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Analysis of the Competitive Position of Sephora [Porter Five]

This paper analyzes the competitive position of the beauty-retail chain of shops called Sephora. The complex analysis of competitors’ movements should be performed on a constant basis in order to build up the useful competitors’ profiles. This will help to foresee competitors’ actions and potential hazards for the business. This paper looks at the competitive profile of two cosmetics companies – Ulta and The Body Shop. Although the three companies have distinct approaches, they aim in the same market and compete for consumers.

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First, the paper provides basic information on Sephora’s history, business model and distinguishing features. It is essential to point out the main characteristics of the company’s business strategy and marketing. The former analysis will help to evaluate its current position and future prospective at the market. Thereafter, the term paper includes the analysis of Ulta and the Body Shop based on Porter’s competitive model. The study of competitors is an essential part of business planning for any company. It helps to evaluate the potential movements of every competitor and the effect of such actions on the particular business. The final part of the paper is a summary of the entire analysis, the recommendations for improving the strategic management and the competitive position of Sephora.

The History and Analysis of Sephora

The first Sephora shop was opened in France by Dominique Mandonnaud in 1970. The retailer specializes in brick-to-mortar and internet sales of a broad range of product categories including fragrance, skin and body care, hair care, smile care, accessories, and gifts. In addition, the shop promotes own label, which is oriented on the middle-income segment of customers. Today, Sephora operates more than 1347 stores in 28 countries, including over the 300 stores in North America (LVMH 2012).

Sephora is owned by the world's leading luxury goods group Louis Vuitton Moet Hennessy (LVMH) which specializes in luxury brands, excellent service, innovations, and a self-service environment. The North American headquarters is located in San Francisco, whereas the main office of the company is located in Paris, France. Sephora stores are both individual 1,500 square feet shops and smaller JSpenny shops that follow the same design and marketing strategies.

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Among the distinguishing features of Sephora’s business are customers’ loyalty programs (beauty insider and very important beauty insider), a variety of luxury high-end brands, knowledgeable and helpful personnel, perfect return policy and free samples of any product. Those advantages allowed Sephora to occupy the niche in the cosmetics market and winning a competitive advantage among other companies.

The analysis of the Sephora’s competitive strategy indicates that a company uses a combination of market development strategy and product development strategy. The first is selling the same products in new markets, whereas the second aim for selling new products to existing customers. For instance, Sephora launched new types of distribution channels – internet and Appstore. The webpage was created in 1999 that offered unlimited shopping possibilities for clients. Online shopping excludes “out of stock” cases and allows ordering the cosmetics from any place.

The success of Sephora’s online store added new customers to the chain. The ongoing online success is supported by the additional value of informative videos, customer reviews of products, professional advice from healthcare specialists, the pertinent detailed information about the ingredients, photos of the products and various price-off offers and kits. Moreover, the Internet serves a powerful communication channel among Sephora’s customers and the company’s representatives. Facebook, Twitter, Youtube, and Pinterest are good channels for ongoing offers, discounts, and trade-offs for customers.

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In addition, whereas Sephora has established a solid reputation among women, their target on men was underestimated. Lately, they launched the new campaign to attract male customers with the new brand – Lacoste men. This means that a company pays much attention to its online presence as the internet and IT technologies have become an integral part of people's lives. In order to fill this niche, a company has to establish a comprehensive online presence.

Ulta and the Body Shop are chosen for the analysis as the main competitors of Sephora across the US. The ongoing competitors’ analysis is based on Porter’s competitive analysis (Porter 1998). Porter’s model aims to build the portrait of the competitor based on the assessment of four components such as the current strategy of the firm, the future goals, the capabilities of the company and the assumptions held about the company and its performance in the ever-changing industry.

The Analysis of Ulta’s Mass-Appeal Strategy

Ulta was organized in 1990 as a discount beauty retailer. The idea behind the project is to create the one-stop beauty shopping where mass beauty products, salon and drugstore categories are organized under the same roof.

