Stronger, Faster Growth. Today, Tomorrow, and into the Future.Masahiko UotaniRepresentative Director, President and CEO
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Shiseido made strong progress in 2017. We surpassed ¥1 trillion in net sales, achieving our 2020 target three years ahead of schedule, and our operating income reached an all-time high. We have now completed the stage of rebuilding our business foundation. We have moved on to a stage of rapid progress, and over the next three years Shiseido will implement a new strategy to accelerate growth.
2017—Building Confidence and Conviction in Shiseido's Bright Future
In 2017, Shiseido recorded higher sales in Japan, China, Travel Retail, and all of our other markets. Overall, the Shiseido Group's sales increased 16 percent year on year on a local currency basis and surpassed ¥1 trillion. Operating income more than doubled from the previous year to reach a record high of ¥80.4 billion. Our strong sales growth led to higher profit margins, and the ratio of personnel and other SG&A expenses to net sales declined. Even though we have stepped up our marketing investment in line with our plans, we have succeeded in bolstering our profitability.
Net income declined year on year in 2017, due largely to an extraordinary loss associated with Bare Escentuals, Inc., in the United States. This impairment loss on intangible and other fixed assets had a significant adverse effect on our net income for the year. But it was the right decision. Although we acquired Bare Escentuals in 2010, we have failed to grow the brand in line with our plans. Under VISION 2020, 2017 was positioned as the final year for rebuilding our business foundation. Accordingly, we reevaluated the actual situation at Bare Escentuals based on a profit plan adjusted for market and consumer changes, and decided to record an impairment loss.
Overall, our initiatives made 2017 a year of solid progress for Shiseido. We significantly reinforced our business foundation, and on that robust base we are already moving toward the objective set out in VISION 2020—Be a Global Winner with Our Heritage.
Operating Results in 2017–Major Achievements
Reaching net sales of ¥1 trillion three years ahead of schedule
Generating record-high operating income
Increasing sales in all markets worldwide
Increasing profitability while expanding marketing investment
The figures for 2013 exclude the impact of last-minute demand ahead of the consumption tax hike. The figures for 2014 exclude the impact of the rebound after the consumption tax hike, market inventory optimization in China and Asia Pacific, and distribution center issues in the Americas.
The fiscal period ended December 31, 2015 is the 9 months from April 1, 2015 to December 31, 2015 for Shiseido and its consolidated subsidiaries in Japan and the 12 months from January 1, 2015 to December 31, 2015 for all other subsidiaries.
Three Years of Progress—With a Focus on Speed and Growth
In 2015, Shiseido launched VISION 2020, our medium-to-long-term strategy that covers the six-year period to 2020, and the first three years of that period were positioned for the rebuilding of our business foundation. To that end, we instituted a variety of reforms, including rigorous measures to resolve the issues in our businesses in Japan and other regions. We also stepped up marketing investment to a cumulative total of more than ¥110 billion.
Over the past three years, we have achieved solid results in a wide range of areas. Those achievements are not only reflected in our improved performance in 2017. They have also bolstered our business foundation, and on that strong base, we will accelerate our growth toward 2020. In particular, in management we established a new global structure to make Shiseido a winner worldwide, and in marketing our Prestige First strategy drove substantial gains.
Under the global management structure, which was introduced in 2016, I serve as the Group CEO and work together with six regional CEOs. This structure enables the Company to implement marketing activities attuned to the characteristics of each region and facilitates flexible decision-making. In this way, we are working to bolster our ability to respond to consumer purchasing behavior and market changes. The regional CEOs have broad managerial authority and responsibility for sales and profits.
Another strength of this management structure is the network of Centers of Excellence (CoEs). Each product category is led by the region that excels in that category. The designated CoEs then take the lead role in the formulation of global strategies and the development of products for their categories. In this way, Japan hosts the CoE for skincare, the Americas for makeup and digital marketing, and EMEA for fragrances. With this new global management structure, in 2017 we recorded higher sales in every region worldwide.
Moreover, starting from 2018, we are advancing an approach known as Connected Multi-Value Creation. Under this approach, Shiseido's operations in each region are not managed and controlled by the global headquarters in Japan. Rather, each regional headquarters transcends the role of a simple sales base and acts as a center for value creation. As we move forward, the knowledge cultivated in each region will be shared around the world and leveraged in marketing initiatives.
In marketing, our highest priority is the advancement of the Prestige First strategy. Under this strategy, we are accelerating growth by concentrating our marketing investment on prestige brands. This process of selection and concentration has made a significant contribution to our profitability gains. For example, sales of fragrances and other prestige products increased 1.5 times over the three years from 2015 to 2017 and now account for 53 percent of our total sales, versus 43 percent three years ago.
