Customers don’t know very much about how beauty retailers sell them products. The process by which a lipstick goes from factory to store to you is pretty opaque. Sure, we know conceptually that beauty has high margins and a big markup. But while newer brands like The Ordinary and Beauty Pie have started to offer a bit of transparency into pricing and how brands are ultimately made available to consumers, there is still a lot of mystery baked into the process.
The recent apparent shuttering of an indie beauty brand and its lawsuit against Sephora helps shed some light on how truly complex it is to sell beauty products — and the costs that get passed on to shoppers.
A few weeks ago, the beloved indie makeup brand Obsessive Compulsive Cosmetics (OCC) abruptly shuttered its website, its New York City store, and all its social media accounts. While the brand has not made any official statement and none of its third-party retailers like Nordstrom and Urban Outfitters have confirmed anything, it’s widely assumed that the brand has gone out of business. Founder David Klasfeld seems to have started a new Instagram account under the handle @dkwmakeup, and notes in the bio: “I founded and ran the world’s first 100% Vegan & Cruelty-Free Cosmetics line from 2004-2018.” (Racked has reached out again to OCC and will update if we hear back.)
If this is the case, what happened? The only person who knows for sure at this point is the founder of OCC, but a lawsuit with Sephora dating back to 2015, may provide some clues. It also sheds some light on things like who actually is responsible for building and filling the product testing fixtures you find in stores, what large markdowns mean for a brand, and how store exclusivity works.
The terms of a Sephora contract
According to the 2016 order, OCC and Sephora signed a contract in 2012 stating that the retailer would sell the brand’s products and that OCC would be 100 percent responsible for the costs of the fixtures, which is the system of shelving and pigeonholes where testers and products for sale are displayed in the store. They can vary in size from a small box on a shelf to an aisle-long behemoth. Per industry sources, this is a pretty common arrangement. (More on what those fixtures cost in a bit. Hint: a lot.) OCC then alleged in the suit that it entered into a verbal agreement with Sephora to alter the original contract in two ways: first, that Sephora would become OCC’s exclusive brick-and-mortar retailer with the understanding that it would place enough orders to make up for the ones OCC would have to decline from other retailers. Second, Sephora was supposedly going to help defray the costs of the fixtures by contributing 50 percent, since it supposedly wanted to increase the number of stores selling OCC, which would then necessitate building more fixtures. OCC alleged in the suit that Sephora reneged on these oral agreements by not placing more orders and not helping to pay for fixtures. Sephora argued that it was a moot point because the original contract stipulated that the contract could only be modified in writing and therefore the suit should be thrown out.
However, the judge ruled that OCC could continue pursuing it, because he determined that OCC had acted in such a way (turning down orders from other retailers, for example) that made it seem clear that OCC relied on Sephora’s verbal statements. (He threw out a fraud allegation that OCC made about Sephora, however.) Sephora was given 20 days to serve an answer, but the conclusion or settlement does not appear to have been made public.
But that’s not the full story. An earlier 2015 order details exactly how much money OCC stood to lose in the Sephora deal. Sephora wrote a letter to OCC to terminate the deal in 2015, stating it would sell the products it had until a certain date, while also requesting OCC to fulfill two outstanding purchase orders that OCC hadn’t shipped yet. After the date in the termination letter, Sephora expected OCC to take back leftover product (this is called a return-to-vendor, or RTV, clause) and reimburse Sephora for the unsold product. The bottom line? Sephora said it expected to be reimbursed $832,700 for the unsold products. Otherwise, it allegedly said it would liquidate its remaining stock at fire-sale prices. OCC asked for a preliminary injunction, arguing that “if provisional relief is not granted it will suffer irreparable harm because an immediate mark down of the outstanding inventory would have financially devastating effects and moot any award of damages.” According to the lawsuit, OCC never reimbursed Sephora for remaining stock, and Sephora did end up marking down the remaining products and selling them off quickly, according to Revelist. Ultimately, OCC claimed damages of $521,647.20. This is where the paper trail ends.
PART TWO COMING NEXT WEEK