Keelung City and Taipei County which is
comprised of 12 small cities and 15 townships. These areas form a metropolitan
area based on their geographical characteristics in which they are all located
within the Taipei Basin.
4.4.2 City chosen-reason
I Large population
The population of the Taipei metropolitan area mounted to 6,863,10617 for
the month ended October 2009, which was the highest among the metropolitan
areas in Taiwan. With this huge population, it can generate satisfactory
purchasing power which will be beneficial for Sephora to station in.
II Large labor force
For the year ended 2008, the labor force in Taipei metropolitan area was
3,041,000, with this high labor force, there will be adequate supply of labor to
Sephora, and the issue of recruitment will be solved.
III Intensive transportation system
For the aviation aspect, there are two airports, one is Taiwan Taoyuan
International Airport for international flights and the other one is Songshan
Airport for domestic and cross-strait flights. In railway aspect, the western line
under Taiwan Railway Administration and Taiwan High Speed Railway connect
Taipei metropolitan area with all other parts of Taiwan. Within Taipei, the Taipei
Metro serves rapid transit for over 1.3 million daily. Also, the Taipei Bus System,
which is under the administration of Taipei Joint Bus Service Management Center,
Taipei City Traffic Bureau, Taipei County Traffic Bureau and operated by 15
17 Taiwan Ministry of Interior

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private agencies, serves the bus routes connecting Taipei and other parts of
Taiwan. The well established transportation system will highly increase the
transportation efficiency for Sephora to import products from overseas suppliers.
With convenient transit methods, Sephora can attract more customers from all
around the Taipei Metropolitan area and even the whole Taiwan.
Based on these three reasons, we will choose Taipei metropolitan area as our
city choice.
4.5 Overviewof Cosmetic Industry inTaiwan
Let’s gain deeper insight on the cosmetic industry in Taiwan. Our analysis
will focus on both opportunities and threats of the industry.
There are various opportunities in Taiwan cosmetics industry. The first one
is higher female purchasing power. With the increasing number of working
female in Taiwan, purchasing power among them will generate higher demand
for cosmetics. What is more, as nowadays more and more female pay attention to
skin care, it is believed that even higher demand will be generated.
Secondly, the consumer age group becomes younger and younger. Main
consumers of cosmetics are mainly 15 to 65-aged female, especially working
female, but recent development showed that consumers of cosmetic products are
getting younger than before, and the potential for younger consumer market is
higher as well. The young female market occupies about 20% of the total
cosmetics industry in Taiwan, it is expected that the market share of the market
will get higher in the future.
Thirdly, new value chains are getting more popular. The online shopping and
TV shopping are gaining popularity in Taiwan, which will be beneficial for
cosmetics to be marketed by these channels.
Fourthly, the fragrance market is expected to get a fast growth. According to
some researches18, the fragrance market will have higher growth than other
cosmetics.
18 <Applying Grey Prediction Theory in the Market Development Trend Forecastingfor Cosmetic
Industry in Taiwan>Chih-Sen Hsieh

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On the other hand, there are three main threats in Taiwan cosmetics
industry.
Firstly, the prevalence of substitutes of cosmetics leads to fierce
competitions within the industry. As the entry threshold is low, many cosmetics
shops and brands enter Taiwan and thus substitutes are formed.
Secondly, the demand for affordable luxuries is increasing. It will be a threat
to cosmetics industry as the quality control will be more important and thus
higher cost will be needed.
Thirdly, there are many potential local and overseas competitors. With the
lowered tariff set by the government in last decade, more overseas brands have
been planning to get into this market.
With all opportunities and threats existing, Sephora needs to develop a
suitable strategy for entering the Taiwan cosmetics market for the best outcome.

