Abstract
The deregulation of Japan’s Large-Scale Retail Store Law or Daitenho (Ghauri and Cateora, 2006) in the early 1990’s resulted in a significant influx of foreign direct investment from multinational retail enterprises into the country. Sephora, the luxury cosmetics retailer, is one such multinational retailer that ambitiously ventured forth into Japan, which at the time was heralded as the second largest consumer base in terms of luxury cosmetics in the world (Ahmadjian and Robbins, 2005).
Sephora’s acquisition by Moet Hennessy Louis Vuitton triggered an aggressive global expansion initiative by the luxury retailer. Due to its proven success in Europe Sephora’s core competency, the model of ‘assisted self-service’ (Sephora, 2009) was standardized across its internationalization process. This stringent application of its signature formula and simultaneous excessive market entry, overlooking the significance of market research resulted in its ignorance of critical socio-cultural and economic factors of the Japanese market. These factors eventually led to the demise of Sephora, Japan.
Introduction
From its humble inception as a single perfumery in France to the global luxury retail venture today, Sephora has followed an aggressively expansive global market entry policy, particularly prominent since its acquisition by Moet Hennessy Louis Vuitton (LVMH) in 1997 (Nihon Keizai Shinbun, 1999a). At present it is the market leader of perfume and cosmetics in USA, the second largest in Europe and is securing a sizable market share in China. As a result of further expansion in Asia Sephora targeted Singapore in 2008 and is now speculated to seek expansion in India, due to the recent trade deregulations by the Indian government, while simultaneously escalating its growth in China, targeting 100 shops in the country by 2010 (Shuey, 2007).
Throughout its internationalization process Sephora has remained stringent with regard to a single concept, its signature category killer business model of ‘assisted self-service’, a standardized geocentric global service strategy. Although this strategy has evidently been lucrative in the long term, at the turn of the century it resulted in the company’s withdrawal from the second largest cosmetics market in the world, Japan (Ahmadjian and Robbins, 2005; Sephora, 2009).
The catalysts that resulted in the failure of Sephora’s service model in Japan are multifarious. This report explores these micro and macro drivers that lead to the extenuating circumstances of Sephora’s ultimate withdrawal.
Sephora – The Profile
Sephora, a fully owned subsidiary of Moet Hennessy Louis Vuitton (LVMH), is a world renowned retail luxury cosmetic chain, operating in over 21 countries in Europe, America and Asia, displaying over 250 brands of makeup, skin care, fragrance, bath, hair products, hair tools, and beauty accessories, including its own private label. Its prominent brands include Clinique, Chanel, Burberry, Bvlgari, DKNY, Dior, Givenchy, Gucci, Lanc�me and Versace. At the end of September 2009, Sephora consisted of a syndicate of 963 stores with continued plans of future expansion (Sephora, 2009; LVMH, 2009a).
Shop 8, the infancy of Sephora, was a retail perfumery in Demagos, France originated as a result of the visionary initiative of its founder Dominique Mandonnaud – ‘assisted self-service’. This new retailing model was unique compared to the existing service based model in the industry at the time, where sales persons, who would receive a performance-based commission, would specialize in a particular brand, providing a tailor-made service. The new model was reflected in the company’s store design with minimalist displays, encouraged free sampling, sales-assistance on request and prominent pricing. This ‘supermarket’ of luxury beauty products was perceived to be a simple, cost efficient concept consequently giving the consumer more freedom to move and experiment (Afuah, 2009).
As Shop 8 acquired a chain of retail cosmetic stores in France from Boots in 1993 the company rebranded itself under its acquired logo – Sephora (Hebrew ‘Tzipporah’ or ‘beautiful bird’). During this transition its signature formula – ‘assisted self-service’ was preserved. Following its acquisition by LVMH this pragmatism was embedded into the ‘Science of Sephora’ (Afuah, 2009; Business Week, 2006; Sephora, 2009). In 1999 Sephora launched its website which now markets its products to 9 countries worldwide. Today, the company is a highly profitable affiliate of LVMH’s Selective Retailing division which reported a growth in revenue of 3% in Asia and 1% in Europe during the third quarter of 2009 despite the flagging effect of global recession on retail sales (Sephora, 2009; LVMH, 2009a).
