China Consumer

Skin in the game

Japanese cosmetics firm Kao ramps up China ambitions to catch P&G

Skin in the game

Kao offers a beautiful choice

“We have to change our tactics in China,” Kao’s chief executive Motoki Ozaki told The Wall Street Journal in an interview in July.

The chief executive was talking candidly about the failure of his company’s strategy. Kao, known for brands including the Jergens, Bioré and Molton Brown skincare lines, has lagged behind global rivals Procter & Gamble and Unilever in China for some time.

Foreign firms have long taken the lead in beauty and personal care products in China, especially when rising incomes spur consumers to trade up. P&G leads the pack with $5 billion in Greater China sales last year. Unilever, too, has seen its Chinese revenues increase by 15-20% a year, and they now stand in excess of Rmb8.5 billion, according to the Financial Times. Kao’s China sales, on the other hand, were $374 million in the fiscal year through to March.

“Kao’s overseas business is a bit of a mishmash and a disappointment,” says an industry analyst. “They only recently started in the diaper business in China and they don’t produce any there yet. Only about 1% of their sales come from China and this is from detergents. It seems to me they are very late and they may have missed the boat.”

To catch up on its rivals Kao is building its second plant in China, to make paper-based personal care products, including nappies. The plant in Anhui province is slated to start production next year.

In November Kao also announced that it had signed an agreement with Shanghai-based Jahwa, a local cosmetics maker, to expand its distribution network from 90 to more than 650 cities, says Oriental Morning Post.

“The Chinese market has taken a prioritised role in our long-term development plan because of its good economic situation and increasing purchasing power. Jahwa has excellent distribution channels and understands Chinese consumers better. It will help us achieve a win-win situation,” says Ozaki.

Kao did not provide details about the revenue it expects to generate through Jahwa’s distribution channels, but in a separate statement it says it plans to boost annual sales in China to about $1.3 billion in the next five years.

The tie-up comes only a week after Shanghai Jahwa announced a new owner. In a deal worth at least Rmb5.1 billion, Ping An Trust, a subsidiary of Ping An Insurance, China’s second-largest life insurer, won its bid to acquire the cosmetics maker. Ping An currently has investments in a wide range of industries including finance, electronics, e-commerce and hotel management. In the consumer sector, it also owns a stake in medicine producer Yunan Baiyao Group.

Jahwa, which is partially listed on the Shanghai Stock Exchange, has faced competition from larger rivals and currently has only 1.6% share of the domestic beauty and personal care market. The company’s portfolio includes 10 cosmetics labels, including high-end skincare brand Herborist. It also owns a 19% stake in LVMH’s Sephora cosmetics chain in China.

“Chinese state-owned companies have very poor management skills,” Ge Wenyao, its chairman, told the Financial Times in an interview earlier this year. “The government cannot do a good job helping state-owned companies compete in the cosmetics market, so they make the company fully private to better compete.”

Other potential bidders for Jahwa included HNA Group (the parent company of Hainan Airlines) and luxury goods giant LVMH. But Ping An was favoured because of its investment capability. Ping An’s presence in online retail, it is hoped, can also accelerate Jahwa’s expansion, says the Shanghai Daily.

HSBC Holdings owns a 16% stake in the insurer.

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