Future Goals

According to Ulta’s website information (Ulta 2012), the company plans to expand its presence as a leading retailer of beauty products and salon services. They intend to increase their presence by fulfilling the following strategies:

  1. Opening new stores across the US. The company wants to increase the number of sites up to 1300 shops in the USA. This means almost doubling the number of shops.
  2. Offering new brands, products, and services.
  3. Improving the existing loyalty program for customers.
  4. Using more sophisticated marketing strategies and promotional campaigns to attract more customer.s
  5. Expanding online services.
  6. Improving the operating margins.
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Current Strategy

Ulta is building its competitive strategy on winning the customer by the intensive presence and a one-stop-shopping concept. Ulta has more shops across the US, than Sephora, and tries to establish its presence in most populated places. The analysis of financial statements (Ulta 2012) shows that Ulta reached a sharp growth in income for the last two years. The net income of the shop has grown from 71$ million reported in January 2011 to 123$ million as of January 2012.

According to the official site’s information (Ulta 2012), Ulta uses the following competitive advantages:

  • Highly differentiated merchandising with a broad range of appeal. Ulta specializes in both high-end and drugstore products. In addition, they have a broad selection of brands (far more than Sephora), price ranges and product categories.
  • The company tries to build a comfortable shopping experience. That is why they choose convenient locations in multiple places. The company is present virtually everywhere. Besides, they cater to women who are time-constrained and want to buy a number of various products for their beauty in one place.
  • The format of shops that aim to benefit from ever-shifting channel dynamics. The company pays much attention to learning the trends in consumer behavior and the manufacturer’s shifts. Ulta tries to find an advantage in constant product mix, price differentiation, and of-mall services.
  • The loyalty program for existing and new coming clients. Ulta states that their customer’s loyalty program enumerates more than nine million members. The company uses its immense customers’ database to communicate with clients, analyze the purchasing patterns and choose new stores’ locations.
  • Strong vendor relationships. Ulta has active relationships with more than 300 vendors that are divided into three large podcasts – prestige, mass, and salon group. The successful cooperation allows offering customers distinct categories of products where every customer can find the product he/she needs. Salon shampoo or conditioner or elite perfume – Ulta certainly has something to offer for every client.
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Assumptions

Ulta tries to win the niche of middle and high- income customers who look at prestigious brands. However, the strategy is not that successful. Through years of successful experience, Sephora earned a reputation for a classic premium-quality shop that sells prestigious brands. Therefore, when a customer chooses a place to buy upper-class perfume, like Aqua di Parma, or brands like Chanel, Benefit of Nars, he goes to Sephora where the knowledgeable personnel will give wise advice. Of course, many customers are attracted by sales, free samples, and value kits.

Here, both Sephora and Ulta are rather successful in attracting customers. However, when it comes to customer’s loyalty, Sephora’s position is far better than Ulta’s. The analysis of customer’s reviews shows that Ulta has worse service than Sephora. Their staff is poorly trained and lacks specific knowledge to give a piece of relevant advice to a customer. The lousy service can be justified by low price and mass group sales. Therefore, when it comes to mass group, Ulta is successful. Nonetheless, for demanding prestige group, Ults’s service is not effective.

Being originally established as a beauty discount retailer, Ulta cannot apply for winning the prestigious niche of Sephora. Many customers also acknowledge that Ulta shops are often out of stock for some products. While some people may count this as coincidence, it is crucial to understand that because of the diversified multi-brand atmosphere, it is extremely difficult to guarantee that every product is in place. Moreover, the inventory turnover is easier to manage in a specialized shop than in a shop with a wide range of products.

Capabilities

Ulta tries to attract the part of customers who tend to buy prestigious brands. By now, they are not successful because of poor service and inventory management. Moreover, their success is pending because of the “discount beauty shop” image. Sephora has a well-built structure, perfect service, and clear appeal. They are classic, prestigious and innovative at the same time. Ulta can develop a life-long learning program for their staff. This will improve their service. On the other hand, the personnel’s education requires additional investments. In fact, it is a question for any business: what generates a better return on investment? Is it more profitable to invest in staff’s education than in a large promotional campaign?