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5 Strategy
5.1 Sephora’s Strategy Choice
There are two main concerns in determining Sephora’s strategy, which are:
pressure for cost reduction and pressure forresponsiveness.
Figure 10 Strategy analysis
The above matrix fits four different strategies into two categories. After
our study, we find that the cosmetics market in Taiwan suffers from both high
pressure for cost reduction and high pressure for local responsiveness. Therefore,
we decided to choose transnational strategy as our strategy. In the following
contents, we would like to explain the reasons behind and suggest some ways to
implement our strategy.
5.2 Pressure for Cost Reduction
Cosmetics industry is very competitive in Taiwan, as many
cosmetics-related companies have already entered this market and have built up
their brand image long time ago. In order to have more clear understanding to our
competitors, we separate them into two categories by characteristics: direct
competitors and indirect competitors.
Sephora acts as a role of retailer. It purchases cosmetic products from many
high-end cosmetic brands and introduces these high-end cosmetic products to
customers.

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5.2.1 Direct Competition
Direct competitors are those having similar characteristics with us, such as
similar company scale, business model, target customers and market positioning.
Therefore, Watson’s and Cosmed, two largest chain retailers in Taiwan cosmetics
industry, are our major direct competitors. Since they have many cosmetics
product lines and they introduce many choices of cosmetic products to customers
in their stores.
In Taipei, there are 77 stores opened by Watson’s and 100 stores by
Cosmed.19 This means that we could easily find one Watson’s store or Cosmed’s
store within 1.54km2. Therefore, the direct competition is very high in Taiwan.20
5.2.2 Indirect Competition
Indirect competitors are those having different company scale, target
customers, business model and market position, but may provide similar products
or services. In Taiwan, there are many cosmetics counters opened by major
cosmetics brands such as Clinique, Shiseido, Lancôme, Chanel, etc. These
cosmetics counters provide the same products as we purchase from these brands.
However, they just focus on the customers who have high l
oyalty to their brand, so
it is different from Sephora’s positioning as a retailer of cosmetic products. As
Taiwanese prefers to visit shopping malls and department stores nowadays
21cosmetics counters opened in these locations will affect Sephora’s business.
Besides, online retailers such as PayEasy who focus on other market
segment are also Sephora’s potential competitors. As they have relatively low
operating costs, they could offer cosmetic products at more affordable prices.
Therefore, online shopping becomes more and more popular in Taiwan. Till now,
3 million people have registered in PayEasy’s online shop.22 And we could see
that the market share of this business will further expand in recent years.
19 Watson’s Website: http://www.watsons.com.tw/Place/Index.aspx
20 Wikipedia: http://en.wikipedia.org/wiki/Taipei  
21 新竹市女性消費者對化妝品之消費行為研究 p.7
22 EasyPay Website: http://www.payeasy.com.tw/payeasy/event/request/about.shtml

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5.2.3 HighElasticity ofDemand
As there are many competitors in Taiwan, many substitutes are available in
the market. Customers could easily buy the same cosmetic products from
Sephora’s stores or other cosmetics counters. For example, there is no difference
between the Clinique’s mask bought from Clinique’s cosmetics counters and that
bought from Sephora’s stores. Besides, since there are many retailer stores in
Taiwan who focus on the same market segment, customers have no loyalty to one
specific retailer. Due to the high competition in cosmetics industry, customers
could easily find similar retailers and products. Therefore, they face on a very low
switching cost when they want to buy from different retailers or buy different
products. Thus, it is easy for customers to change their purchasing habit. As a
result, the elasticity of demand for cosmetic products is very high, and it presses
down the bargaining power of Sephora. Thus, Sephora is not able to freely set
prices for its products; instead, the prices are set by the market power.
5.2.4 Future cost pressure
Since the import duties and tariff of cosmetic goods in Taiwan have been
lowered, the profit of cosmetic industry has risen rapidly. Therefore, more and
more cosmetics brands would like to enter the market directly or via JV in order to
maximize their profit. This causes the redeem of exclusive agency23
5.3 Pressure for local responsiveness
To know how Sephora is facing pressure for l
ocal responsiveness, we first
have to look at the consumer taste and preference in Taiwan.
Customers nowadays prefer open-shelf large retail stores offering one-stop
shopping experience. According to a report that studies women consumer
behavior towards cosmetics in HsinChu City, consumers no longer shop at
traditional specialized stores but open-shelf stores like Watson’s and Cosmed. And
each time over 80% of them spent over $6000 and 73% of them will consume
23企業經營策略期末報告 p.3

