Inside some 600 J.C. Penney outposts across the United States, you can find mini Sephora stores flanked with the brand’s signature black-and-white striped decor and packed with beauty products, ranging from Rihanna’s Fenty Beauty foundations to Drunk Elephant’s lineup of skincare serums and hydrating face masks. For over a decade, the two companies have engaged in such a “stores-within-a-store” deal, in connection with which the LVMH Moët Hennessy Louis Vuitton-owned beauty retailer offers products from more than 200 beauty brands, including its own collection of products, and serves as J.C. Penney (“JCP”)’s “exclusive source of beauty offerings within [its] stores.”
The partnership, which got its start in 2006, saw the parties agree that “Sephora would place stores ‘inside’ JCP locations, containing an exclusive beauty offering which would benefit both of the parties.” Sephora, which maintained less than 200 of its own brick-and-mortar outposts at the time, would expand its physical footprint (and its reach to cosmetics-seeking consumers) without having to roll out sweeping, standalone stores. At the same time, JCP – in line with what other department stores had been doing for years – would be able to provide added value for its in-store shoppers, differentiate its offerings from competitors, and ideally, boost foot traffic.
The deal, which has led JCP and Sephora to “open a large number of [Sephora shop-in-shop] locations” over the past 14 years, was a win-win (for the most past), until it wasn’t. As of late last month, the parties’ partnership has landed them in court, with JCP arguing that Sephora is threatening to terminate the deal immediately unless JCP offers it more favorable terms.
According to the complaint that JCP filed in a Texas state court (which has since been removed to the federal U.S. District Court for the Eastern District of Texas) on April 27, “Sephora has threatened to terminate the contract [with one day’s notice],” and thus, “will not open [its shop-in-shops] when JCP re-opens [9 of its Texas-based] stores later this month, unless JCP agrees to shorten term of their contract … which does not expire for several years.”
“Seeking to circumvent the carefully-crafted dispute resolution process in their contract” and to “gain negotiating leverage where it has none,” Sephora threatened to pull the plug on the contract, one that JCP characterizes as “key contract that [it] has depended on for over a decade.” However, according to JCP, while the parties have had “several disagreements of late,” including over JCP’s decision to furlough employees, none of those spats “give Sephora any right to terminate the agreement.” (Sephora says that it “chose not to lay off or furlough any full- time employees because of the pandemic shutdowns” in connection with its “brand value,” which “lies in its commitment to its personnel and its reputation as one of ‘America’s Best Employers.’”).
With that in mind, JCP filed a declaratory judgment action, seeking a formal declaration from the court that Sephora “has no right to terminate the contract,” and a temporary restraining order preventing Sephora from attempting to terminate the agreement.
Just days after JCP first filed suit, Sephora responded and called foul. According to Sephora’s emergency motion to dissolve JCP’s temporary restraining order, counsel for the beauty retailer asserted that “JCP manufactured a false impression of Sephora as supposedly attempting to use minor grievances to suddenly pull from JCP the ability to sell any beauty products.” In reality, Sephora claims that “the only ‘threat’ [it] made was to begin a long termination process based on independent defaults, in exact compliance with the agreement, that would have no immediate effect or impose any imminent harm on JCP’s business, and which the parties had already been negotiating.”
Nonetheless, Sephora argues that JCP’s quest for – and ultimate gain of – a temporary restraining order was “based on misrepresentation.”
“No part of JCP’s fanciful, one-sided narrative was or is true,” Sephora argues, noting that in fact, “it is JCP that seeks— and has obtained through its wayward [temporary restraining order] – ‘negotiating leverage’ and to delay and change the basis for good faith wind-down discussions that have been underway between the parties for weeks, so that JCP can take advantage of an impending bankruptcy.”
More than that, Sephora argues that “JCP’s business has been declining for years and it now faces insolvency, perhaps even liquidation, in the face of the COVID-19 pandemic,” and that its temporary restraining order, which forces Sephora walking away from the parties’ deal without penalty, is part of a scheme “to unfairly and unreasonably bind Sephora’s hands beyond JCP’s presumed bankruptcy filing date, so that JCP could use bankruptcy to increase its leverage in the parties’ negotiations.”
A hearing on Sephora’s emergency motion to dissolve JCP’s temporary restraining order is set for Friday morning.
Looking beyond the specifics of the parties respective filings and the terms of their partnership contract, there seems to be a bigger fight over the parties’ deal, and more generally, the attractiveness of such shop-in-shops for companies like Sephora, which currently boasts nearly 500 stand-alone stores of its own.
The scuffle comes as no shortage of brands have either walked away from or demanded a revision of the shop-in-shop arrangement, enabling them to technically lease space from the department store and employ their own staff, and thereby, gain significant control over these retail partnerships with department stores. Specifically, many brands have ensured that even if they operate within the confines of another company’s brick-and-mortar store, they maintain full-and-final say over the pricing, merchandising, and markdown of their inventory, among other things.
Even with such control and potential benefits in mind, though, that does not change the fact that “the department store model is broken,” Jessica Ramirez, retail research analyst for Jane Hali and Associates, told Modern Retail this week. “Traditionally, when you were a designer, when you were a brand, you wanted to be in a department store, because it gave you exposure.” Now that consumers are largely opting to shop online (both before and during the onset of COVID-19, and almost certainly, with increased willingness to forgo the mall after the initial phases of the global health pandemic have subsided), and given that many of the major department stores are on the brink of bankruptcy (or on the case of Barneys, have already filed), the situation has changed quite significantly in recent years, in particular, making such tie-ups far less alluring to brands than they were in the past.
Already reportedly exploring a bankruptcy filing, a severed relationship with Sephora – which is said to be a sizable traffic driver for JCP, which also stocks the beauty retailer’s offerings in its e-commerce site – is one more blow for the already-ailing department store.
UPDATED (May 7, 2020): In a joint statement, J.C. Penney and Sephora announced that “they have reaffirmed their long-standing partnership to operate Sephora inside JCPenney.” They stated that “both companies worked constructively to resolve outstanding legal matters and have agreed to mutually beneficial revisions to their joint enterprise operating agreement.” In connection with the settlement, J.C. Penney filed to voluntarily dismiss its suit against Sephora, and the case was formally terminated by the court on May 7.
While the parties may have settled their differences, Reuters reports that J.C. Penney could file for Chapter 11 bankruptcy as soon as next week. According to Reuters’ sources, the department store plans to “permanently close about a quarter of its roughly 850 stores, becoming the latest major U.S. retailer to succumb to fallout from the coronavirus outbreak,” after struggling with “nearly $4 billion in debt and competition from e-commerce firms and discount brick-and-mortar retailers even before the pandemic’s onset.”
*The case is J.C. Penney Corp., Inc., v. Sephora USA, Inc., 4:20-cv-00364 (E.D.Tex).
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