Sephora’s initial growth strategy primarily focused on expansion within home boundaries with gradual progression in successively expanding psychic distance to Monaco and Luxembourg, progressively developing its market investment (Johanson and Vahlne, 1990; Forsgren, 2002). But following its acquisition the retailer’s market entry strategy reflected that of LMVH where it aggressively pursued internationalization. This process was sustained by forming strategic alliances (acquisitions and joint ventures) with companies established in the industry of the target market. In 1998 alone Sephora expanded in to Japan, USA, UK, Spain, Portugal and Italy. Within 3 years following its acquisition the retailer’s chain of stores increased eight-fold globally from 57 to 461, proliferating into 12 countries (LVMH Annual Report-Selective Retailing, 2000)
But the successive years saw Sephora retreating from Japan, UK and Germany, struggling in Spain while restructuring its investment in USA by ceasing operations in Rockefeller Centre in New York (Sokol, 2002). As a consequence of the company’s ambitious attempts to global expansion it reported large revenue losses at the turn of the century, the aftermath of which resulted in a management overhaul in 2003 (Groves and Drier, 2005).
Japan – The Culmination of Pragmatic Nationalism
Following the World War II Japan’s outlook of the world was cynical in terms of foreign direct investment (FDI). Due to this pragmatic nationalistic stance, it resisted any form of FDI in local industries that granted foreign companies ownership rights, with the exception of non-equity ownership and licensing (Hill, 2009).
In the aftermath of the stock market crash in 1990 and due to Structural Impediment Initiative (SII) and follow-up negotiations the Japanese government adopted economic reforms which attempted to revolutionize the retail sector in the country. It slackened the terms of the Large-Scale Retail Store Law, which was perceived to be the main impediment for foreign investment in the sector, especially for supermarkets and large retailers (Tsuchiya and Riethmuller, 1997). This Law required that firms or individuals planning to open a store above a government prescribed limit obtain the approval of several regulatory committees (Riethmuller, 1994). Engendered by the slackened trade barriers and enticed by the large and lucrative consumer market, falling property prices of the post-asset-bubble and populous of cheap labour, many foreign retailers such as Toys R Us, Sephora, Boots, Carrefour and IKEA eagerly ventured into the Japanese market (Larke and Schmekel, 2002; Nakamoto and Rahman, 2001).
‘Konnichiwa’ – Sephora Extends a Hand to Japan
For Sephora, Japan presented the largest consumer pool with its demand for high quality luxury cosmetics being only second to USA, symbolizing a significant scale advantage. In 2002 Japan was home to 126 million consumers and generated a retailing trade volume of �136 trillion making it the second largest consumer market in the world (JETRO, 2002). Through the application of its standardized service model in Japan, it is clear that Sephora intended to gain economies of scope and scale in the country.
Sephora entered the Japanese market by obtaining a fully owned subsidiary – Sephora EEP, targeting Japan’s cosmetics and beauty care market which generates $10bn in revenue each year. In 1999 the retailer launched its superstore chain in Tokyo with a total of 7 shops, in high class locations such as Ginza and Shibuya. By April, Sephora planned to open three additional shops in Osaka and in Tokyo’s Shibuya and Funabashi districts (Juji and Rahman, 1999).
The Eventual ‘Sayonara’ – The Analysis of Sephora’s Key Failure Factors in Japan
Although the deregulation of trade barriers invited FDI into Japan, the asset bubble that burst in the 1990s plunged the nation in to severe economic recession. The multinational retail enterprises flocking into Japan in the post-asset-bubble economy were engaging in a proverbial game of chess. Too many false moves and the companies found themselves checked out, literally. This is evident in the cases of the multinational retail companies Boots, Carrefour and Sephora who did not understand the rules of the game; the intricate set of social norms and commercial ethics that formed the base of the Japanese business structure.