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cosmetics in 6 months. (Refer to appendix 1)
Besides, demand for make-up is highly linked to fashion trend in the market.
There is an obvious trend showing that consumers have became more and
more aware of the dangers of using chemical-based cosmetics so they begin to
switch to products with natural ingredients that serve the same function as
traditional cosmetics do. 24
Those highly educated women in Taiwan tend to buy high quality brand name
imported products.
Sunscreen and whitening products will continue to be the market dominant
with expected rate to be increased to 10-12% per annum over the next 3 to 5
years25.
Statistics have shown Taiwan customers value skin care products most with over
60% of sales come from anti-aging and whitening products26.
Figure 11 Market Sales of Cosmetics, by function ,2007
With elevated correlation between service quality and repeated purchase,
24 Cosmetics to Taiwan – For Australian exporter
http://www.austrade.gov.au/Cosmetics-to-Taiwan/default.aspx
25 Taiwan - Make-Up © Datamonitor (Published November 2008)
http://web.ebscohost.com/bsi/pdf?vid=5&hid=107&sid=989f401a-4bb9-467e-ad43-018616f71
f5d%40sessionmgr110
26 Taiwan Institute of Economic Research

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Sephora will have competitive advantage in expanding to Taiwan with its high-end
open-shelf retail store and customized service.
About the law and registration, it is favourable to Sephora as the tax is l
ow,
minimum wage is reasonable and procedures for importing cosmetics would be
simple. The only special remind is that labeling should be written in Chinese.
(Refer to Appendix2)
5.4 Differentiation: Reduce Pressure for Cost Reduction
The problem of cost pressure is due to the similarity between cosmetics
products provided. Therefore, we need to differentiate our products in order to
reduce the high competition. Several implemental strategies will be made in order
to build up our core competence:
5.4.1 IntroductionofExclusive Brands
Sephora owns a series of high-end exclusive brands. Therefore, as a role of
retailer, Sephora provides more choices of brands that other retailers could not
offer. It differentiates Sephora from other retailers as it provides a more
complete product line to customers.
5.4.2 Positionat High-End Users
As other retailer stores have already occupied a large portion of the market
share, we need to find another niche market segment that other retailers do not
focus on.
Study shows that people with higher education level tend to have a greater
demand for high-end cosmetic products, as they believe it to be more trust-worthy
and more effective. As women in Taiwan are better educated now, demand for
high-end cosmetics products is expanding. 27
We find that major retailers in Taiwan seldom sell high-end cosmetic
27新竹市女性消費者對化妝品之消費行為研究 p.13-16

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products, such as Clinique, Shiseido, Chanel, Shu Uemura, etc. Instead, they just sell
some low-end products at affordable prices, such as L’Oreal, Nivea, Olay, etc.
Whereas the cosmetics counters just sell their brands’ products. There is no such
retailer store that would sell a variety of high-end cosmetic products in Taiwan.
Therefore, we would like to target this new market segment that other
competitors overlooked.
Sephora is already a high-end-oriented giant retailer worldwide. It has
product lines from 250 international high-end brands that are not available in
Taiwan. Therefore, it could provide a one-stop shopping experience for
high-income customers to purchase high quality and luxury goods.
5.4.3 Introductionof PersonalizedService
A study shows that service quality is directly correlated to the repeated
purchase behavior and consumer loyalty in Taiwan retailing business. (Refer to the
appendix 3) Therefore, we would like to introduce Sephora’s outstanding
personalized service to satisfy the customer’s needs28
Sephora’s success in western markets is because of its core competence – its
service. Sephora provides a variety of high quality personalized services in order to
differentiate itself from other cosmetics retailers. Its service includes free in-store
consultation, which provides one-on-ones help customers find the best solution for
their skin condition, face structure and so on. It provides a lot of samples for trial
uses. It shows customers how to customize current trend and help them to build up
their own style. Also, it provides plenty of beauty services, such as eyelash bar,
customized make-up, etc. In order to introduce cosmetic knowledge and technical
skills to customers, Sephora also provide some cosmetic-related courses to satisfy
customers’ needs.
Sephora pays high attention on its staff training. It introduces a variety of
cosmetic-related training programmes for its employees to improve their cosmetic
knowledge.29(Refer to appendix 4)
28 TheInternational Journal of Organizational Innovation Vol 2 Num 2 Fall 200
29 Sephora’sWebsite: http://www.sephora.com/university/index.jhtml?searchString=sephora%20university

