#141. Every week on the podcast we’ll challenge a recently-announced business strategy to understand the upside and downside of the brand’s approach. We discuss Goop’s expansion into Sephora and whether or not the brand’s products will stand out beyond the Goop universe.

Check out the full transcript below. 

Richie: [00:00:01] Welcome to the sixth episode of Espresso, a podcast by Loose Threads where we challenge a recently announced business strategy to understand the upside and downside of the brand’s approach.

Richie: [00:00:11] I’m Richie Siegel, the founder of Loose Threads, which analyzes and advises next-generation consumer companies, and FaceLift by Loose Threads, a retail incubator and accelerator for leading brands and retailers. For our latest analysis and insights, check out our free weekly newsletter at LooseThreads.com.

Richie: [00:00:25] Joining me for our discussion this week is Rebekah Kondrat, a partner at FaceLift by Loose Threads, and Caroline Tibbetts, who leads our research at Loose Threads. This week, we analyzed Goop’s expansion into Sephora. The third-party beauty retailer will start carrying Goop’s skin care products—first online and then in stores—marking the most significant wholesale partnership in the Gwyneth Paltrow-founded brand’s history. For a company predicated on a specific and all-encompassing worldview while sitting on a shelf next to thousands of other beauty products help or hurt the brand’s standing? Here’s what we thought about the move.

Richie: [00:00:59] So I think the most interesting part of this is that they’re doing it online. If I were Goop, part of me would want to test this strategy only in Sephora stores and then allow my own ecomm and newsletter and everything to be the sole place to buy it online. It’s telling, though, that they’re opening it up across all Sephora channels, because Sephora.com is now gonna compete with Goop.com. And, from like a pure marketing perspective, and you have this issue with a lot of wholesale brands, is Sephora is now gonna be bidding on keywords that compete against Goop, and they’re gonna be basically bidding against themselves.

Richie: [00:01:28] So, you would see that often—Nordstrom’s or Saks or whatever would be buying marketing for, like, if you Google “Theory blazer,” your wholesale account is now competing against your own dot com, and I assume Sephora’s gonna do that. And so, I find that the most interesting part is that they’re doing it everywhere, versus saying, “Hey, you can carry us in stores or we don’t have much distribution.” Goop only has, I think, around a dozen stores globally. But they’re saying, “Let’s go everywhere.”

Rebekah: [00:01:52] Yeah, I didn’t even think about the bidding-against-itself angle. I more went straight to Goop products in Sephora, which is eventual. They’re gonna roll it out online first, and then they will roll it out in, it says, “select Sephora stores.”

Richie: [00:02:06] Right. Online first.

Rebekah: [00:02:07] Right, online first. So, I agree with that. I mean, I think because Goop is already an aggregator to like, put yourself on another aggregator platform seems a little bit strange to me. But having the Goop items alongside all of these other skincare items, there’s—I mean, Sephora stores are huge beauty Meccas for the most part. I just wonder how it will be able to compete in those environments.

Caroline: [00:02:38] My question is, what is Goop’s end goal? And this announcement made me transform my opinion of what I thought Goop’s goal was, which was catering to this niche audience. And now that they’re available in Sephora stores, I just wonder how Goop’s current following is going to feel about this. Are they going to feel kind of like their brand sold out, and not as interested in purchasing the products the way that they did before? Goop even has a subscription service in, kind of like the way that Amazon does it; you can buy a single product or pay like, five dollars less and get it every month. I’m curious how that will affect its current following.

Richie: [00:03:19] Is the audience niche anymore? I think in 2018 it did $100 million dollars in sales? They expanded to the U.K., so let’s assume—I don’t know, in 2019 they did $150 [million]? Is that still niche?

Rebekah: [00:03:29] Right. I think you have that early adopter period and the people that feel like they’ve discovered something that’s really new and special, and now it’s expanded pretty far beyond that. And to continue to grow, both in revenue and in audience, because I think if someone discovers a Goop product in Sephora—let’s say that they do a really good job training the Sephora staff. They’re able to recommend the products alongside all of these other products that have been around for longer and are more trusted, potentially. If they can convert someone, do they then convert them into the fold of the Goop media ecosystem as well?

