Critical state: Kao must make ‘bold upfront investments’ in digital to secure growth of cosmetics division – CEO

Kao’s cosmetics business, which comprises of brands such as Kanebo, Freeplus, Curél and Molton Brown suffered due to a significant decline in inbound demand and the impact of COVID-19 restrictions.

According to the firm’s FY2020 results published on February 3, its cosmetics business saw sales decrease 22.1% on a like-for-like basis compared to the previous year. Operating profit decreased over 90% from JPY 41.4bn to JPY2.6 from the previous fiscal year.

The impact on the cosmetics business was greater because of the ratio of make-up, which is approximately 10% higher than the market.

According to Kao, the colour cosmetics market contracted 25% in Japan, with lip make-up and face make-up decreasing by 51% and 28% respectively.

Digital centric reform

Speaking to during the company’s FY2020 earnings conference, CEO Yoshihiro Hasebe stressed that the cosmetics division was vital to the company’s global sales and profit growth.

“I firmly believe that cosmetics will continue to be a growth driver for sales and profits,” ​he said.

Hasebe highlighted the importance of its 11 global brands (G11) and eight regional brands (R8) and stressed the need to promote them.

“If we can achieve making them valuable brands [to the consumer], we will see 100% loyalty. That is what we will aim for.”​

A crucial part of its plans to reform the business lies in the company’s strategy to invest heavily in digital technology.

“We will radically make bold upfront investments in digital. Cosmetics is an area which digitalisation can be quite effective,”​ said Hasebe.

This year, the company stepped up on e-commerce in response to consumer shifts. E-commerce sales increased by more than 20% year-on-year in Japan.

In China alone, its e-commerce channel grew approximately 1.5 times to account for about 70% of sales as a result of ramping up initiatives on e-commerce platforms for brands such as Freeplus and Curél.

Hasebe elaborated that the company intended to use digital technology to deliver solutions that are customised to consumer wants and needs.

“This is our strategy driven by digital. It’s globally applicable, especially in China, the country that is the most advanced in digital. We have already started this last year and we would like to move forward in unison as a digitally-driven company.”​

He added that this would require essential investments into hardware and software but said the company would mainly focus investment efforts on software.

“We would need to build the hardware as well, but our focus is on software as it is something that continues evolving. While hardware does evolve as well, it, unfortunately, becomes a fixed cost, so instead of fixing our investment, we want to build our foundation with software.”​

With these measures in place, the group forecasts that sales in cosmetics will increase by 6.7% year-on-year on a like-for-like basis to JPY249bn.