INTEGRATED REPORT 2023 Online Ver.

Message from
the COO

To ensure sustainable growth, we must focus on our core strengths to succeed in key strategic areas.
We will transform our business globally to become highly profitable and innovative to keep thriving as a pioneer in shaping a new culture of beauty.

Director
Representative Corporate Executive Officer,
President and COOKentaro Fujiwara

Embracing Challenges as Opportunities for Transformation

I have spent the past year as President and COO of Shiseido reflecting deeply on the rapid shifts within our business environment and their profound impacts. This period highlighted the importance of strengthening our core business, not only to survive but to thrive in such a rapidly changing external environment.

In 2023, we faced significant challenges, with core operating profit declining by 22% year-on-year to 39.8 billion yen. The backlash against Japanese products following the treated water release had substantial impact on our business, particularly in the China and Travel Retail Businesses. This has highlighted the urgency to diversify our regional footprint by accelerating growth in other regions to address the vulnerabilities in our business stemming from heavy reliance on China, which has been an ongoing issue for some time. Throughout the Company, we instilled a strong sense of urgency and shared understanding of the imperative for our desired evolution. The management team is now more determined than ever in embracing these challenges as opportunities for transformative change.

On a positive note, I am encouraged to see that we are driving robust growth in the Americas, EMEA, and Asia Pacific Businesses, while delivering steady results in the Japan Business through strategic initiatives.

Revitalizing the Japan Business is not only vital for ensuring profitability but also for the overall value creation within the company. In September 2023, I assumed another role as Chairman of Shiseido Japan to take the lead in our business transformation process, emphasizing the need for radical and unconstrained change as part of our group-wide reform. Upon managing the Shiseido Japan organization myself, I recognized that the complex operations and dispersed resource allocation were hindering the efficiency of our business and posing challenges to our profit structure. By sharing my observation with the team and through extensive communication amongst ourselves, we are bound together with a renewed commitment to execute fundamental structural reforms. As a result, 2023 marked a year of growth, with successful market share expansion in key focus areas and a substantial improvement in earnings, leading to shift towards profitable growth. Additionally, our Americas and EMEA Businesses, which had previously faced challenges, have returned to profitability through divestitures and other strategic initiatives. These regions are now positioned for growth and enjoying operating leverage. We have sharper investment focus to accelerate growth of the key brands, leading to double-digit year-on-year growth in net sales in both regions, significantly accelerating our growth momentum in 2023.

Focusing on Structural Reforms and Sustainable Growth Initiatives

In 2023, we launched our medium-term strategy, “SHIFT 2025 and Beyond.” Despite the shift in business landscape, our strategic framework remains unchanged, though we have had to adjust our numerical targets accordingly. The key to Shiseido’s sustained growth lies in our selection and concentration in focus areas. To continue investing in and effectively managing these areas, it is essential to streamline our operations and reduce costs to transition to a highly profitable structure. Now is the time to embark on decisive structural reforms.

Through this transformation, we aim to “Be a Global Winner with Our Heritage.” In order to achieve a core operating profit margin of 15%, which is one of the indicators of our aim, we must establish a revenue stream that can continuously drive a virtuous cycle of investment and growth as soon as possible. Our initial milestone is to reach 9% by 2025. As our top priority, we will complete structural reforms and build a business framework that allows for sustainable growth and profit expansion, with over 40.0 billion yen in global cost reduction. Detailed plans have been formulated and executed across all regions with all major actions expected to be completed in the first half of 2024.

In addition, we are building an operational structure that can consistently generate profits amid an uncertain and volatile business environment. Our goal is to maximize gross profit not only through volume increase, but also by enhancing brand and product mix and implementing strategic pricing. Shiseido’s core areas are in the mid-to-high price range, a sector that grows by enhancing added value. Therefore, investments in our innovation, brands, and people are indispensable to realize such gross profit expansion through value addition.

Based on these ideas, we are committed to establishing a “value-added business model” that sets us apart from other companies, with a strong emphasis on unprecedented value creation. To construct this model, we believe it is necessary to redefine the concept of “added value.” Currently, we are engaging in discussions with leaders across each category and brand to validate KPIs that contribute to sustainable growth—including non-financial (pre-financial) indicators. I believe that our ability to create new value is precisely why Shiseido has endured for more than 150 years. We aim to create a model of Shiseido’s value creation by visualizing idea generation based on consumer insights, R&D, and professional development.

