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Global latecomer Kao takes fight to P&G, Unilever

Japan's top household goods maker mounts challenge to far larger titans

Kao's Attack Jaz1 detergent is a big seller in Indonesia.   © Not selection

TOKYO -- Not content with being a big fish in a small pond, Japan's Kao is finding early success in its quest to become one of the world's leading consumer products companies by the end of the next decade.

Big in Japan

The Tokyo-based group on Thursday reported an 87.3 billion yen ($785 million) operating profit for the first half ended in June. The 7.7% jump from a year earlier came on the back of a 2.5% bump in net sales to 717.3 billion yen.

Kao President Michitaka Sawada discusses earnings Thursday.   © Not selection

"What is really significant is that we've surpassed last year's brisk performance," President Michitaka Sawada said. "Our determined activities have paid off."

The best growth performer was the health care business encompassing diapers and feminine hygiene products. A 45.7% surge in the segment's operating profit offset sluggish growth in beauty care and other businesses amid uncertain times for Japanese consumer spending. Kao expects to log a record full-year group operating profit for the fifth straight year.

Yet for all its success at home, Kao has a problem: It derives less than 40% of its sales from overseas. Global names such as U.S.-based Procter & Gamble and Anglo-Dutch company Unilever generate most of their revenue abroad. Kao comes up short by this measure even against smaller Japanese peers Shiseido and Unicharm, which stand at roughly 50% and 60%, respectively.

Though Kao's overall earnings dominate those of either domestic rival, Sawada, now in his sixth year as chief executive, fears for the company's fortunes in the international arena. "As global competition accelerates, we can't survive by continuing along the same path," the president said. At the end of last year, Sawada unveiled a vision that places Kao within the global industry's top three by 2030.

That announcement amounted to a declaration of war against Western competitors.

First China, then the world

China serves as one battlefront. Kao entered China's disposable-diaper market -- worth roughly $7.4 billion last year -- with its Merries brand in 2009 and now holds an 11.5% share, according to Euromonitor. That puts the Japanese group on par with American rivals P&G and Kimberly-Clark. And "we can expect growth in excess of the market's double-digit growth," Sawada said.

The brand's popularity there led to an unexpected setback in 2014 and 2015. Sales of aboveboard Merries imports in China were undercut by Chinese vendors who made bulk purchases at stores in Japan for resale at home, thus avoiding customs duties.

Kao retaliated in fall 2015 by opening an outlet on Tmall Global, the cross-border e-commerce platform run by China's Alibaba Group Holding. Items sold there receive significant tax breaks. The success of that move helped beat back parallel importers.

Separately, Kao's sales partnership with Chinese household goods group Shanghai Jahwa United ended at the close of last year. Since then, the Japanese company has taken control of its own Chinese sales channels by starting direct deals with around 50 local wholesalers.

"Diapers are a driver of Kao's Asian consumer goods business," said Hisae Kawamoto, analyst at Mitsubishi UFJ Morgan Stanley Securities. "Its internet strategy will be a strength" going forward, Kawamoto added.

Beyond China, Kao is taking the fight to P&G in Southeast Asia, a stronghold for the U.S. group. Attack Jaz1, a laundry detergent that Kao developed in 2014 specifically for that market, is enjoying double-digit sales growth in Indonesia. In the U.S., Kao's Biore has taken the No. 2 market share among facial cleaners, thanks partly to a social-media-heavy promotional campaign.

But with full-year sales projected at 1.47 trillion yen, Kao still has a long way to go before joining the elites. Third-ranked global player L'Oreal makes roughly twice as much, while P&G and Unilever tower even higher.

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