Irrespective of its depleting market shares and continuous losses Sephora maintained its investment in Japan until 2002, assured that prolonged market presence will impact customer resilience and help achieve market share. But following the September 11 attack on the World Trade Centre, its impact on the world economy coupled with the severe economic slowdown in Japan finally drove Sephora to succumb to its failure in January 2002. The company’s losses in its final year operations were over $50 million (Weil and Hirano, 2001). The closure resulted in market speculation that LVMH will sell its Selective Retailing problem child, which was denied by the company. It cited the decision to withdraw from Japan as a move to be in conformance to its new strategy of ‘achieving profitable growth’ by venturing into new markets where it can eventually gain significant market share. The management’s trajectory was to focus on Europe and key region in the United States where it had major market positions (LVMH – Selective Retailing Annual Report, 2001).
Dawson (2007) identifies retailing as a “response to culture”. The key antecedent that drove Sephora out of the Japanese market can be identified as its lack of “response” or adaptability arising from lack of understanding of key elements of the market. For the purpose of this report four key failure factors are identified.
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- Failure to understand the target consumer
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- Challenging the status quo – Failure in supplier negotiations and underestimating competition
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- Failure to interpret the economic climate and resulting consumer dynamics
4) Lack of integrity – knowledge transfer and learning
The following sections will analyse the above failure factor and attempt to understand the cause behind each factor.
Failure to Understand Target Consumer
Lack of Customer Service
Using the standardized global signature ‘assisted self-service’, Sephora attempted to infiltrate the psyche of the Japanese consumer by emphasising on its Laissez-faire environment. The average Japanese consumer is quality conscious not only in terms of the product but also the related services rendered. In the existing Japanese cosmetic department stores the customer would be exposed to a cocktail of services by specialized brand ambassadors. The ‘unique’ experience that Sephora offered deprived the Japanese consumer of the prestige and privilege that she was accustomed to (Financial Times, 2001b).
Ineffective Product Targeting
Another blunder Sephora made in Japan was the emphasis placed on perfumes, harbouring on the fact that perfumes generated a principal portion of its global profits, in spite of cosmetics accounting for the largest beauty products market share in Japan (Financial Times, 2001b). The average expenditure on fragrance products was a mere $4.40 per capita (Lepir, 2002), historically accounting for 2 or 3 percent of beauty sales (Weil and Hirano, 2001). Few multinationals have been aware of the aversion the Japanese have for fragrance, such as L’Oreal who has developed products based on specialized formulae targeting the Japanese market (Lepir, 2002). By placing fragrance as their main attraction Sephora has clearly misdiagnosed the consumer habits. Rahman’s (1999) statement “the sweet smell of perfume wars: French retailer Sephora’s first Tokyo store will make waves” provides an insight into the extent to which the consumer was misjudged.
Ineffective Market Targeting
Further, Sephora launched its flagship store in Harajuku, Tokyo, targeting an age range of 20 to 30, where the majority of the population was far younger than of its target segment (G-Cross Inc, 2008). This is a clear indication that the retailer failed to analyse the population demographics which is key in identification of the products, its placement and promotion.
Effect of Colour Association
In my opinion Sephora’s colour theme may have being a precipitating factor for consumer aversion of the retailer. Sephora’s signature colour theme is Black and White which is not only reflected in the company logo, but extends to all aspects of the company design, to the floors, gift wrapping and decorations. According to Business Week (2006) the first Sephora shop in Tokyo stood out with a “black-and-white striped facade”. In the Japanese society the colours black and white are associated with death (Bucknall, 2006). The late 90s was an era where the Japanese society was in the initial stages of being exposed to Western culture and norms. The consumer may not have been sufficiently sophisticated to disengage from such colour association that is embedded into their psyche. This colour association may have further aggravated the aversion of the Japanese consumer towards the luxury retailer.
Challenging the Status Quo – Failure in Supplier Negotiations and Underestimating Competition
Lack of Contingency Planning
At the point of launching its stores in Tokyo Sephora had not negotiated its supplier contracts and did not anticipate any future discrepancies. Estee’ Lauder one of Sephora’s main suppliers globally, had delayed shipment of many of its products except for perfumes. The cosmetics manager of the Ginza area stated “It seems they (Estee’ Lauder) will ship only perfume to Sephora” clearly surprised by this decision. At that time the skin care manufacturer was the owner of prominent brands such as Clinique, Estee Lauder and Bobbie Brown, some of which it already supplied to domestic department stores in Japan (Nihon Keizai Shinbun, 1998).
