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Shiseido is answering its customers' concerns regarding the pandemic and other matters, partly with a digital in-store shopping experience and refill stations. (Photo by Yuki Kohara)
Business Spotlight

Shiseido bets on luxury skin care and China's fickle consumers

CEO Uotani adapts to changing customer preferences amid COVID pandemic

NANA SHIBATA, CK TAN and KIM JAEWON, Nikkei staff writers | Japan

TOKYO/SHANGHAI/SEOUL -- Tokyo's Ginza is suffering, bereft of the throngs of Chinese tourists who used to step off buses every day eager to shop in its tony emporiums. But one time-honored boutique is using the lull to upend the shopping experience.

It is a cosmetics shop that started out as a pharmacy almost 150 years ago and has since become famous for the in-person makeup tutorials its beauty consultants offer.

That personal touch is now digital. Shoppers at the Shiseido Global Flagship Store are asked to stand in front of a digital display and be photographed. The picture is then read by artificial intelligence, which goes on to suggest products that best suit each individual.

The store shows how Shiseido, Japan's largest skin care and cosmetics company, is adapting to changing consumer behavior, answering customers' concerns and competing against new Chinese and South Korean brands that are giving the made-in-Japan label a run for its money.

Before COVID-19, Shiseido largely relied on those busloads of tourists as well as airport duty-free stores and similar channels to grow sales. Perhaps the tourism sector will bounce back, but the beauty business sees prolonged upheaval ahead.

And that has Asia's biggest beauty brand wondering whether customers will continue to work from home after being vaccinated, which could mean they go easier on face creams, and whether they have come to appreciate the safety of masks, which could curb their use of makeup and splurges on high-end beauty products.

"There are fewer opportunities to wear lipstick and other cosmetics now that everyone wears a mask and there are fewer opportunities to go out," Shiseido CEO Masahiko Uotani told reporters last year. "While [people's] buying behavior becomes more cautious, there is an increasing trend in which consumers tend to [purchase goods they consider] very valuable and necessary."

Shiseido had been riding an Asiawide surge in the popularity of Japanese products and benefiting from a consumer goods "premiumization" trend, one driven by the region's swelling incomes and newfound fondness for travel.

Even as COVID wreaks havoc with economies around the world, Uotani believes the premiumization trend still has legs.

Shiseido has overcome previous crises, but this one is presenting myriad challenges. There are those questions regarding consumer behavior, the luxury business and travel retail. And the strait Shiseido is sailing through is becoming narrower as Western majors crowd in from one side, and those newly popular Chinese and South Korean brands cast shadows from the other.

Uotani -- a Columbia Business School-educated executive who spent 17 years at Coca-Cola, mainly in marketing roles -- says his company has mapped out a course.

"Skin is really a barometer of health," Uotani said. "We will concentrate on more prestige and the premium business."

Here is the reason for that: The global premium beauty and personal care market is estimated to reach $163 billion in 2024, up 19.3% from 2019, according to Euromonitor International. Of this, Asia is expected to account for about 49.8%.

Shiseido was founded as a Ginza pharmacy in 1872 by Arinobu Fukuhara. After Fukuhara released his own toothpaste, soda pop and ice cream, he entered the cosmetics business in 1897. From its drugstore beginnings, Shiseido has not only grown to become Japan's largest cosmetics company but has been expanding globally since 1931.

Shiseido in 2019 made 55% of its sales outside its home country, up from 36.9% in fiscal 2009. That same year, the company's operating profit was triple what it was three years earlier.

Then the pandemic struck, and Shiseido in 2020 earned an operating profit of 15 billion yen (about $137 million), down 86.9% from 2019.

CEO Masahiko Uotani is navigating Shiseido through an upheaval in the beauty business. (File photo by Keiichiro Sato)

So how does Shiseido climb back up? It goes to China. The company expects the world's most populous country to remain as its most important foreign market.

Amid the pandemic last year, Shiseido opened a research and development center in Shanghai's Oriental Beauty Valley, becoming the first global cosmetics company to set down roots in the industrial park, where the Tokyo-based company intends to collaborate with its new neighbors.

Uotani said the research institute, together with one in Japan, gives Shiseido "its greatest strength," one that will allow it to "deeply analyze the skin and eating habits of Chinese and other Asians."

Digitization is another important factor in Shiseido's China expansion. The company in 2019 formed a business alliance with Alibaba and has been collaborating with the e-commerce giant on promotions.

Its next step will be to analyze Alibaba's purchase data and develop products better suited to consumer demand. Shiseido announced last year that it also plans to make more than 100 digital hires, mainly in China by 2023.

"Chinese people, especially zoomers, are becoming more interested in environmental problems and sustainability," Uotani said, adding that his company must address climate change to gain consumer trust. He also pointed out how the concept of mottainai -- a term that loosely translates as "What a waste!" and has been used by Japanese environmentalists to remind people to mind the planet -- has caught on among some young Chinese. Shiseido plans to ride this trend by refilling containers that customers bring back to its shops.

"Japanese cosmetics are popular with consumers younger than 30 because they have been touted as more suitable [than Western brands] for Asians," said Linda Cai, a partner at Loyal Valley Capital, a Shanghai-based private equity firm that manages $1.6 billion worth of assets.

But there is another big consumer trend in the country -- latching on to homegrown brands, a shift from the worship of foreign goods. Young consumers tend to base their purchases on a sense of patriotism, Cai said. "As we have seen on social media," she added, "there is a renaissance of young people donning traditional hanfu clothing," attire from the Han Dynasty, and this trend stretches to the eating, drinking and consuming of local brands, "all with emotional attachment."