Prestige + Fragrance:
Nevertheless, on a global basis, we still have work to do, and we still face multiple challenges. We will not be satisfied—with our past achievements, or with our present situation. Rather, we will work with humble confidence and continue to steadily achieve growth in 2018 and beyond.
Achievements in 2015–17
Growth of global prestige brands
Brand / Business portfolio reinforcement
Japan business back on growth track
Solid foundation for growth in China and Travel Retail businesses
Organizational integration and improved efficiency
Establishment of the global management model
Launching the New Three-Year Plan
In March 2018, we announced the New Three-Year Plan, which covers the period from 2018 to 2020, the second phase of VISION 2020. It comprises five key strategies, "Building for the Future," aimed at achieving growth over the next three years—tailoring our brand strategies to the needs of local consumers in markets around the world, stepping up aggressive investment in marketing, accelerating digitization and developing new businesses, and creating new value through innovation. Shiseido believes that people are the source of all value creation, and accordingly we will increase investment in our human resources. Moreover, we will move forward with VISION 2020 through ongoing efforts to enhance our global management model.
Our 2020 business plan incorporates both basic objectives and stretch targets, which take into account the resolution of our supply chain issues. These are challenging targets that will not be easily accomplished. Nonetheless, we will set our sights high, and I expect the Company to record strong progress with new initiatives and reforms.
Exploring New Frontiers
Further Selection and Concentration of Brand Businesses
Acceleration of Digitization and New Business Development
New Value Creation through Innovation
Talent and Organization Development to Be a Global Winner: "PEOPLE FIRST"
New Global Management Model
Five Key Strategies
Further Selection and Concentration of Brand Businesses
Under the Prestige First strategy, we place the highest priority on the prestige category, which is our strength, to bolster our operations around the world. By leveraging the principles of selection and concentration in brand investment, we will work to achieve growth that outpaces the market. Accordingly, we will strive to achieve growth by concentrating our investment on specific brands in our portfolio—SHISEIDO, Clé de Peau Beauté, NARS, bareMinerals, IPSA, Laura Mercier, and Dolce&Gabbana. Moreover, in China and other Asian markets, among our cosmetics and personal care brands, we will concentrate our initiatives on made-in-Japan brands, including ELIXIR, ANESSA, SENKA, and INTEGRATE.
Acceleration of Digitization and New Business Development
We will implement measures to strengthen digital marketing and e-commerce worldwide, aiming to increase the e-commerce share of our overall sales from 8% in 2017 to 15% by 2020, and to 40% in China. At the same time, we will work to enhance our CRM initiatives, such as integrating consumer data from e-commerce sites and stores.
In new business development, we will focus on personalization—offering value tailored to the needs of individual consumers. To that end, we will create new products and services that combine IoT and other digital technologies with existing businesses.
New Value Creation through Innovation
To leverage synergies, we will take steps to integrate a range of resources. These include the know-how that we have cultivated, the new technologies that we have acquired through mergers and acquisitions, and the human resources who offer high levels of expertise. As a result, we will create new value not only in cosmetics but also in new frontiers such as artificial skin, hair and skin regeneration, and advanced beauty care. To enhance innovation, we will bolster R&D investment. By 2020, we expect to increase the number of R&D personnel to 1,500 and to realize an R&D-to-sales ratio of 3%.
Talent and Organization Development to Be a Global Winner: "PEOPLE FIRST"
Developing the next generation of Shiseido leaders is one of our top priorities, and to that end we are working aggressively to enable a large number of motivated employees to enhance their skills. We are instituting a range of initiatives, including training programs as well as English language training in preparation for the English mandate, which starts in October 2018. In addition, we plan to open a global learning center in each region, starting with Asia.
The global management structure that we launched in 2016 enables us to respond promptly and appropriately to conditions in our markets. We have delegated responsibility and authority to the CEO of each regional headquarters, who is in charge of regional management. From 2018, we will go a step further with the start of the Connected Multi-Value Creation Model, which will become a base for the creation of value by each region. Going forward, we will ensure that the wide range of knowledge cultivated in each region is shared with the other regions around the world and fully leveraged in our marketing activities.
Challenges and Initiatives
To achieve the business plan as spelled out in the New Three-Year Plan, there are issues that we need to tackle immediately. First, we need to establish a stable product supply system, and second, we have to improve profitability in the Americas and EMEA. We have already formulated initiatives to address these issues, and I believe that it will be important to show steady results moving forward.
Over the past several years, Shiseido has achieved rapid growth in sales and, in particular, a rapid recovery in the Japan business. Our made-in-Japan products are enjoying growing demand in China and other Asian markets. As a result, product supplies are tight. In response, we will execute countermeasures over multiple time frames. In the short term, we will invest in the facilities at our three existing factories in Japan, strengthen our personnel systems, rationalize SKUs, and expand outsourcing and raw materials procurement linked with growth in demand.