Mismanagement of Supplier Relationships
Further, Sephora demanded its local suppliers a price of 50% of its retail price, in order to secure a higher profit margin, which aggravated many Japanese cosmetics distributers. Although in the case of domestic cosmetics where face-to-face selling was required the price was established at 50% of retail price, for retailers the standard discount provided was 30-35%. Hideyuki Shirashi, the Vice President of Sephora EEP Japan rationalized this approach by justifying the cost benefit for manufacturers by distributing in Sephora, due to the lack of necessity of sales personnel, cost of attractive displays and packaging. But these rigid demands resulted in the reluctance of the suppliers to market their products via the company. KOSE Corporation, a major manufacturer of cosmetics withdrew its offer to supply brands already sold by department stores in Japan and eventually sold only a single brand of perfume. Further Kanebo Ltd, another leading manufacturer refused to supply popular brands such as ‘RMK RUMIKO’ (Tachiki and Hidaka, 1999; Sato, 2004).
Unawareness of Embedded Cultural Aspects of the Japanese Distribution System
A retail analyst at Merrill Lynch Japan states in an article in Financial Times (Juji and Rahman, 1999) “Officially, the Japanese department stores deny (they are putting pressure on brand manufacturers) but unofficially they’re doing it – and succeeding”. Although the Large-Scale Retail Store Law was relaxed and practices such as Retail Price Maintenance were abolished in 1992 (Martin, Howard and Herbig, 1998), it is evident that the Japanese distribution system was still governed by these traditions (Lohtia and Subramaniam, 2000). Such traditions allow large manufacturers, to enjoy higher prestige, greater political power and social legitimacy (Martin, Howard and Herbig, 1998) where they can choose to be inflexible in terms of their pricing mechanisms. Sephora is not the only multinational enterprise to fall victim to these embedded customs. Carrefour, the world’s second largest retailer in FMCGs, faced a similar dilemma when it entered the Japanese market in December 2000 enforcing a similar discount policy with its suppliers resulting in an outcome that mirrored that of Sephora’s. A similar predicament was faced by USA’s leading toy store Toys R Us, in the initial stage of its inception in Japan in 1991 which it overcame by following a chain of intricate negotiations (Larke and Schmekel, 2002).
It is my belief that Sephora’s rebuff was also a result of Japanese customs of giri (duty or indebtedness) and keiretsu (network of firms that operate cooperatively towards a common objective) (Schlegelmilch, 1998). Although the formal practice of keiretsu was abolished in 1988, these two concepts are deeply rooted Japanese business customs that filter into the complex Japanese distribution system (Martin, Howard and Herbig, 1998). Dunfee and Nagayasu (1993) describe a form of ‘vertical keiretsu’ as a combination of suppliers, manufacturers and distributors, in which the manufacturer dictates every aspect of the business negotiations from price, profit margins and exclusive representation (Ghauri and Cateora, 2006). In my opinion, Sephora’s attempt to impose their pricing terms while infiltrating into this tightly coagulated distribution network only resulted in exacerbating their suppliers.
Misinterpretation of the Market’s Competitive Structure
In November 1999, Howard Meatner, the president of Sephora EEP Japan claims that “although the cosmetics market in Japan ranks second only to the US, there is no retail store which serves as a leader” (Nihon Keizai Shinbun, 1999b). In my opinion it is clear by this statement that the management expected to gain first mover advantage via the concept of ‘assisted self-service’. They had failed to consider the indirect competitors in the market, such as the significantly large number of department stores who eventually reacted formidably to the impending threat.
The company’s lack of insight into the Japanese distribution system and its traditions as well as the existing competitive barriers to entry is a clear indication that the company failed to analyse the target’s socio-cultural environment, the distribution system and market structure.
Failure to Interpret the Economic Climate and Resulting Consumer Dynamics
When Sephora entered Japan, there were clear indicators in the market that reflected the economic decline of the post-asset bubble. The total turnover of Japanese cosmetics market has been in decline since 1998 and the prestige hand and body care market was expected to decline 2.56 percent each year (Lepir, 2002). Economic stagflation was evident and department stores had witnessed a steady decline in cosmetics sales since 1998, as a combined result of increase in competition and deteriorating consumer spending due to the country’s worst post-war recession (Juji and Rahman, 1999).