Richie: [00:04:09] I think the question you’re asking, which is right, is, how big can it actually get before it starts to fall apart? And that, I don’t think there is a full answer to. I want to say we think it can get bigger than it actually can. Could Goop get to $3[00], $400 million dollars? Yeah. Could it get beyond $5[00 million]? I don’t know the answer to that at this point, without really starting to chip away at, I think, that kind of core integration of content, community event, product, press, television that you’re talking about. And I think this is almost like the first step at trying to give it as much runway as possible, by just being like, “We’re gonna be everywhere.” Because I think that’s the crucial question of what you said, is “Are Sephora customers now just gonna slowly integrate Goop products into their buying process?” Which is incrementally fine. Or, are they gonna actually discover it in Sephora, and then start to go buy directly from Goop, as well?

Rebekah: [00:05:04] Or are they gonna see it on Netflix, and then go and seek out the products?

Caroline: [00:05:09] Definitely.

Rebekah: [00:05:09] And it has to be in more places if you’re gonna make this play and put it out on this huge platform like Netflix, then you need to be able to have it be available and not quite so exclusive.

Richie: [00:05:24] I don’t know about that. Let’s just say two million people, minimum, are gonna watch that show. Because she’s famous, it’s on Netflix, they’re gonna serve it to people who like all her other stuff. Between two and five million people are gonna watch that. If they only can buy this stuff from Goop, that’s like, the best ad you could ever ask for. Versus now, again, when you coincide the release of the Goop Lab Netflix show with going into Sephora, you’re already gonna split the audience. It’s probably easier to get Goop from Sephora now than it is from Goop. Unless you’re open to fully cannibalizing your dot com business, you wouldn’t make that, the release of the Netflix show coincide with the release of going into Sephora.

Caroline: [00:06:00] Well, I would think, from a fulfillment standpoint, that being in Sephora—that’s what I thought you were getting at, Rebekah.

Richie: [00:06:04] Right. It’s more widely available.

Caroline: [00:06:06] Widely available. And Sephora’s handling the processing of those purchases.

Richie: [00:06:11] Right. I guess what I would say is, okay, do you now have a conversion and a distribution problem? If you can’t figure that out from your own website, is the answer to actually go in Sephora, or to make your website better, your conversion better, your shipping faster?

Rebekah: [00:06:25] Okay, I know I’m totally changing my stance here, because at first I thought this was a bad idea, but the more I think about it and listen to what everyone is saying, I think there’s another thing here that we need to consider, and that’s how much of Goop’s potential customer base will not make a purchase because of this, like, pseudoscience? This like, looming cloud over the brand. And so, what if this Netflix series is a way—I mean, I’m sure it is—a way to try to reform or remake the image, and then have people be open to going to purchase Goop, and then having it available where they already shop?

Caroline: [00:07:02] Definitely. I think in the Netflix series she explicitly addresses this, and she explains how those pseudoscience rumors and issues that they first had were just due to being really small and niche and not having medical staff on hand, whereas now that they do. But just bringing it all back from a brand-positioning perspective, I would think it would be more interesting for Goop to be temporary in Sephora, to create the hype and demand, versus really joining the Sephora family full-force. And yes, of course their sales are going to increase, and of course they will grow to exponential numbers. But just from a longevity standpoint, I don’t know that it’s the best idea.

Richie: [00:07:42] The other part, too, is the margin structure changes, again, for the first time. So, again, we talk a lot about private labels. G. Label is a private label. The reason it’s so great is because they have this media platform and a newsletter that brings their audience in, and they can just sell on these incredibly high-margin expensive products. I mean, I’m guessing the margins on Goop products have to be above 80% if not 90% on their G. Label skin care, because it’s so expensive. So if that’s the case, you’re going in Sephora, you’re gonna cut that in half now. You can sell a bunch more units now, but the actual net income you’re gonna get from that is significantly lower. I think you’re letting them off the hook a little bit easy on the pseudoscience stuff, because she’s very wealthy and could have 100% hired a scientist if she wanted to.