25
5.5 Product Adaptation
There are over 250 brands in Sephora, but of course Taiwan market will not be
interested in all of the brands.
As the importance of skin care products overwhelms that of colour makes up,
products which can be serve as whitening, anti-aging features, with natural
ingredients should still be the upcoming trend in Taiwan. With reference to the
Datamonitor statistics30, Shiseido, L’Oreal and P&G are the three market dominants,
so brands such as Lancôme, Shiseido, which are widely known by consumers, will the
core products of Sephora. Besides, with some exclusive natural skin care brands to be
sold in Taiwan, like 100% Pure, Antipodes, Nvey Eco, etc, Sephora will be able to
grasp the market niche as well as the major market demand.
Figure 12 Market Share by Brands in ,2007
30http://web.ebscohost.com/bsi/pdf?vid=5&hid=107&sid=989f401a-4bb9-467e-ad43-018616f71f5d%40sessionmgr11

26
6 Entry Mode
6.1 Entry mode selection
There are mainly four types of entry modes, which are: export, license,
franchise and foreign direct investment. In order to decide which entry mode suits
Sephora the best, the following flow chart was used.
Figure 13 Entry Mode Selection diagram
The major problems concerning export are transportation costs and trade
barriers; including tariffs, quotas and legislations. Although in Taiwan, there is no
other trade barrier other than tariff; but for the nature of Sephora, a cosmetics
retailer; export is not a wise choice.
Neither license nor franchise is applicable. As one of Sephora’ core
competences is its top quality services and well-trained beauty consultants.31
31 http://www.sephora.com/university/index.jhtml?searchString=Sephora%20University
To build the most knowledgeable and professional team of product consultants in the beauty industry,
Sephora developed "Science of Sephora." This program ensures that our team is skilled to identify skin
types, have a knowledge of skin physiology, the history of makeup, application techniques, the science

27
Licensing will, however, raise the fear of losing this core competence. Moreover,
precedence to year 1990 agencies and exclusive licenses were very common in
Taiwan, but since 1992 tariff has dropped from 35% to 10% and taxation for
cosmetics has ceased to exist. Therefore many international cosmetic brands
revoked their agencies and invested back in the form of FDI instead, as it would
be more profitable. And in fact, studies clearly show that profits have averagely
increased by 70% after companies have switched their entry mode32.Companies
that made this move included Lancôme, Dior, Estee Lauder and Chanel. Chanel
even decided to set up a flagship store in Taiwan by December 2009.
In theory, franchise solves the problems that license cause. However, Sephora
is a retailer, franchise will result in a lower profitability when distribution channels
further increase. Also, Sephora does not only sell products of its own brand. What
gives the most value to the brand equity is that it provides large varieties of
products from different brands and the high quality services that come along with.
The following Country-attractiveness/ company-competitive strength matrix
can also be a reference of what entry mode should be chosen:
Figure 14 Attractiveness-competitiveness Diagram
of creating fragrances, and most importantly, how to interact with Sephora's diverse clientele. To
further enhance the education program, Sephora opened the doors to an expanded training facility
“Sephora University”in San Francisco in October 2007.
32

