TOKYO -- Shiseido is revamping its Chinese operations, which are blamed in part for the cosmetics giant's slump overseas.
Shiseido's operating profit in Japan surged 43% to 18 billion yen ($147 million) for the six months ended September. But the company incurred a 6.1 billion yen operating loss overseas, sinking deeper into the red from a 3.1 billion yen loss a year earlier. The irony is that the growth in Japan was fueled by Chinese and other foreign tourists doing heavy-duty shopping, while overseas operations were dragged down by business in China.
President Masahiko Uotani urgently flew to Shanghai in mid-October to meet with 140 executives at 62 Chinese wholesalers to address a sharp drop in sales since August.
Shiseido has been implementing reforms under the leadership of Uotani, a former boss at Coca-Cola (Japan). Since entering China in the 1980s, Shiseido had been called a success story of a foreign company in that market. Today, however, its inflexible structure has generated excess inventory at wholesalers and retailers while its regional brand has been weak.
Inventory purchase and liquidation pushed down Shiseido's operating profit by 5 billion yen in the April-September half. Meanwhile, the company is dealing with unhappy employees there. Salespeople were told to start handling more than one brand, but many detested the change in work responsibilities and refused to comply. They also complained about a wage system change that led to a higher ratio of commissions as opposed to salary.
Shiseido generates more than half its sales in overseas markets. Seeking to revive the Chinese business, a segment as important as Europe and the U.S., the company replaced the chief in China in mid-October and is set to launch a task force dedicated to the country that will be supervised directly by Uotani.
Uotani pledges to boost Chinese sales to 200 billion yen by 2020 from 114.7 billion yen in fiscal 2014. The market apparently boasted an operating margin above 10% before the 2008 financial meltdown. As long as its profitability improves, China will grow as a backbone of the company.
Purchases by foreign tourists to Japan helped lift Shiseido's sales 13 billion yen in the April-September term. Given this figure, it is clear that Shiseido still is an attractive brand for Chinese consumers. Whether the company can refine product planning and distribution channels in response to local consumer trends will likely determine its growth.