The Challenges and Evolution
of the Japan Business

Although the prolonged impact of COVID-19 has certainly made things difficult, the positioning of the Japan business has not changed and will continue to serve an important role going forward.
Let me explain it from both financial and value creation perspectives. From a financial perspective, the Japan business is responsible for generating profit and cash with its high profitability. With over one hundred years of accumulated business, our Japan business prides itself on its strong brand equity and trusting relationship with customers, and it has accounted for a large portion of Shiseido Group's overall profits. During the 10 years preceding the pandemic, its operating margin ranged between the high single digits and 20%. Given that Japan is a mature market, maintaining stable profit is more important than high sales growth.

In terms of value creation, since Shiseido is a company with a Japanese heritage, consumers around the world expect the high quality and value coming from Japan. The Japan business will continue to be a source of value creation and is responsible for creating new values and communicating them to the world. When I talk with investors and analysts, I find they have particularly high expectations in this regard.
Shiseido’s value creation is based on high quality backed by strict internal standards and the ability to create new values by bringing together different values such as East and West, art and science, etc., which has been Shiseido’s uniqueness and driving force since its founding. This has only been possible because we have continued to refine our technological advantages in R&D, quality inspection standards, and in-house design and advertising creation. By combining these with external knowledge and technology, we will be able to evolve even further.

In the consumer business, it is important to quickly identify changes in consumer demand and expectations that are triggered from the changes in the environment, and to develop products and provide value in a flexible manner, even with future uncertainty.

One example is the MAQuillAGE mask-proof BB cream, which is a daytime tinted face cream that does not easily come off from mask usage. We launched this product in only 4 months after the product planning proposal, which became a phenomenal success. I was the Chief Supply Network Officer when the product planning started, and I was the Japan Region COO when the product was launched in the market in November 2020. Shiseido would normally manufacture and launch products through an elaborate step-by-step process from product planning, raw material verification, quality inspection, and production design, until launch, which would take about 13 months. However, a cosmetics product that would stay on the face and not come off from mask usage was an immediate need by consumers. With an aim to quickly deliver what the consumers required, we formed a project team and shortened development lead time by having different departments including product development, research centers, production and procurement, and creative, work in parallel. Shiseido's strength lies in our cumulative knowledge, technology and systems that allows for rapid development. It was meaningful that project members were able to build confidence and understand that they could achieve what used to be considered impossible.

In the Japan business, we are implementing reforms continuously to improve profitability and expand our loyal customer base.
Our biggest regret prior to 2019 was that we were not as attentive as we would have liked with local loyal customers as the store-front became too busy responding to the rapid increase in inbound demand. Regular users, or repeated consumers, are no doubt very important to us, as they support our brands. In the Japan business, 60-70% of our overall business is from repeating consumers. Amid the significant market shrinkage due to the impact of pandemic, our most important challenge and priority in the Japan business would be rebuilding our loyal customer base. And from 2020, we have immediately established a management approach that separates local and inbound operations in order to make appropriate business decisions.

Since then, we have prioritized issues and taken swift actions, and as a result, the number of loyal customers and the rate of repeat store visits, both of which we consider to be important KPIs, are on an increasing trend. After bottoming out in July 2022, the number of new consumers exceeded the number of departing consumers, and the loyal user base turned into an upward cycle.

From the past, the Japan business had an issue that it had a large number of brands and SKUs, therefore the investments were dispersed. But during the several years of pandemic, we advanced the selection and concentration of business, aiming to become the world's No.1 company in skin beauty, proactively investing in prestige and premium skin beauty categories, while at the same time striving to increase both sales and market share by expanding loyal user base through enhancing communication of the value of our innovations.

In terms of profitability improvements, we are steadily taking actions and will be bringing measurable results. We have set a target of SG&A-to-sales ratio in the low 60% range in 2025, and its roadmap is already in place.
In addition to improving the product mix by expanding the skin beauty sales ratio, we are reviewing logistics, including reducing returns and excess inventory, shortening production lead time to reduce inventory and warehousing expenses, and improving delivery efficiency. These efforts will decrease costs and also help build a sustainable society. Regarding personnel expenses, we will be optimizing our offices across Japan and improving employee work styles and business processes to maximize our ability to retain talent and boost productivity.

In the wake of society’s “new normal,” consumers' values and lifestyles are changing rapidly, and their purchasing behavior and ways of gathering information are also diversifying.
In our business in Japan, we have been shifting away from TV, newspaper ads, and other forms of traditional mass media that communicate the same message to everyone. Instead, we are pursuing a CRM strategy that focuses on social media and other forms of digital communication, allowing us to reach consumers at the individual level. But this is just one way of reaching people. The important thing is to build new relationships with each consumer utilizing both real interaction and digital interfaces.

In September 2022, we introduced Beauty Key in Japan, a new central membership service consolidating previously offered services. To provide an optimal beauty experience for each and every person, it is essential that we consolidate all of the consumer data that exists for individual sales channels and brands across our stores and e-commerce into a single service. Digital CRM is only meaningful when it is connected to a physical store. In introducing this One ID system, we faced many challenges to realize data consolidation across various retailers. However, eventually we had our business partners recognize how useful it is to maintain consumer information in one place with Beauty Key, such as skin diagnostic data and preferences, and this led to the implementation of the service.
We are currently centralizing various types of information and developing a CRM system that makes the best use of such information. Also, we are digitizing in-store tools and training Personal Beauty Partners (PBPs) to specialize in digital communication. Our skin diagnosis technology, in particular, has become increasingly sophisticated. We have set up skin diagnosis tools by brand and are able to provide each consumer real-time personalized beauty suggestions based on such digital advances. In March 2022, we developed our Beauty DNA Program in Japan, a skincare service offered online by PBPs that is optimized for each user based on the results of DNA testing using our proprietary algorithms.
We will continue expanding our base of loyal customers by leveraging digital technologies to provide new beauty experiences optimized for each individual and offering everyone a tailor-made experience to enhance their own unique beauty.

New membership service “Beauty Key”

Screen image of Beauty DNA Program

The recovery of the Japanese market was slower than anticipated, and we struggled through 2021–2022, but our reforms have gradually begun to deliver tangible results. In 2023, as the market starts to recover, we will shift to aggressive marketing, which should lead to significant growth.

In the future, we plan to accelerate the momentum of this business growth in Japan through marketing, R&D, and further DX.
People, of course, are vital to the success of this plan. Diversity is another key element to realize agility. In the past, we use to teach "the Shiseido way" to our employees, but today, we must appreciate the values of every individual to pursue a more diverse vision for beauty tailored to each consumer. That appreciation must extend beyond Shiseido, allowing us to facilitate collaborations with knowledge and values that exist externally.

Respecting individuality and inclusion require dialogue, and therefore I wish to encourage more active communication, both between management and the field and between employees themselves in the field. Our employees understand the importance of transforming our business to help our consumers pursue their unique beauty and bring joy and happiness to their lives. It is not easy to achieve sustainable growth while increasing profitability. But we are committed to having candid discussions with our employees to draw out diverse ideas, establishing necessary action plans, and uniting them all for further growth.

At Shiseido, we want each of our consumers to enjoy life to the fullest, and it is our mission to realize a world of beauty where that is possible. In pursuit of this goal, we will continue to integrate real and digital experiences to deliver value tailored to each individual, revitalizing our Japan business at the heart of Shiseido's value creation and propelling the company on a path to sustained growth. I hope you are excited as I am. Please stay tuned.