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Business Trends

J-beauty brands look beyond China success

Buoyed by millennials, smaller players are venturing into new markets

Chinese tourists have helped drive up sales of MTG’s ReFa facial and body massage devices.

TOKYO -- The flood of Chinese tourists to Japan has given a fresh uplift to the high-end beauty products market. Buoyed with success, some niche brands are now venturing beyond China.

Nagoya-based MTG, which sells health and cosmetic tools that cost hundreds of dollars, is gearing up for further expansion abroad. The company made its stock market debut in Tokyo on Tuesday, raising 34.2 billion yen ($309 million).

Excitement around the listing -- the second largest initial public offering in Japan this year after e-commerce unicorn Mercari in June -- was reflected in its share price, which ended 27% higher than the offer price of 5,800 yen, giving it a market capitalization of $2.56 billion. This is partly due to the stellar growth of its overseas business; revenue for its global segment more than doubled to 11.2 billion yen in the year ended September. This was driven by sales in China, mostly through Alibaba Group Holding's Tmall shopping platform.

"Over the next three to five years, we want to grow in Asia, centered around China," MTG President Tsuyoshi Matsushita said at a press conference on Tuesday. The company is exploring options to enter Russia, Dubai and the Philippines, he added.

Established in 1996, MTG designs and sells beauty and health products in collaboration with universities, medical institutions and celebrities. To stimulate interest among Chinese consumers, the company recently appointed Chinese actress Fan Bingbing as "global ambassador" for ReFa, its best-selling facial and body massage tool.

"I have seen many Japanese brands that have great quality but lose because of branding and marketing," said Matsushita. "Overseas sales now account for 35% of the total. We want to show that upstarts from Japan can compete globally."

Japan's beauty market has benefited from a rise in foreign tourists, especially from China -- with annual visitor numbers from that country tripling between 2014 and 2017. Popular products are exposed through social media to mainland Chinese consumers, who buy the products through e-commerce platforms like Tmall. This virtuous cycle enables relatively new players like MTG to succeed without having a large physical presence in a foreign country. Matsushita said that five years ago the company did not have any overseas talent.

The eagerness to go global highlights the opportunity that MTG and its rivals see ahead: millennials willing to spend lavishly on new ideas to improve their looks. Such behavior is rare in Japan, where spending on skincare and cosmetics is already the highest in the world and led by older women.

"The main difference [with] Japan is that users in China are very young," said Kimiyo Yamazaki, president of high-end beauty device maker Ya-man. "In Japan our products... target seniors who want to go beyond cosmetics, but in China they are college students, or people in their 20s and 30s."

Ya-man makes high-end facial care devices that can cost upwards of 40,000 yen. It logged a 50% increase in net profit for the year ended March to 3.3 billion yen, driven by sales in China. The company launched its products in South Korea and Singapore last year, and recently expanded to Indonesia. It is looking to enter Vietnam before the end of this year.

Ya-man targets 30 billion yen in annual revenue over the long term, 30% higher than its latest fiscal year. Jiro Kojima, an analyst at Daiwa Securities, estimates that half of that growth will come from East Asia and other overseas markets. "The market for products like facial rollers is continuing to expand in Asia," he wrote in a research note to clients in June.

Other companies are also expanding their product lines. Fancl, a smaller cosmetics rival to Shiseido and Kose, has seen overseas sales for its supplements grow faster than its core cosmetics business. The company recently unveiled plans to sell supplements in China as early as 2020, pending approval from local regulators.

Some observers warn that the current boom in Japanese brands might cool. The growth in exports of South Korean cosmetics products to China is said to have slowed last year amid tensions over the deployment of the U.S. THAAD anti-missile system in South Korea, to which Beijing has strongly objected. Another challenge is preventing copycat products -- MTG has partnered with Alibaba to protect its intellectual property.

"We need to create a system that doesn't rely on a single brand or product," said MTG's Matsushita. "We made some progress. Now we need to prove the high expectations by shareholders with numbers."

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