28
Taiwan is a highly-attractive country as from Part 3 of our report. Sephora
also has high competitive strength, apart from its core competences, it is very
effective in penetrating market, gaining market share promptly in both developed
countries and emerging countries and therefore should impose the invest/grow
strategy, which is FDI.
Foreign direct investment is clearly the solution to all. The next step is to
decide whether wholly-owned subsidiary (WOS) or joint venture (JV) is more
favorable. First, let’s analyze the advantages of WOS.
6.2 Advantages ofWOS
Firstly, this helps enhance the internalized advantages of Sephora. Its service
quality can be maintained up to standard; a cost cheaper than JV due to time and
resources can also be saved because of fewer conflicts and negotiations. Strong
control over operations can be ensured as Sephora is able to oversee distribution
in different countries. Setting up WOS is preferable to JV because it also gives us
tight control that might be required for coordinating a globally dispersed value
chain. Management decision can be made with higher flexibility, where every
move can provide maximum benefits to stakeholders and especially shareholders,
as WOS will obtain 100% shares in profits and market shares without sharing.
All entry modes have their advantages and disadvantages, and trade-offs are
inevitable. However, Sephora still have its own special strength that nobody could
copy.
6.3 Overcoming Drawbacks of WOS
Although there are many advantages in using WOS as the mode of entry, some
obstacles still need to be overcome. There are 3 main problems contributed by
WOS: 1. A huge investment involved, 2. the social and cultural strains from
different country boundaries, and 3. A longer period of time for establishment of a
new oversea market. The best way to tackle these problems is to take advantages
of the internalization advantages of Sephora.

29
I Good management decisions
Inovis33, Infor WFM Workbrain34 and Red Prairie are employed by Sephora
for supply chain management, workforce management, which aims at
maintaining competitive advantages, improving budget and forecasting
capabilities, and distribution management respectively. These software systems
could provide customized programs to solve the difficulties that Sephora
experienced. These three system providers have been establishing for many
years and they are expert of their own field. By outsourcing these management
functions, it helps enhance the efficiency of the operating performance, cut cost
and maintain competitive advantages. This move enables Sephora to concentrate
on developing their expertise- cosmetics and the high quality of their staff.
In addition, the management of Sephora is efficient because they can enter
China and Hong Kong within three years.35 It has planned to spend US$50
million to open 100 specialty stores in China by 2010 and open 15 new stores in
Hong Kong within the next five years. This efficiency leads Sephora to take the
niche from entering the China market and gaining the market shares more
rapidly in this intensively competitive industry.
II LVMH as Sephora’s parent
Sephora has been the subsidiary of LVMH since 1997. According to exhibit 341,
Sephora shows a growing trend of increasing operating revenue. It is attractive for
LVMH to invest and provide strong financial support for the growth of Sephora.
Moreover, Sephora could make use of the database of LVMH and the experience
from LVMH. Since LVMH has a large range of brands spreading all over the world,
it has accumulated a huge database from different brand products and regions.
Sephora could make a good use of it and this would facilitate adaptation in Taiwan.
33 http://www.inovis.com/news/press/2006/2006051701.jsp
34http://www.infor.com/company/news/pressroom/pressreleases/infor-wfm-workbrain-sephora/
35http://www.konaxis.net/index.php/20081026172/news/cosmetic-perfumery-hygenic-products-china
/first-sephora-store-to-open-in-hong-kong.html

30
Figure 15 Sephora: Revenues and Operating Profits, 1998-2012E
III Experience from overseas markets
Both Sephora and LVMH have much experience in exploring overseas markets.
Exploring Taiwan market would be easier with the experience curve from China
and Hong Kong markets. Since Taiwan has similar cultural and historical
backgrounds with the two, it is easier for Sephora to collect relevant information
that are related to Taiwan market. Also, there is some degree of interaction and
influence by the multi-media among these three places so that Sephora can obtain
local information of Taiwan in a more accessible way.
6.4 Greeenfieldor Brownfield?
Establishing a WOS in a new market involves a huge financial investment, a
more cost effective way should thus be chosen. Greenfield WOS should be used
as the entry mode because there are fewer direct competitors in Taiwan, no
inherit problems needed to be tackled and more local financing incentives can
be gained.

