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China closes in on Japan at beauty giant Shiseido

This file photo shows Vietnamese model Hoang Thuy presenting a creation by Vietnamese designer Hoang Hai during the Vietnam International Fashion Week in Hanoi. (AFP Photo). Sketched by the Pan Pacific Agency.

TOKYO/BEIJING, May 14, 2021, Forbes. Shiseido’s geographic balance has shifted considerably in the space of a year—so much so that China could soon challenge Japan as the beauty company’s biggest region for sales, Forbes reported.

In the first three months of 2021, Japan still held the top position with sales of $687 million (75.3 billion yen), down 12% on the same period last year. But China’s growth of 47% has propelled it to just under $600 million (65.3 billion yen).

For comparison, in the first quarter of 2020, Japan’s sales were approximately double that of China, which had been impacted by lockdowns when Covid-19 first struck. Nevertheless, how that gap has closed indicates just how far Shiseido’s home market has fallen—and how fast China has risen.

When Masahiko Uotani took over as Shiseido’s 16th president and CEO in 2014, the former CEO of Coca-Cola KO +0.9% in Japan quickly unveiled a strategic plan called Vision 2020. At the time Shiseido had suffered almost a decade of quite flat sales and declining profitability.

This was thanks to an over-reliance on Japan where sales were declining year-on-year but the country still accounted for 50% of revenue at the time. Uotani set about turning an inward-looking company into one that embraced consumers worldwide using a matrix model across brands and regions which revamped the business from the ground up.

His plan was hugely successful. By 2019 the company had turned the Shiseido brand into a $1.8 billion juggernaut and the overall business crossed $10 billion in sales. Meanwhile sister high-end houses such as Clé de Peau Beauté, Laura Mercier and NARS, drove the prestige division to a 46% share of company revenue. Under Uotani’s tenure up to 2019, Shiseido’s share price rocketed by more than 330%.

Expanding the non-Japan business

At the same time, Shiseido increased business outside Japan to 60%, helped by double-digit growth in China, EMEA and travel retail. In the first three months of 2021 those non-Japan sales rose again to just shy of 70%, driven mainly by China. Comparing Q1 2021 with Q1 2019 all of Shiseido’s six region’s have shrunk apart from China which was ahead by 24%.

Thanks to strong sales in Hainan, travel retail showed the smallest decline at 1%. Japan, on the other hand, declined by almost a third due to a Covid-driven state of emergency imposed from January 8 to March 21. Another was announced at the end of April, ahead of the forthcoming Olympic Games in Tokyo which will affect sales in this quarter.

Despite China’s powerful sales momentum, the cost of doing business there and the commercial investments required in such a competitive market led to operating profit contracting year-on-year by 63% to $18.3 million in the three months to March. This was less than half of the $45 million generated in Japan where operating profit also declined, but less steeply at 37%.

China’s high costs take the gloss off its runaway sales growth, and will be something Shiseido needs to watch carefully. The company is expected to continue investing there to maintain share in such a critical market.

However, for this year at least, the company does not expect China to overtake Japan, despite the mainland achieving year-on-year sales gains for four quarters running, while Japan has seen at least five quarters of double-digit contractions.

Shiseido’s full-year outlook—taking into account the impacts from its personal care spin-off and partial termination of a license with Dolce & Gabbana—is for revenue to hit $9.7 billion with net profit of $324 million. Of the sales figure, Japan is expected to contribute $3 billion with China still in second place at $2.6 billion.

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