Shiratsuka (2005) in his account of the post-asset-bubble economy of Japan states that the decline of average Japanese consumption through the wealth effect was a primary outcome of the economic downturn in Japan following the Heisei boom in the late 1980s to early 1990s. In a recent article in the New York Times Tabuchi (2009) states “The economic malaise that plagued Japan from the 1990s until the early 2000s brought stunted wages and depressed stock prices, turning free-spending consumers into misers and making them dead weight on Japan’s economy”.
In my opinion, Sephora being a luxury retailer with products priced rather exorbitantly would have found the changing consumer spending habits affecting its sales figures dramatically. I believe the following statement made by a Japanese cosmetic industry source is evident of this fact: “Sephora (‘s)… prices… are not attractive to the Japanese consumer,” (Weil and Hirano, 2001). Although contrary to this argument Financial Times (2001b) reported that “Observers point out, however that the rest of the luxury goods market is performing well in Japan” possibly indicating that any excessive consumer spending, was therefore limited to luxury goods companies for which the consumer had developed brand loyalty.
The general manager of the Japanese subsidiary, Jeff Daggett commented that the retailer is retreating due to the severe impact of the recession on the company’s performance (Financial Times, 2001a). An in-depth analysis of the economic indicators of the Japanese market prior to entry would have better equipped Sephora in making the decision to enter Japan and even sustaining during the recession.
Lack of Integrity – Knowledge Transfer and Learning
Lack of Integrity within the LVMH Group
Louis Vuitton (LV), the exclusive fashion house that merged with Mo�t et Chandon (Champagne producer) and Hennessy (a leading manufacturer of Cognac) to form the LVMH group, has been established in Japan since 1981 as a luxury fashion retailer. In Japan LV sells its products strictly through its own retail stores, small boutiques in high-end department stores (LVMH, 2009b).
In my opinion, being a successfully established entity operating in the luxury retail market in Japan, LV would have gained extensive insight into the Japanese business customs and consumer behaviour patterns, especially in a retail perspective. But it does not seem as if this knowledge transferred to Sephora. This may be due to the fact that LVMH allows total autonomy to its subsidiaries, which prevents integration and coordination between its daughter companies that would facilitate knowledge transfer. More control by the parent over the integration of knowledge would have benefitted Sephora more in Japan.
Lack of Integrity between the Home Company and the Japanese Subsidiary
Although the acquisition of a fully-owned subsidiary in Japan is a commendable move by the company, it is clear that Sephora could not benefit from the learning the alliance could have generated. I believe the cause maybe the fact that the control of Sephora EEP Japan still lay in the management of the home company, Sephora France, and thus the key decision makers were not based locally (Nihon Keizai Shinbun, 1999b) resulting in a bottleneck for knowledge transfer. One of the main objectives of forming strategic alliances upon internationalization is to obtain local resources and management in order to facilitate integration with the target environment. In order to optimize such learning the strategic decision making process must to a greater extent involve the local management. Sephora’s failure to do so in Japan may have cost them sustainability in the Japanese market.
The Impact of Overconfident Market Expansion
Japan in terms of business is a Pandora’s Box of ambiguity. For multinationals who seek internationalization in highly volatile and ambiguous environments, market research should be an obvious first step to mitigating risk. This logic has slipped past Sephora, in its decision to enter Japan. Fuelled by its success in Europe, Sephora played a ‘guessing game’, entering multiple markets with significantly different market conditions, assuming its signature service model would serve as a framework that will fit globally, disregarding the psychic distance between Europe and these new markets.
Camere and Lovallo (1999) in their study of overconfidence and excessive market entry states that “many (excessive) entry decisions are mistakes, made by ‘boundedly-rational’ decision makers…who have ‘competitive blind spots’ (fail to appreciate the competitors) or…over-confidently think their firm will succeed while most others will fail”. In the case of Sephora’s entry into Japan, the company not only misjudged the competitive arena, it misjudged the complete market; the supplier, the consumer and the economic climate, under the cognitive bias that its service model will be successful in Japan. The reason can be explained as the bounded rationalization that a geocentric application of its services model could be a global competitive strategy.