31
7 Conclusion
The strong core competences of Sephora, together with the strong financial
backup from LVHM, provide the essential elements for Sephora to expand globally.
Along with the high market share of Sephora in Europe and the US, the saturation of
Sephora-winning area limits the growth of future revenue. However, the market value
of Asia grows at 8% per year. The emerging Asia-economy and market value of
Cosmetic industry in Taiwan has been the spotlight for Sephora. With the detailed
analysis, it is foreseeable that enormous revenue will come from Asia and it is no
doubt that Sephora should expand to Asia and Taiwan.
“To represent the most refined qualities of Western "Art de Vivre" around
the world.”
~ mission of Sephora LVMH.
MGT2510-Dubai Group
Student ID Student Name + (Alias)
s0862415 Chiu Nga Man (Carrie)
s0861437 Chow Ming Wai (Jennifer)
s0861734 Chung Ki Tat (Kitat)
s0862549 Lee Wing Sze (Tania)
s0862061 Ma Ning (Maning)
s0860199 So Wing Ki (Jessica)
s0861625 Sze Pang Ching (Alfred)
s0860886 Wong Kei Ming (Florence)
s0862855 Wong Yin Ting (Chinny)

32
8 Appendix
Appendix 1
新竹市女性消費者對化妝品之消費行為研究
平均隔多久時間購買化妝品平均每次購買金額
次數百分比累積百分比次數百分比累積百分比
1~3 個月 84 30.43 30.43 2000 元以下 95 34.42 34.42
4~6 個月 117 42.39 72.83 2001~6000 142 51.45 85.87
7~9 個月 30 10.87 83.7 6001~10000 31 11.23 97.1
10~12 個月 5 1.812 85.51 10001~20000 2 0.72 97.83
每隔 1 年以
上
5 1.812 87.32 20000 元以上 6 2.17 100
不一定 35 12.68 100 總和 276 100
總和 276 100
何種方式購買化妝品
名稱次數有效百分比累積百分比順序
開架式商店(康是美、屈臣氏) 227 27.4 27.4 1
百貨公司專櫃 224 27.1 54.5 2
專賣店 135 16.3 70.8 3
專人購買(直銷) 75 9.1 79.9 4
美容沙龍或護膚中心 39 4.7 84.6 5
平行輸入站(莎莎) 35 4.2 88.8 6
超市、便利商店 32 3.9 92.7 7
其他(美容材料行等) 60 7.3 100.0 —
總次數 827 100.0 — —

33
Appendix 2
Forall cosmeticscontainmedicated ingredients and eye makeup
cosmetics:

34
Appendix 3
Correlation betweenservice quality and customer loyalty
5The International Journal of Organizational Innovation Vol 2 Num 2 Fall
2009
Referring to the study, a hypothesis is constructed in order to measure the
impact of service quality to customers.
In the correlation matrix, r value measures the degree of correlation
between the comparing factors, when r value is closed to 1; it shows a perfectly
positive correlation between two comparing factors. p value measures the
probability that the above calculation is wrong, if the p value tends to 0, it
indicates that the calculation would not be wrong.
36
The result shows that the service quality and repeated purchase have r =
0.411 and p = 0; whereas service quality and customer loyalty have r = 0.490 and
p = 0. Therefore, it implies that repeated purchase and customer l
oyalty are
positive correlated with the retailer’s service quality. Therefore, it provides strong
evidence that Sephora should introduce its service to Taiwan.

35
Appendix 4
Sephora’s Website:
http://www.sephora.com/university/index.jhtml?searchString=sephora%20univ
ersity
Sephora has established its own education center called “Sephora University”. In
this education center, many training programmes are introduced to staff, such as
Science of Sephora, Skincare Encore, and Skincare PhD, etc. In “Science of
Sephora” programme, staff acquires a lot of different skills and knowledge, such as
skills of identifying skin types, knowledge of skin physiology, history of makeup,
application techniques, science of creating fragrances and interaction with
customers.
Appendix 5
To build the most knowledgeable and professional team of product consultants in the
beauty industry, Sephora developed "Science of Sephora." This program ensures that
our team is skilled to identify skin types, have knowledge of skin physiology, the
history of makeup, application techniques, the science of creating fragrances, and
most importantly, how to interact with Sephora's diverse clientele. To further
enhance the education program, Sephora opened the doors to an expanded training
facility “Sephora University” in San Francisco in October 2007.

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