Caroline: [00:08:20] For sure. Yeah.

Rebekah: [00:08:21] The thing that’s interesting about their stores that is similar to what will be happening in Sephora is they don’t just carry Goop products in Goop stores. In fact, they carry way more third-party products in their stores. And, at least from my own personal experience of being in the store, the people that work there are very knowledgeable, but they’re not recommending Goop over something else.

Richie: [00:08:45] But it goes to your point, though, of they are already aggregators. And even when you’re in the store, even if you’re not buying a Goop product, you’re still in the Goop world. When you step into Sephora, you’re in the Sephora world. And you might happen to be buying a Goop product, but it’s a weak tie, right? When you buy anything in the Goop world, Goop product or not, it’s a Goop purchase, in a sense; you’re buying through their worldview. You’re now gonna go buy through Sephora’s worldview and maybe happen to just buy a Goop product.

Richie: [00:09:10] But the issue for me that I don’t love about it is, if you take this like worldview that Goop has—whether you agree with it or not, you can accept it for what it is—it’s a much deeper connection and emotional touch than just buying a product off a shelf and using it and buying another product off the shelf. And when you put it on a literal shelf in Sephora, you’re objectively losing that. It’s a little bit of saying something has secret sauce and then just being like, “Yeah, we don’t need the secret sauce anymore.”

Rebekah: [00:09:35] What if there are two different customers? What if there’s the customer that’s like, in it, and they live the Goop life or whatever that is, and they buy everything from either Goop stores or online. And then what if there’s the other customer that’s just, like, a prospect, and they discover them in Sephora and integrate them into their skin routine, and they don’t use only Goop, and they don’t read the media and they don’t visit the website but they still consistently purchase. Like, it’s integrated into their routine, they always use the same creams like, you know, kind of how that goes. So.

Richie: [00:10:06] Do you think someone, though, would spend that much money and not have brand affinity? Because that’s the other thing is like, they’re damn expensive products.

Caroline: [00:10:13] I mean, sadly, all women’s beauty care products are.

Richie: [00:10:16] You really think all brands are that expensive?

Caroline: [00:10:19] At Sephora?

Rebekah: [00:10:19] Anything that’s really worth owning and using at Sephora is gonna run you that.

Richie: [00:10:24] Interesting. I yield the floor.

Caroline: [00:10:26] It’s much more expensive than Sephora’s brand, of course. But, to your point, Rebekah, I agree with you and I thought of that. However, I don’t think that they’ll fully integrate Goop into their life for the next ten years of their skincare regime, and that they’ll try for a month or two and then move on to the next best thing.

Richie: [00:10:45] It’s a weaker integration.

Caroline: [00:10:46] Exactly. Whereas Goopies—as they call them—visit the site often. I mean, she just started all these series of events. A Goop cruise, In Goop Health…

Richie: [00:10:57] It’s a world.

Caroline: [00:10:58] Yeah.

Richie: [00:10:58] It’s like adult pseudoscience-Disney.

Caroline: [00:11:01] And they buy luxury, like, a Chanel purse on Goop.com, and then might try the new foundation or serum.

Richie: [00:11:08] I mean, G. Label apparel is a luxury-level product. They’re $500 sweaters. Like, this stuff isn’t cheap. I guess from a price perspective, maybe I’m just anchoring at Glossier and how affordable that is. And I know you could argue the efficacy is very different between them, but it’s probably a third of the price of most Goop products, at least.

Caroline: [00:11:24] It’s different audiences.

