14 ★ FINANCIAL TIMES Friday26 July 2019COMPANIES
SIDDARTH SHRIKANTH—HONG KONG
BENJAMIN PARKIN—MUMBAIAn Indian government panel has
upheld a regulator’s decision to fine
Vodafone IdeaandAirtelmore than
$400m for disadvantaging upstart
Reliance Jio, in a setback to two of the
country’s largest providers amid fierce
competition in the telecoms sector.The Digital Communications Commis-
sion, the top decision-making body of
the telecoms department, saidon
Wednesday that it would uphold a total
fine of Rs30.5bn ($442.1m) against the
two telecoms companies for not provid-
ing enough points of interconnection to
Reliance Jio when it launched in 2016.
Interconnection points allow users to
make calls between different networks,
and Jio had complained to Trai, the tele-
coms regulator, that Airtel, Vodafoneand Idea had hobbled the new Reliance-
backed service and caused a large
number of calls on its network to fail.
Vodafone and Idea latermergedto
form India’s largest operator by market
share.
“Given the recent forced consolida-
tion due to the financial stress in the sec-
tor, this decision will be an additional
burden on the already stretched balance
sheets of the operators,” saidAirtel,
adding that the decision had come
despite interconnection points being
“provided within the prescribed time
limits and... more than the numbers
requested”.
Vodafone said it would “explore all
options, including seeking legal
recourse to protect our interests”, high-
lighting that the panel’s decision had not
been unanimous and that “at least four
committee members out of seven haddiffering views on the subject”. The
decision to impose heavy fines on Airtel
and Vodafone Idea will add to their
financial woes as they battlecut-throat
competition in India’s telecoms sector.
Since it was launched in 2016, deep-
pocketed Jio has invested heavily in
winning market share, and kicked off a
price war that has reduced the margins
of incumbent operators.
Reliance Jio did not immediately
respond to a request for comment.
Jayanth Kolla, founder of telecom and
tech consultancy Convergence Catalyst,
said the fine was significant enough to
hurt Airtel and Vodafone Idea’s balance
sheets even as the recent price war
showed signs of stabilising. “It’s a finan-
cial strain,” he said. “But most impor-
tantly it’s demoralising, and for Reli-
ance Jio it’s a shot in the arm.”
Rivals have accused Jio of violatingindustry regulations that prohibit
predatory pricing, with Airtel saying in
2017 that it was “providing telecom
services below its average variable cost
with the sole intention of eliminating
competitors”.DAVID KEOHANE— PARIS
ANJLI RAVAL— LONDONFrance’sTotalwill sell $5bn of assets by
the end of next year as volatile energy
prices force the company to focus on
businesses that can be operated more
cheaply.
The planned sales, which will mostly
come from Total’s exploration and pro-
duction businesses, were announced asthe company reported a nearly 20 per
cent drop insecond-quarter profits
thanks to a weaker oil price.
“Markets remained volatile,” said
chief executivePatrick Pouyanné, citing
a particularly acute decline in natural
gas prices which tumbled 36 per cent in
Europe and 26 per cent in Asia. The
company’s refining margins dropped by
16 per cent.
The decision to put assets up for sale
marks a reversal for Mr Pouyanné, who
has been on an acquisition spree that
included a deal in May to buy US oil
companyAnadarko’s operations in
Africa for $8bn.Biraj Borkhataria, an analyst at
RBC Capital Markets, said Total’s deci-
sion to focus on assets that can be more
cheaply operated were part of a trend
across the sector.
“We remainsceptical about the ability
to execute these programmes at reason-
able prices to the sellers,” he said.
Earlier this month Total announced
the $635m sale of a pool of mature North
Sea oil assets it had acquired as part of
the 2017 purchase ofMaersk Oil.
In parallel with the asset sales, Total
will concentrate on gas and deep off-
shore assets in an effort to lower its
break-even point, or the level at which itcan finance its current investments. The
current break-even point is $25 a barrel
of oil and the level at which it can both
finance investments and continue pay-
ing a dividend is $50 a barrel.
Mr Pouyanné has previously said that
Total can weather a low oil price more
easily than smaller rivals, giving it an
edge in acquisitions and investments.
The group’s second-quarter adjusted
net income fell 19 per cent compared to
a year ago to $2.9bn, just slightly below
the $2.98bn analysts had forecast.
Despite the more challenging
backdrop, Total still generated large
amounts of cash, with free cash flow of$7.2bn in the quarter, up 6 per cent from
a year ago.
Total also saidyesterday that its
dividend will be increased by 3.1 per
cent in 2019, in line with the target
increase of 10 per cent over the period
2018-2020, and it will buy back $1.5bn
of shares in 2019 as part of its $5bn
share buyback program over the
2018-2020 period.
