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Shiseido looks to China’s online model for post-pandemic growth

Shiseido Co is pumping up its e-commerce presence amid a “deep crisis” in the beauty business, with the Japanese company looking to its China strategy as a post-pandemic model for growth.

The 148-year-old beauty giant sees its online proportion of overall sales growing to 30 per cent in two or three years if current conditions continue, from about a fifth right now, according to CEO Masahiko Uotani.

“From a business standpoint, we’ve been trying to come up with solutions to the current situation and use this as an opportunity to go at a faster pace with some reforms,” Uotani said in an interview in Tokyo.

The reforms for Shiseido, which has relied heavily on department-store sales, involve training beauty consultants to use live streaming and social media, working more closely with retailers on the tech-enabled shopping experience, and investing in new marketing content for online, Uotani said. All strategies the company has implemented in China.

Human touch

“We need to merge online and offline to get people to buy more. Beauty products are different from others in that a human touch is very important, so we need to think about a structure that allows that,” he said. “There’s a lot we can learn from what’s going on in China.”

Uotani’s focus comes as the beauty industry faces unexpected challenges because of the global pandemic that are different from previous downturns. Measures to control the spread of the coronavirus have melted away social norms like putting on makeup in the morning or spritzing on perfume before a night out. As people stay home, the need for beauty care has become a lower priority, making it difficult for businesses to bounce back quickly.

The situation has also been complicated as department stores and beauty salons have closed during lockdowns, sending consumers to seek cheaper cosmetics brands online.

Shiseido’s sales fell 17 per cent in the first quarter and operating profit plunged 83 per cent, mostly due to clampdowns on movement in China, where it does a fifth of its business, and a hit to tax-free sales to Chinese tourists in Japan. The company withdrew its annual forecast, acknowledging it would be unable to hit its mid-term goal of more than US$11 billion in sales by this year. For the second quarter, analysts are expecting Shiseido to swing to a loss.

“The near-term earnings outlook will be difficult,” said Ritsuko Tsunoda, an analyst at JPMorgan Chase & Co. “But I think Uotani will leverage that for any material structural change that he couldn’t have implemented otherwise.”

Mini-influencers

Transitioning beauty-product sales online isn’t an easy step for an industry built on consumer preferences and dominated by the image of rows of samples at physical retailers that encourage trying and buying on the spot.

Shiseido is training its sales staff in Japan to follow the example of Chinese employees, turning beauty counter ladies into mini-influencers. In China, department store consultants have taken to social media to stream the newest products that have arrived. Interested customers are then directed to the website of the department store to purchase the products.

China has developed a booming culture for live video merchandising, and companies are beginning to catch on to the trend.

Uotani sees China’s e-commerce sales hitting 40 per cent of revenue from the region this year, jumping from 30 per cent currently. He said China’s fast recovery — sales of high-priced prestige brands in April, after the strictest lockdowns ended, were at levels before the coronavirus hit — could bode well for other regions.

Drunk elephant

The focus in the short-term will be prioritising its high-end beauty brands that can generate cash flow to invest in e-commerce, according to Uotani. The company, which owns Nars and Laura Mercier makeup, is looking to speed up expansion of its Drunk Elephant brand, which it bought in an $845 million deal last year, as prestige skincare products have been resilient during the pandemic.

Dealmaking, such as selling off non-core assets or buying businesses that can support the focus on prestige and e-commerce, is also part of the equation, Uotani added.

“It’s a very deep crisis for our business, and we need to protect employees and the company,” he said.

At stake is the legacy of Uotani’s tenure. When he took the helm of Shiseido in 2014 following stints at companies including Coca-Cola Japan, it was a rare instance of an outside executive joining the C-suite in the island nation, where managers are typically elevated through decades of service to one firm.

Analysts and investors have praised Uotani’s efforts at Shiseido, whose value more than quadrupled during his tenure before the coronavirus hit. After such success, the current crisis is shaping up to be his biggest test.

“In my 40 or so years working in business,” he said, “the unexpected and uncontrollable impact from the global pandemic is the biggest I’ve dealt with in my career yet.

©2020 Bloomberg L.P.

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