Richie: [00:11:27] A hundred percent. The other thing is, I think most of Sephora’s audience knows about Goop. We had the same thing happen with Ulta and Kylie Cosmetics, when she went in there. I would assume there’s a huge overlap of Ulta’s and Kylie Jenner’s audience[s]—because it’s Kylie Jenner, because it’s Ulta—and that the new customer acquisition pool that one perceives happens when you go into one of these new distribution channels is actually smaller than you would think. I feel like a lot of people know who Gwyneth Paltrow is. I feel like a lot of people know who Goop is. I think the biggest hurdle for them is the buying thing. Which is, again, some people don’t want to buy it because it’s too expensive, because of the pseudoscience. I just don’t know if Sephora solves that. If, for example, there were massive back orders of the product, and it was five-day shipping windows, and if there were all these like, actual logistical problems, and Sephora said, “Hey, we’re gonna put it in all of our stores, you can pick it up same day, etc.” That’s there. But it seems that the hurdle is psychological, it isn’t actually logistical.

Rebekah: [00:12:24] Okay, but what if by seeing it on a shelf in Sephora next to other reputable brands, it legitimizes it one, and two, if the hurdle for you to purchase Goop has just been, “It’s not available to me. Like it’s not where I shop…” If you’re one of those people, you always shop at Sephora, they have the Beauty Insider points program, or whatever. “Whatever, I get all my beauty at Sephora.” And, suddenly, it’s there. Then you can actually purchase it. I don’t think it’s going to get her a huge amount of new customers, but is it enough to kind of move the needle so that they can figure out, like, what customers they’re missing and where they wanna make their next move? Maybe. I do agree that a limited offering would have been a better move.

Richie: [00:13:08] To your point before: if the goal is to legitimize the product further, to put it in competition with all these others and so forth, that’s great. But again, you’re bringing this thing that’s on this mountain of branded luxury, you’re just pulling it down. And maybe that’s inevitable as you get bigger.

Caroline: [00:13:25] Well, it’s funny. To your point: one of my initial thoughts of them entering Sephora was, “Wow, there are so few options of retailers for them to join.” I would think in the past, maybe they were there, but in Barneys—and that’s no longer an option—something more, a bit more luxury, and there’s nowhere for them to go.

Richie: [00:13:43] I mean, Goop at Nordstrom’s would make sense.

Caroline: [00:13:45] Exactly, actually. I think that would have been a better move than Sephora.

Rebekah: [00:13:49] Yeah. Especially if they did the Glossier Play-style pop-in. That would be smarter.

Richie: [00:13:54] I guess the argument is they’re “too big for that” and I’m putting that in quotes. But like, that objectively will not move the needle. I’m sure the Glossier revenue from those things is negligible, to be generous about it. And it seems that, again, given they’re gonna go to Sephora.com and then into Sephora stores, they want this to drive revenue. The question then becomes, “Okay. Do you want Sephora to account for a third of your business in two years?” Or in three years, whatever that is.

Richie: [00:14:17] The other question is: what happens if this fails? Does that mean that this thing doesn’t actually work in retail beyond your own? I mean, we talk about, with a lot of direct-to-consumer brands going into wholesale of like, if you wanna grow and if online has limits to it, you either can go open up your own stores or go in other people stores. And again, for a lot of these high-end brands, as we said, there are very limited options of what to do.

Caroline: [00:14:38] But I think that they could have been more creative. I agree there are few wholesale options, but to keep that community alive that built the brand and made it famous in the first place, think of some more temporary things that would draw customers in and make your current customers happy.

Richie: [00:14:54] The other thing, too, is they didn’t do it as like, a collaboration with Sephora.

Caroline: [00:14:57] Exactly.

Richie: [00:14:57] Which is interesting. And maybe if the goal is to like, kind of seed that audience, you do some one-off thing that isn’t there. But again, all these products are now available in multiple channels. The concern is short-term revenue will increase a lot, margins will degrade and then cannibalization will increase. And then, the two-to-three year impact on that is potentially problematic.

Richie: [00:15:21] Thanks for listening to Espresso, a Loose Threads Podcast. You can read full transcripts of the podcast and join the newsletter at LooseThreads.com. Feel free to leave a review on iTunes, we always appreciate it, and thanks to George Drake, Jr. for editing this episode. We’ll be back with more.