In their study Camere and Lovallo (1999) discuss the concept of the ‘inside view’ that results in ‘reference group neglect’ both of which are products of overconfidence. They state that “An inside view forecast is generated by focusing on the abilities and resources (of the company), constructing scenarios of future progress, and extrapolating current trends”. The result is ‘reference group neglect’ where the company fails to adapt to its competitive market. This can be witnessed in the case of Sephora where the company forecasted a positive market response to its self-service strategy in Japan based on its past success in Europe, thus failing to adapt to the impending market. Some examples can be driven from other multinationals such as Tesco in USA where it failed to adapt to the consumer purchasing patterns and has as a result re-branded itself to ‘Fresh and Easy’ in USA. Wal-Mart’s predicament in Germany can be another example where the company failed due to ignorance of key principles of internationalization strategies and intercultural management (Knorr and Arndt, 2003).
Further, the company failed to ‘test the waters’ prior to diving in. Johanson and Vahlne (1977) when describing the Uppsala Internationalization Process Model emphasises on the important of the learning that is derived from the sequential internationalisation process which will allow adaptation of business activities to its new market. Overconfident market entry defies this concept only to suffer the severe penalties due to the lack of market experience. In the case of Sephora in Japan the penalty is higher due to its negligence in terms of market research. The retailer could also have opted for a sequential model of internationalization starting with exporting and gradually developing to foreign direct investment.
Although Sephora failed in Japan, it is evident that the company has learnt from its past mistakes, for when it attempted a second entry into Asia through establishing itself in China the luxury retailer performed a series of market research activities structured around different aspects of the Chinese market. The company adapted its marketing mix to amalgamate more cohesively to the Chinese culture. Through market research the company realized that the Chinese consumer, similar to the Japanese have a preference to body care over perfume. Further the company changed its target demographics to be 25-40 which they identified as the segment with an estimated highest growth rate in terms of purchasing power. The company has further identified the colour association of red in Japanese people by changing packaging from their signature black and white to pink and violet during the Chinese New Year, signifying happiness and prosperity (Fang, 2008).
The significance of Sephora in China is that through identification of simple yet intricate details of the Chinese consumer the retailer managed to ‘sell’ its service model. It has followed a more customer-centric approach where the sales people are trained to interact with the Chinese consumer (Lowther, 2005), while maintaining the ‘openness’ of the store. Although Sephora has not attempted another entry into Japan, the learning from its previous endeavour and its current operations in China will provide the retailer with the competitive edge they require to succeed in the Japan if it chooses.
Conclusion
Sustainability in the East-Asian markets depends upon the seamless interaction and integration with its culture, due to the significance of different socio-religious aspects integrated into business operations. Conducting comprehensive market research provides foreign entrants the necessary leverage to succeed in any target market by identifying these critical success factors. Performing a gap or SWOT analysis between the target and the entrant will identify the key factors that will bridge the gap of psychic distance. McGoldrick and Blair (1995) provide a checklist for international market appraisal which they identify a framework of four key segments: Residential Spending Power (GDP, spending patterns, seasonal fluctuations and age profile), Barriers and Risks (laws, religious/cultural barriers, nationalization or controls, civil risks and economic risks), Competition (saturation levels, co-operative competition) and Costs and Communication (factor costs and infrastructure-related costs). Application of this checklist in the target markets in the internationalization process of either a manufacturing or service enterprise would be a powerful advantage for the entrant, creating sustainable competitive advantage.
The strategic decision of internationalization is not one to be taken lightly. Not only does it involve a substantial opportunity cost, it can be damaging to a multinational’s global image and influence investor confidence in its management. Even though overconfident experimental market entry is not prevalent, it is an easy mistake to make. In terms of service multinational such as retailers, the key is to identify two significant layers in its service model; a core concept that can be standardized, to achieve cost efficiency, upon which a second layer of customization and adaptability can take place, which will lead to cohesion with the target environment. This would of course require comprehensively structured, extensive market research; but in the process of internationalization, where market knowledge provides the main competitive advantage, this fact may prove to be the key that bridges the gap between failure and success, while optimizing economies of scale and scope.
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