In the medium term, we will build new factories to increase our in-house production capacity. We are already planning to start up the Nasu Factory in Tochigi Prefecture, Japan, in 2019 and the New Osaka Factory in Osaka Prefecture in 2020.
To implement this series of improvements in our supply system, we plan to invest a cumulative total of ¥130 billion over three years.
Improvement of working conditions for factory employees
Establishment of permanent positions for 1,200 employees on fixed-term contracts
Total investment (2018–20) ¥130billion
We are steadily stepping up our initiatives to improve profitability in the Americas and EMEA, aiming to achieve an operating margin of more than 10% in 2020. In the Americas, targeting a turnaround in the performance of the bareMinerals brand, we will optimize sales channels, revise fixed costs, and bolster digital marketing and e-commerce. In the EMEA Business, we will aim to increase sales of Dolce&Gabbana, for which we commenced full-scale in-house production in 2017, and to achieve sustainable growth of narciso rodriguez. In addition, we will further optimize the One Shiseido organization, which integrates the cosmetics and fragrance businesses.
In 2018, as outlined below, we are planning another year of higher sales and profits. While maintaining our priority on investing in growth, we plan to increase dividends by ¥2.5 per share, to ¥30.0.
Under VISION 2020, Shiseido has announced that it will strive to "Be a Global Winner with Our Heritage." To continue to record sustainable growth over the next 100 years, we will aim to be a company that is trusted and needed by consumers around the world and by society. Accordingly, we have a clearly focused management policy—"To Be the Most Trusted Beauty Company in the World."
Since our founding, Shiseido's corporate mission has been "to inspire a life of beauty and culture." Based on that mission, we are aiming for the realization of a sustainable society in which people find happiness through beauty. We believe that Shiseido's business activities can significantly contribute to the creation of value for society and that from a long-term viewpoint, leveraging our businesses to contribute to society through beauty innovation will enhance our corporate value.
Shiseido's products can help to address the wishes of consumers as well as to resolve issues faced by society. In emerging countries, cosmetics play a role in supporting the empowerment of women. In economically developed countries as well, people of different ages and lifestyles, including seniors, working women, young adults, and athletes, have a variety of expectations regarding beauty. Through Beauty Innovation, Shiseido will offer solutions to a wide range of needs and issues related to beauty and cosmetics.
"Beauty can change the world." We believe that beauty can deliver happy smiles and health to people around the world, as well as create energy and confidence. Shiseido's employees share this belief, which is reflected in their approach to their work each day. This approach is also aligned with the philosophy of the United Nations' Sustainable Development Goals (SDGs). Accordingly, Shiseido is aggressively implementing initiatives targeting the realization of the SDGs.
In this way, we will strive to create value for all of our stakeholders, including not only consumers but also society, business partners, employees, and shareholders.
Aggressively Investing in Human Resource Development to Be a Global Winner
From an ESG viewpoint, our people are our biggest asset in establishing the competitive edge that will make us a global winner. There is no question that our growth and progress over the past few years have been led by our human resources. I have directly experienced how the power of people—our employees—has driven our growth. Since I became president in 2014, I have engaged in dialogue with a total of about 65,000 employees. As a result, I have developed a direct understanding of how strongly our employees feel about our business and products, and that understanding has reaffirmed my confidence. For Shiseido to achieve sustainable growth over the next 50 or 100 years, I believe that we must strengthen our human resources.
Accordingly, investment in human resources is positioned as one of our key strategies under the New Three-Year Plan, and we are now advancing the People First strategy. We have enhanced development programs for the employees who will be our leaders in the future, including global and other managerial-level personnel, as well as professional employees. At global headquarters, we are also launching the English mandate in October 2018. Moreover, we will reinforce our human resource and organizational capabilities through a range of multifaceted measures, such as flexible working styles.
We will also take steps to further advance diversity among our workforce. We will ensure that our people, with their diverse values and experience, can mutually support and challenge one another in order to foster new creativity and innovation.
Shiseido is currently working to achieve VISION 2020, and at the same time we are advancing management initiatives from a long-term perspective, with a view to 2030. We are taking steps to achieve the No. 1 position in the Japanese and Asian markets and rank among the top three in the global prestige cosmetics market by 2030. Through these initiatives, we will strive to enhance our presence as a global company with net sales of over ¥2 trillion and operating income of over ¥300 billion.
In closing, I would like to ask our stakeholders for their continued support of Shiseido as we prepare to tackle the challenges that lie ahead and strive to achieve stronger, faster growth—today, tomorrow, and into the future.