Meanwhile, its European rival,
Norwegian producerEquinor,said
yesterday that it will cut spending this
year after reporting a drop in second-
quarter profits.
Additional reporting by David SheppardHARRIET AGNEW AND
HANNAH COPELAND— PARISIt is lunchtime in La Défense business
district in Paris, and theSephorastore
is full of shoppers browsing through
its high-end make-up and beauty
collections.
One young woman is testing out lip-
stick colours on a virtual mirror;
another completes a touchscreen ques-
tionnaire to find the perfume that best
reflects her desires. She plumps for a
bottle ofDior’s J’Adore and takes it to the
personalisation counter for engraving.
Like its stores in New York’s Times
Square and Dubai Mall in the Middle
East, Sephora in La Défense has recently
reopened after an extensive refurbish-
ment. The investment reflects how
bricks and mortar and experiential
retail are vital to Sephora’s growth. The
LVMH-owned group, which stocks
about 300 brands alongside its own
label, has increased sales fourfold in the
past eight years, fuelled by a booming
beauty market.
“A lot of people are scared of the retailapocalypse so they’re not investing in
stores, and that becomes a self-fulfilling
prophecy,” said chief executiveChris de
Lapuentein an interview on the shop
floor. “We’re investing in our stores, tak-
ing our top 100 stores in the world and
renovating them to the best possible
standard.”
Theglobal cosmetics marketwas
worth $532bn in 2017 and is expected to
grow more than 7 per cent a year to
$806bn by 2023, according to Orbis
Research.
LVMHon Wednesday said that like-
for-like sales at the selective retailing
division that Sephora is part of rose
8 per cent to €7.1bn in the first six
months of the year. Rogerio Fujimori, an
analyst at RBC Capital Markets, esti-
mates that the beauty group accounts
for about 60 per cent of the unit’s sales,
and has a profit margin of 12-13 per cent.
Sephora is LVMH’s second-largest
brand by sales.
Mr de Lapuente says one attraction of
Sephora is that consumers “discover
brands they can’t find anywhere else”,
noting that about one-third of its offer-
ings are exclusive to Sephora, and it acts
as an incubator for up and coming or
niche brands.Exclusivity might be with Huda,
which began selling false eyelashes in
Dubai and subsequently developed a
collaboration with Sephora; pop star
Rihanna’s cosmetics brandFenty, which
is on track for €500m sales this year.; or
an exclusive collaboration with Dior for
the Dior Backstage range of make-up.
Pointing to the beauty bar where cus-
tomers can get a free makeover, Mr de
Lapuente added: “Experiential retail is
crucial to our success. Sephora is a place
where people come for advice, they
come to listen. We teach, inspire and
play... You’re not going to get this
online. Online you can do your
research... here you can come and
experiment.”
Mr Fujimori agrees, saying Sephora
“successfully combines experiential
retail with a leading ecommerce pres-
ence, leveraging digital technology to
enhance the shopping experience in-
store and online”.
The challenge now for Sephora is to
stay ahead in a world where there are
more make-up and beauty brands than
everand social media has lowered barri-
ers to entry and boosted the speed to
market. Meanwhile,Amazonlast month
announced the launch of itsprofessionalbeauty stores, aimed at the mass market.
“Amazon is just another one of the many
choices out there,” said Mr de Lapuente.
“They have a strong ecommerce offering.
They don’t have stores. We love that con-
sumers love to shop online and in-store.”
He says that customers who buy both on-
and offline tend to purchase three times
more than those who buy using just one
channel. Ecommerce represents an aver-
age of 20 per cent of sales in each country
for Sephora, which uses influencers to
build its community. “Amazon just forces
us to raise our game.”
Mr de Lapuente, a formerProcter &
Gambleexecutive, joined Sephora as
chief executive in 2011. It has since
launched in 14 new markets, including
Mexico, Brazil and Malaysia and now
has 2,600 stores in 35 countries,opening
themat a rate of up to 150 a year.
The priority, however, is Asia — “a fan-
tastic opportunity” according to Mr de
Lapuente — where sales are growing 20
per cent a year, and 30 per cent in China.
Asia’s younger consumers, its growing
middle class and a high interest in pres-
tige beauty are attractive, and this year
Sephora will open stores in Hong Kong
and South Korea. The region accounts
for roughly 15 per cent of overall sales.Despite Sephora’s increasingly inter-
national footprint, it is small or absent
in some key markets. It re-entered Ger-
many in 2017, and has no presence in
the UK — having pulled out a few years
ago — or Japan.
