TOKYO -- In July, Sanrio, the company behind the world-famous Hello Kitty franchise, experienced its first leadership change since it was founded in 1960. Shintaro Tsuji, 92, the company's charismatic founder, handed the reins to Tomokuni Tsuji, his 31-year-old grandson. The company has not had any major hits since Hello Kitty, and the new coronavirus is putting it under even more pressure. With the change in leadership, the question is whether the company can innovate upon the business model created by the elder Tsuji and chart a course for future growth.
"Kitty-chan, it's been so long! We're back!"
Guests returned to the company's theme park, Sanrio Puroland, when it reopened in mid-July after temporarily closing in late February, a roughly five-month break. "It's not like it was before, but I'm glad that we've reopened," said Tomokuni Tsuji as he surveyed the scene in the western Tokyo city of Tama.
The crowds have partly come back, but the business environment is still tough. Sanrio's three main sources of revenue are merchandise sold at Sanrio shops, licenses of characters to other companies and its theme parks. Puroland, which was popular among overseas tourists, had contributed to the company's profits in recent years.
But with the coronavirus pandemic, the company's consolidated sales for the fiscal year ended in March 2020 fell 7% to 55.2 billion yen ($525 million), and operating profit dropped 56% to 2.1 billion yen. Puroland is limiting the number of guests, and its performance could be even worse this year. The new president's challenge is to find a path to financial success that does not rely on Hello Kitty's popularity or overseas tourists.
After experiencing the hardship of war, Shintaro Tsuji founded Sanrio on the principle of "helping people befriend each other." Character merchandise sales supported the company's growth. It found a major hit in the late 1990s with Hello Kitty, but revenue has fallen since the boom ended a few years later.
Kunihiko Tsuji, the company's former vice president and Shintaro Tsuji's son, tried to break out of that situation by making licensing central to Sanrio's business. He brought on Rehito Hatoyama, a former Mitsubishi Corp. official, to help him expand the company's overseas licensing operations. Brisk sales of Hello Kitty merchandise at Walmart in the U.S. led to record operating profits of 21 billion yen in fiscal 2013.
But tragedy struck when Kunihiko died suddenly in November 2013. With no one at the wheel, the company's overseas operations have lost momentum as Disney implemented its own expansion strategy.
Tomokuni Tsuji joined Sanrio in January 2014 to solve the issues of who would take over the company and of reforming its operations. He poured his efforts into improving the company's marketing.
"In particular, there's not enough branding at our company," he said in a recent interview. It would be difficult to sustainably grow revenue from both merchandise sales and licensing if marketing was not controlled throughout the company.
Previously each character at Sanrio had its own department, which came up with individual strategies. The first step was to change this and set up a marketing head office in 2018, which enabled the company to develop a long-term branding strategy that cut across departments. Tsuji tapped Makoto Kimura, who had previously worked at P&G Japan and in overseas marketing for Seiyu, to head the new division.
"We've finally become able to work smoothly within the company" over the past two years, Kimura said. Moving forward, "We want to decide how to invest in characters based on fans' reactions." The company is now analyzing purchasing data, a long-delayed step. In July it launched a point app that enables centralized management of purchasing data from its stores, its e-commerce site and Puroland.
As the company finds its footing, it plans to revamp its brick-and-mortar stores and once again grow its licensing operations, which had been declining.
"We'll become a general entertainment company by moving ahead with marketing and digitization," said Tsuji, adding that he wants to create the next generation of stores. "We're going to turn it into a new retail experience where people can pay just by leaving the store."
In April, Sanrio set up an entertainment business unit. It will work with the marketing division and other units to develop new lines of business.
The company also aims to promote media-specific characters. "Aggretsuko," a cartoon coproduced with Netflix, was a major hit in the U.S., and its third season was released worldwide in late August.
While Puroland was closed, the Sanrio Entertainment subsidiary offered two-minute video calls with characters for 4,000 yen. The goal was to create a new experience of "meeting the character" using digital technology. It was flooded with orders.
But the company's efforts to reconstruct its overseas operations are still underway. In April Sanrio created a department to oversee all its overseas businesses. "There's a high chance we'll bring in someone from outside the company to take charge," Tsuji said. The release date of a Hollywood adaptation of Hello Kitty, seen as key to the company's revival, is unclear because of the pandemic.
In contrast to Disney, which has acquired a number of production companies with successful content, Sanrio has stuck to creating its own characters and seen limited growth.
At a shareholder meeting on Aug. 26, Tsuji said he wants to carry on the company philosophy of "small gift, big smile" and indicated his intention to follow the policies of his grandfather Shintaro, who retains the right to represent the company.
But it is a challenge to determine the value of a "gift" as people in the midst of a pandemic reconsider what is real. "The question is how to increase consumer access points other than brick-and-mortar stores," said Junko Yamamura, an analyst at Nomura Securities. The search for solutions is no simple matter.