By now, Ulta has high employees’ turnover ratio and a lack of professional service. However, the company can change its strategy and invest in human capital that will create additional competitive concerns for the perfect service of Sephora. The same is with an inventory. The company could improve operations management and impress its customers with the constant availability of all products. Ulta can improve operations and human resource management; however, the “discount” label will probably stay forever with Ulta Company.

The Body Shop’s Original, Natural and Ethical Beauty Brand

The Body Shop was established in 1980 by Human Rights Activist Dame Anita Roddick. By now, the shop’s chain covers more than 2,500 stores in over 60 markets worldwide. The Body Shop is a part of the L’Oreal group. The Body Shop offers a range of over 1,200 animal cruelty-free and natural products (The Body Shop 2012). According to L’Oreal’s annual report, (L’Oreal 2011), the Body Shop reached excellent results in expanding to new markets, notably Saudi Arabia, Egypt, Asian countries such as India and Hong Kong, and in Eastern Europe. Moreover, the company is oriented toward franchising. Out of 143 new shops in 2011, 122 were franchises and only 21 were company-owned shops.

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Current Strategy

Currently, the entire business model of the Body Shop is built on an environmentally-friendly image. The company has created solid intangible goodwill that plays a pivotal role in winning the loyalty of health and nature-conscious customers. The strategy is based on the following business ideas:

  1. Animal testing protest. All products in the Body Shop are animal cruelty-free and vegetarian. Historically, the Body Shop was the first brand that joined the Humane Cosmetics Standard Against Animal Testing policy.
  2. Fair trading policy. In 1987, the Body Shop established Community Fair Trade program as the commitment to fair trade with suppliers. The Body Shop’s vendors are small farmer manufacturers, artisans, and co-ops in a rural area that deliver natural and clean cosmetics. The Body Shop values its suppliers and offers affordable price deals to support their activity.
  3. Human rights defendant. The Body Shop is an active member of various Human Rights Defending movements, specifically the movements to improve the human rights of workers and indigenous people in Latin America. The company also supports the donations to local partners who fund the support, prevention, and protection of abused women and children.
  4. Planet protection. The Body Shop takes action to protect the environment. The company even worked out their own environmental protection plan that has to be performed until 2010.
  5. Activate Self-Esteem. The company believes that beauty is born from feeling good. The company initiated Learning is of Value to Everyone (LOVE) program that aims training, learning courses and various social activities, like volunteering, for employees. In addition, the company has its own charitable foundation that assists the NGOs in the sphere of human and civil rights, environmental and animal protection.

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Future Goals

The Body Shop is not going to change its strategy. The company is enhancing its nature-preserving approach. Being part of L’Oreal, the Body Shop is positioned as a distinct brand with its own values and goals. The environmental concerns are the primary driver for building up their strategy. Therefore, they concentrate efforts on improving the sustainability of their business. According to their website’s information (The Body Shop 2012), the company plans the following improvements:

  • Reduce their CO2 emissions by 50%, including emissions from gas, electricity, and diesel consumption that is used for transporting purposes and business travels.
  • Reduce electricity consumption as it contributes to CO2 emissions.
  • Reduce the waste at stores, distribution centers and head offices, including the recycling product packaging.
  • Reduce the domestic consumption of water by 25% as water is a scarce resource.
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Capabilities

The Body Shop has a number of loyal customers who have chosen their brand and follow it from the early years. The cosmetic is clean and nature-friendly. However, the company faces tough competition from other “environmental” brands, for example, LUSH. Many-Body Shop’s former customers made their choice in favor of LUSH because of the better quality and better reputation. The company can amend its reputation by the vast advertisement campaign aiming to explain that the Body Shop is a distinct brand. The Body Shop has to emphasize that its cosmetics are not manufactured at L’Oreal’s production sites. The Body Shop should explain the clear difference between economical and functional relationships with L’Oreal. Probably, this could return some part of customers to their service.