Building a Business Portfolio That Can Win in Areas Each Region Excels

Our business portfolio must be built on a balanced regional structure, resilient enough to adapt to the ever-evolving business landscape. In the Japan Business, we are executing a business transformative initiative called “Mirai Shift NIPPON 2025,” aiming to build a profitable foundation. One major theme of the plan is “self-innovation,” a principle I deeply cherish. Our focus is on fostering brand growth, optimizing touchpoints, and transforming human capital to achieve sustainable growth, build a profitable foundation, and become more consumer-centric. Our human capital transformation involves future career plans that align with each employee’s aspirations, backed by proactive investment in training programs and early retirement support to ease their career transitions. We will complete these reforms so we can expand our value from Japan to the world.

Briefing session on strategic reforms of the Japan Business

The China and Travel Retail Businesses remain critical markets for us. While we view the consumer pull back on Japanese products after the treated water release as temporary, the change of consumer behavior and the diversification and complexity of the market are structural. Therefore, we will focus more on investing in high-prestige brands such as THE GINZA and Clé de Peau Beauté, as well as a diversified portfolio of brands including NARS and Drunk Elephant. Our goal is to win in focus areas and concentrate on a more profitable business structure.

In the Americas, in addition to NARS and Drunk Elephant, we have further strengthened our brand portfolio by acquiring Dr. Dennis Gross Skincare, marking our entry into the derma cosmetics area. The EMEA Business has established a virtuous cycle of reinvestment in skincare brands, fueled by the profitability of fragrance brands. The Asia Pacific market, while although the size of each country or region is not very large, holds significant growth potential with a solid market share and a robust digital foundation. I am confident that these three regions will further accelerate growth through proactive investments.

Continuing Transformation for 2030 and Beyond

Through our reforms, we will continue to challenge ourselves on pioneering new beauty values to realize our vision of becoming a leading “Personal Beauty Wellness Company.” However, to realize our vision and continue to succeed, transformation efforts need to continue beyond our plan of “SHIFT 2025 and Beyond.” We are working hard towards reaching our core operating profit margin goal of 15% between 2028 and 2029, yet we are determined to mobilize the collective wisdom and execution capabilities of the entire company to achieve this goal even sooner.

First, we will further accelerate the growth of our existing businesses, targeting a robust CAGR of over 5% in net sales starting from 2026. Next, in terms of costs, we will continue to refine our cost structures to sharpen our competitive advantage. Our growth trajectory will also be fueled by strategic M&As and collaboration with other companies, as we venture into new categories. At Shiseido, we are not participants but trailblazers in the beauty industry, continuously venturing into uncharted territories with our globally acclaimed technologies and expertise. We are at the forefront of skincare market creation, leveraging IFSCCaward-winning technology to combat skin sagging as well as our cutting-edge foundation serum technology. We are also developing advanced “Second Skin” technology, which redefines the boundaries of skin and beauty. With the full-scale launch of our Inner Beauty business, we will create new markets with new healthy beauty habits based on our unique beauty insights.

Continuing Transformation for 2030 and Beyond

Realizing a Sustainable Society Through Our Unique Initiatives

Beauty support activities after the Noto Peninsula earthquake

At Shiseido, we envision a sustainable society in 2030, where everyone can experience happiness through the power of beauty. Our commitment to integrating sustainability into every facet of our operations is unwavering, as we align our business strategies with sustainable practices across the globe. We recognize the pressing expectations for environmental stewardship and are dedicated to minimizing our environmental footprint, advancing sustainable innovation, and ensuring responsible sourcing. Yet, my focus extends beyond these critical areas to encompass the entire value chain. Addressing climate change, with a particular emphasis on Scope 3 emissions, is at the forefront of our agenda. I am committed to fostering collaboration with other companies and to lead the industry. As a beauty company, we are equally passionate about cultivating an inclusive society where gender equality, human rights, and empowerment flourish with the power of beauty. In the wake of the Noto Peninsula earthquake in January 2024, Shiseido extended beauty support activities, offering hand care, healing touch services, and skincare products to those impacted by the disaster. During my tenure in China, the COVID-19 lockdowns led to stress among our employees and their families, who were unable to leave their homes. Our Beauty Creation Center provided a much-needed lift by sharing videos on how parents could enjoy hair styling at home with their children. Our dedication to sustainability is unparalleled, and we are poised to make an indelible impact in ways that other companies cannot match.

My Commitment

As the COO, my foremost duty is to successfully navigate Shiseido through “SHIFT 2025 and Beyond,” and to bring us back on a growth trajectory.

It is essential that we not only improve our current situation, but also boldly design the future, integrating social viewpoints into our management strategies to achieve a strong transformation. I am dedicated to foster open dialogues with our investors, and share the strategic vision and direction, while simultaneously developing a bold and nimble management structure.

I am eager to surpass your expectations in terms of transformation, growth, and value creation. I humbly ask for your ongoing understanding and support as we embark on this journey.

April 2024

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Message from the COO