“They’re opportunities for one day,”
said Mr de Lapuente.
The pressure is on to keep innovating.
“Beauty is so fast-moving, you can’t
cruise,” said Mr de Lapuente.
He says innovation will come both
from new products (citing untapped
potential in haircare and wellness), and
from the waybrands reach consumers.
He sees opportunities in areas such as
voice-activated ordering through home
assistants such as Amazon’s Alexa, and
social commerce through platforms
such as China’sWeChat.
But despite such technological devel-
opments, for Mr de Lapuente, the store
has a robust future.
At La Défense, customers are return-
ing to work with Sephora’s distinctive
striped bags modelled on the black-and-
white stripes of Italy’s Siena Cathedral.
“Is physical retail alive or dead?” mused
Mr de Lapuente among the throng of
shoppers. “It looks pretty alive to me.
The store is where the magic happens.”Telecoms
Fine of $442m for Vodafone Idea and Airtel upheld in New Delhi
Interview.Chris de Lapuente
Sephora chain sees the chic in bricks and mortar
LVMH unit lifts sales fourfold
over eight years as it bucks
trend with store renovations
Oil & gas
Total to put $5bn of assets up for sale
Quarterly profit down
a fifth as volatile energy
prices take heavy tollThe challenge
for Sephora is to
stay ahead when
there are more
make-up and
beauty brands
than ever and
social media
have lowered
barriers to entry
and boosted the
speed to market
Leo NovelThe market
for cosmeticswas $532bn
in 2017 andis expected
togrow7%a year to
$806bnby 2023
SONG JUNG-A—SEOULSK Hynix, the world’s second-largest
memory chipmaker, plans to cut
investment, fearing supply disruption
from a trade dispute between South
Korea and Japan.Demand recovery had not met expecta-
tions and price declines were steeper
than expected, forcing cuts in dynamic
random-access memory chip produc-
tion capacity from the fourth quarter,
said the South Korean company.
The shares rose 2.6 per cent yesterday
on the Korea Exchange. Shares of SK
Hynix gained about 30 per cent, and of
Samsung, its main rival,20 per cent this
year on expectations of second-half
earnings recoveries.
SK Hynix also plans to further reduce
its Nand flash memory output by more
than 15 per cent, from 10 per cent previ-
ously. Investment earmarked for 2020
would be “significantly lower” than this
year as it delayed capital expenditure on
facilities.
The announcement came after the
company posted its lowest quarterly
earnings in three years on weak chip
prices as the South Korea-Japan ten-
sions and the lingering dispute between
China and the US added to uncertainty
about the industry outlook.
“We are trying to secure inventories of
chip materials as much as possi-
ble... but we cannot rule out produc-
tion disruption if Japanese export con-
trols drag on,” Cha Jin-seok, head of the
company’s finance and procurement,told analysts after announcing second-
quarter results.
Net profitwas Won537bn ($455.8m)
in the April to June period, down 88 per
cent from a year earlier. Sales fell 38 per
cent to Won6.45tn.
SK Hynix is the latest South Korean
technology company to report weaker
quarterly earnings as a result of a slow-
ing global economy, the US-China trade
war and Japan’s curbs on exports of
chemicals used in chipmaking and
smartphone display.
South Korean chipmakers are trying
to ensure stable supply of materials,
with managers at Samsung Electronics
and SK Hynix visiting Japanese suppli-
ers this month after Tokyo tightened
curbs on exports of high-tech materials.
Mr Cha said SK Hynix was trying to
diversify suppliers and minimise input
of the chemicals affected by Japan’s
export controls.LG Display, the flat
panel maker,which also relies on key
Japanese materials, said this week it was
looking to diversify its sources.
South Korean officials are stepping up
their diplomacy to resolve the trade dis-
pute with Japan, with Yoo Myung-hee,
trade minister visiting Washington to
flag concern about its impact on global
supply chains.
Analysts expect chipmakers’ earnings
to bottom out in the fourth quarter and
recover next year as demand picks up
amid capacity reduction. CW Chung at
Nomura said Hynix’s strategy would
help advance the recovery.
“Ironically, Japan’s trade restrictions
are lifting chip prices as companies are
restocking memory chips on fear of pro-
duction disruption,” he said. “How long
the recent price rises will continue
depends on Japan’s attitude going for-
ward.”Technology
SK Hynix to
cut output in
response to
Seoul-Tokyo
trade spat
‘We cannot rule out
production disruption
if Japanese exportcontrols drag on’
Chris de Lapuente
says customers
come for advice
and to experiment.
‘You’re not going
to get this online’Contracts & Tenders
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