During the firm’s latest third-quarter (Q3) earnings conference, director and CFO Shinichi Mochizuki revealed that it scuppered plans to increase the departmental store footprint of Decorté in China in light of how it has been affected by the COVID-19 restrictions.
“At the beginning of 2022, we planned to increase the number of our shops at department stores for the purpose of spreading Liposome products in China following the launch of a fresh line-up for this brand. However, this plan was affected by slowing economic growth in China.”
With China still staunchly sticking to its zero-COVID policies, the company has opted to adopt a wait-and-see approach.
“At this time, there is still uncertainty about when the zero-COVID policy will end. Some people believe the market in China will start recovering in 2024, but we have a cautious outlook.”
He added: “We are holding down expenses in 2022 and plan to make investments in 2023. If these activities improve our operations, we believe that the operating margin will increase.”
For now, the company will focus on raising consumer awareness of Decorté in China and shifting focus to high-end products.
The situation with COVID-19 in China has negatively impacted Kosé. Mochizuki described the China business as having “slowed down and is not growing”.
“The impact of the zero-COVID-19 policy has become a negative factor, and moreover, competition continues to intensify among the high- prestige cosmetics. As a result, the sales are expected to fall short of the previous year's level and the plan.”
While sales in China’s offline channels declined by 69.1%, sales were positive in e-commerce and travel retail, growing 6.6% and 89.3% respectively.
Overall, Kosé net sales in the nine months Ending September 30 were up 7.5% to JPY200.8bn, while operating increased by 88.6% to JPY12.4bn.
China’s zero-COVID effect on Asia
The weakening of its business in China has pulled down the entire Asian market, in particular in South Korea, said Mochizuki.
“When we announced the second quarter revisions, we explained that our performance was becoming worse in Greater China, including China. We also noted that dark clouds were starting to appear in South Korea. The business climate in South Korea has changed dramatically in the second half of 2022 because of the impact of China’s zero-COVID policy and the dollar’s strength versus the won.”
The situation in China was also partially to blame for the sales decline in the South Korean travel retail business.
“This was our biggest miscalculation, and we are now suffering from the effects of the strong US dollar against the weak won, the economic slowdown in China, and the travel restrictions in China, which are triple troubles causing a very serious damage. We believe this is expected to continue in 4Q,” said Mochizuki.
He added that the recovery of Asia as a whole would depend on China. “If China changes its zero-COVID policy and its economy recovers, all Asian economies will probably recover in 2023. However, this recovery may not begin soon and could take a long time.”