Assumptions

The Body Shop is a winning concept that finds the approval of many customers due to natural technologies. However, the strong brands' comparison with L’Oreal proves to be harmful to Body Shop’s reputation. L’Oreal is known for its unethical practices, especially the animal testing, which contrasts to the pure image of the Body Shop and alters the perception of Body Shop’s strategy.

In addition, the company faces competition. Most Body Shop’s sites are situated in large stores, malls, and shopping centers. This gives a possibility for the competitors, like Lush, to establish their presence at the same places and win a part of customers. The Body Shop should have more separate shops that are situated in crowded places.

Competitive Analysis Essay Conclusions

Having analyzed the competitors with the help of Porter's model, we can sum up the research in the following findings:

  1. Sephora uses the combination of market development and product development of competitive strategies. The company plans to expand both the service quality and the range of product lines. Regarding the technological innovations, Sephora is going to expand the use of mobile checkout devices, which allow processing payments on the store. The company plans to equip its shops with IPads. This innovation will help customers to make the right choice by accessing their personal pages and viewing the items they have bought before. Also, in France, a new tool, MySephora, that is designed to personalize the in-store customer relationship will be launched intensively. The company builds its strategy on market development accompanied by technical innovations that improve the quality of service.
  2. The Body Shop and Ulta are also using market development strategy. They want to penetrate Asian, Pacific, and Eastern Europe markets. The Body Shop uses its nature-oriented technologies to develop further the environmental position. Ulta uses a combination of market development and product development strategies. They try to increase the number of brands, categories of products and also open new shops.
  3. Ulta tries to win prestigious customers of Sephora. The most probably, Ulta will offer more luxury brands in the near future and improve its service. The Body Shop is expanding at a fast pace; nevertheless, they are not going to change their strategy.
  4. As far as Sephora performs multinational business, the company is vulnerable to exchange rate risks, taxation and other legislative differences across the globe, and changes in strategies of competitors. Right now, it is evident that Sephora successfully occupied the niche of higher-end beauty products. However, the competition from Ulta (in the USA), Marriounaud and Douglas (in Europe) and other beauty retailers (different regions have distinct competitors) may become tougher and call for actions that are more sophisticated.
  5. The Body Shop is vulnerable due to brand comparison with L’Oreal. The negative connotations with L’Oreal’s unethical business practices obscure the environmentally friendly strategy of the Body Shop. In addition, according to L’Oreal’s annual report 2011 (L’Oreal 2012), the Body Shop is subject to immense seasonal fluctuations with an enlarged demand in the three last months of the year.
  6. According to a number of customers’ reviews, Ulta has poor customer service. Their website announces that they have already launched the employee-training program that includes modules on Ethics and social responsibility issues.
  7. Whereas the strategic goals of the Body Shop are out of Sephora's control, the expanding plans of Ulta find the ultimate reaction in Sephora's strategy. Sephora follows the same plan to increase the points of sales in new markets. For instance, Sephora now holds a 65% stake of Ile de Beauté retail network in Russia that performed remarkably well in recent years. In continuation of France's leadership position, Sephora opened its first retail store in Denmark and launched an e-commerce site in Italy. The retailer also expanded its presence in Latin America with the opening of additional shops in Mexico. Right now, the company prepares to open the first point of sales in Brazil. In addition, Sephora continued its expansion in China, the Middle East, and Southeast Asia.
  8. The suggestion to Sephora is to continue its market development strategy. The results of successful market expansion suggest that the company has chosen the right way. Through 2011, Sephora more than doubled its net income that confirms the remarkable performance of the company. Moreover, the online presence is a "must" for modern retailers, so the company's online expansion (for instance, launching the e-commerce site in Italy) is the right reaction to changes in consumers' behavior.

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