This presents new Chinese brands with a big opportunity "to take market share from international brands," Cai said.

Chinese brands such as Perfect Diary are rapidly gaining prominence in China's beauty market, deploying a combination of online and offline marketing strategies to directly reach out to customers.

Founded in 2016 by Huang Jinfeng, a former Procter & Gamble executive, Perfect Diary is now a skin care brand under Yatsen Holdings. The Guangzhou-based company targets working adults in the 20 to 35 age bracket. It reaches out to them through its official WeChat account and other social media platforms with promotions and personalized services.

Shiseido and Alibaba plan to extend the business alliance they formed in 2019. (Photo courtesy of Alibaba Group)

Its sales channels include e-commerce platforms Tmall, JD.com and Vipshop. Perfect Diary caught many by surprise in 2019 when its eye shadow, mascara and lip gloss topped their categories during the Singles Day campaign. The brand repeated the feat last year, doing 503 million yuan ($77 million) in sales and beating out the likes of Estee Lauder and other foreign brands.

Yatsen so far has opened over 200 stores across the country to enhance customer engagement. Some of the stores are equipped with cafes and experience corners, where members can experiment with makeup.

Yatsen began an overseas acquisition spree in October, when it debuted on the New York Stock Exchange, an effort to raise its profile in a market known to prefer foreign brands. Eva Lom, the latest acquisition, is a U.K.-based skin care brand. It followed the purchase of French brand Galenic.

Yatsen did not respond to a request for an interview. Analysts believe the acquisitions are part of a strategy to diversify product development and target more market segments.

"The acquisitions of high-end foreign beauty brands reflect the company's ambition to penetrate the high-end market," said Hua Xiaonan, an analyst at market research company Daxue Consulting in Shanghai.

Shiseido's Asian rivals are not confined to Chinese players. South Korea, whose boy bands and TV dramas have found fanatic global audiences, has another cultural export that has gained a devoted following, K-beauty.

AmorePacific, the leading South Korean cosmetics company, in October signed a strategic business partnership with the China Duty Free Group so it could ride the rising tide that is China's duty-free market. The companies agreed to cooperate in opening new shops as well as in marketing and digital transition investments.

"Through the partnership with leading global duty-free company CDFG, we want to maximize our business synergy as well as gain a chance to understand Chinese customers more deeply," CEO Ahn Se-hong said in a statement. The company also cooperates with Shopee, a Southeast Asian e-commerce major, to expand its sales channels in that up-and-coming region.

Aya Suzuki, an analyst at Euromonitor International said that "with the rise of local brands in China and South Korean players, the color cosmetics [such as lipstick and nail polish] market will become more competitive."

Expanding in China presents unique challenges. Shiseido came up against one of them in 2012 when Chinese consumers boycotted the brand due to a flare-up over the Japan-administered Senkaku Islands, which China claims and calls the Diaoyu Islands.

Hiroshi Saji, a Mizuho Securities analyst said that "focusing on a profitable prestige business is a positive factor in the short term" but added that depending on the Chinese consumer is risky. Shiseido, Saji said, needs to lean into other markets.

The Shiseido-Dolce & Gabbana licensing agreement became a corona casualty in April.   © AP

"I think that when the coronavirus calms down after next year, economic growth in Asia will have great hope again," Uotani said. "That's why I've been laying the foundations for [future development] for a long time."

Shiseido in 2015 established an office in Singapore to oversee and enhance its Asia-Pacific marketing. And Taiwan has become an important digital innovation hub for Shiseido, Uotani said.

The company is also looking further south. "The market size is still small, but demand will grow in the Philippines," Uotani said. Shiseido recently launched a joint venture and started operations in the country.

One big mission in Asia remains, entering India. Shiseido "aims to launch the market by 2030," Uotani said, noting that Indians' income is on the rise and that many are taking to makeup. "There is a high degree of affinity for the Japanese brand," he went on, "so there is considerable potential in the future, depending on how the sales base is created. But it will take time."

In a move meant to maintain its global competitiveness, Shiseido earlier this year announced the sale of a portion of its business, including hair care products, to the European private equity fund CVC Capital Partners for about 160 billion yen. In April it announced the cancellation of a product-licensing agreement with Dolce & Gabbana, part of a restructuring drive necessitated by slumping sales amid the pandemic. Shiseido had produced and sold the Italian brand's perfumes and cosmetics.

The selling of less-profitable divisions to focus on its core cosmetics business is the "result of selection and concentration as a prestige-first global company," Euromonitor's Suzuki said, adding the moves "will limit the reach and touchpoints to consumers, compared to giants L'Oreal and Unilever."

Like Shiseido, L'Oreal of France, the world's largest cosmetics company, has prioritized China during the pandemic. L'Oreal China reported that it "significantly outperformed the market" in 2020 with double-digit growth in all businesses.

Estee Lauder of the U.S., meanwhile, has been accelerating its investment commitments to meet demand from Asian consumers. In addition to opening an innovation center in Shanghai in 2022, the company is building a factory near Tokyo that will be operational in late 2022.

Despite the big global players' aggressive plays in Asia, Uotani says he remains confident Shiseido can attract Asian consumers. "Asian skin is a little different from that of people in the West, isn't it?" he asked. "That's because eating habits and various backgrounds are different. ... [Asian consumers say] Shiseido's products suit their skin."

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