Kao breaks financial records but fails to reach forecasted goals

Kao announced that its full-year 2018 net profit increased 4.5% to ¥153.7bn ($1.4bn). This was a record for the cosmetics and personal care company.

It also achieved record high operating income for the sixth consecutive year and increased its profits for the ninth consecutive year.

However, the company was not able to achieve its forecast goals. “I feel this is quite a shame that we weren’t able to achieve this forecast, but November and December were tough for us – December especially so,” ​said Kenichi Yamauchi, executive officer, senior vice president, accounting and finance of Kao Corp.

Additionally, Kao’s operating income increased 1.4% year-on-year to ¥207.7bn ($1.9bn) while sales grew 1.2% to ¥1.51tn ($13.7bn)

Shampoos drag down segment

All in all, the company’s cosmetics segment grew 5% to ¥279.6bn ($2.5bn). Domestically, Kao cosmetics portfolio, which consists of Sofina, Kate, Kanebo and Curél grew 1.3% to ¥217.7bn ($1.9bn).

Yamauchi attributed this grow to the strong performance of Curél and Sofina IP in Q4. “This is why the cosmetics category grew slightly year-on-year.”​

Overseas, Kao’s cosmetics brands continued to be strong. Asia showed solid growth of 36.6% due to the popularity of Freeplus and Curél.

Cosmetics sales in the Americas and Europe grew 3.5% and 5.5% respectively mostly because of solid Molton Brown sales.

The skin care and hair care segment however, did not perform as well cosmetics. While skin care and hair care grew 2.7%, the category declined 0.3% without factoring Oribe sales.

Asia and Japan saw 3.4% and 2.1% year-on-year growth respectively. “This may look like sluggish growth, but Bioré enjoyed extremely strong sales,” ​said Yamauchi.

He added that while Bioré continued to do well in the region, Kao’s hair care brands suffered and dragged the segment down.

Not counting sales of Oribe in the Americas, Kao suffered a 6.8% loss in the Americas as Bioré sales continued to not sell well in the market.

Europe saw 2.6% decline in sales, attributed to issues in sales in both personal and professional use products in salons, said Yamauchi.

Playing the long game

President and CEO of Kao, Michitaka Sawada, said that the company made an intentional decision not to hit its 2018 goals when it noticed sales slowing.

Sawada said, “Internally, we had deep discussions on whether we should try hard to meet this year’s forecast, or if we should instead work to improve the situation this year in order to contribute to the achievement of K20 in 2019 and 2020.”​

K20 is Kao’s mid-term plan to achieving its vision of becoming a “company with a global presence”​ by 2030.

Sawada revealed that the company decided not to take “unreasonable actions” in November and December just to make its 2018 forecast.

For instance, said Sawada, the company decided not to go forward with any hair care product campaigns to strengthen its year-end sales activities.

While such campaigns like the Disney campaigns are popular, he said that in the past Kao had been forced to dispose of leftover campaign products

“As we are promoting [Environmental, Social and Governance initiative] we should not be disposing inventory, therefore we should revise out thinking on campaign products. We must consider how to run them so we don’t end up with products that need to be disposed of.”​

Looking ahead

For 2019, Kao expects sales in the cosmetics segment to increase 4.5% to ¥290bn ($2.6bn).

It plans to do achieve that by defining and refining its brand while enhancing its initiatives in the growing e-commerce and travel retail channels. Additionally, it plans to enhance operations in Asia, namely China, while continuing to make structural reforms in Japan.

As for skin care and hair care, Kao forecasts that sales in this category has the potential to increase 5.7% to achieve ¥357bn ($3.2bn) in sales.

The company said it would assess changes in consumer values and lifestyle habits in order to create greater product value for consumers.

For instance, it plans to launch sun protection products under Bioré brand using its new sun screen formula that prevents uneven application.

In the Americas and Europe, the company said it plans to reorganise the business to reinforce the importance of development and manufacture of products. Additionally, it plans to reform marketing and sales efforts to resonate more with consumers’ purchasing behaviours,