10. Shiseido Marketing in China

One of Shinzo Fukuhara’s favorite sayings was “let the products do all the talking.” To that end, he put his best efforts into product names, containers, and packaging, which evoked the “product.” The camellia flower trademark used by Shiseido for more than 120 years was designed by Shinzo himself. The first Miss Shiseido, the predecessor to today’s in-store beauty consultants (“BCs” as they are popularly known) who help customers with beauty-related issues, debuted in 1934 (Table 10.1)

From the post-war period through the first half of the 1980s, a time of high economic growth, Shiseido experienced soaring sales in its domestic market. This strong growth is attributed to its business model, which consisted of voluntary chain stores built over a resale system in which stores were obligated to sell products in their retail stores at set prices. However, the bursting of the economic bubble in the latter half of the 1980s began a long period of stagnation for the company, coinciding with further diversification of consumer preferences, buying patterns, sales channels, and pricing. In addition, the resale system for cosmetics was abolished in 1997, kicking off a price war. In an attempt to boost flagging sales, Shiseido consistently introduced new brands and products into the market, diluting its sales efforts and beginning a vicious cycle of introducing numerous new products, dispersing marketing investments, reducing the power of their brand, and experiencing poor sales. The company then attempted to limit the number of brands, but with stagnant unit sales, competition in the Japanese market became fiercer and business remained sluggish because of a further decline in sale prices. In an effort to break out of this long period of slow growth, management reforms were put in place at the beginning of 2005 to expand overseas profits and create a post-resale domestic business model. In addition to securing a double-digit revenue growth overseas led by China, the company also greatly improved its profitability by disposing unprofitable divisions.

However, the latter half of the 2000s witnessed a stronger impact of new domestic distribution channels, such as drugstores and internet shopping, leaving Shiseido to fight difficult battles because of its dependence on department stores and specialty shops. In April 2012, Shiseido began a new marketing campaign that combined its traditional strength of in-store beauty consultants with information offered via the web to individual customers by creating a special web page “Watashi+.” As domestic sales weakened, overseas sales became more important because revenues in Asia and Oceania regions, particularly China, were increasing (Tables 10.2 and 10.3).

As of March 2012, the Shiseido group had 94 consolidated subsidiaries globally. The company’s businesses cover manufacturing and sale of cosmetics, cosmetics tools, toiletries, hair and beauty products, beauty foods, and pharmaceuticals, as well as research and other services for each of the businesses (Table 10.4).

Shiseido began its global operations in 1957 with sales of cosmetics in Taiwan. At the time, importing of cosmetics was banned in Taiwan; therefore, Shiseido began local production. In 1957, Shiseido Taiwan’s marketing strategy was a system of chain stores with in-store beauty instruction, because the company realized an inadequate cosmetic-related knowledge among consumers in the country. Later, Shiseido aggressively expanded its sales network into Asia, Europe, and the US under the “SHISEIDO” global brand, focusing on its specialty: anti-aging and skin-whitening products.

Shiseido aims to expand operations in Southeast Asian markets, with a stronghold in China. The “SHISEIDO” brand in Taiwan is highly sought-after. In Vietnam, Shiseido has been selling skin care and makeup products under the “SHISEIDO” brand through agent stores since 1997. In response to growing needs caused by the high growth of the cosmetics market, accompanied by dramatic economic growth, Shiseido created Shiseido Cosmetics Vietnam Co., Ltd., and began operations in January 2010. On the other hand, a JV with the large local manufacturer Amore Pacific in the 1990s marked the beginning of Shiseido into the Korean market, but significantly strong local manufacturers and sales channels for which the general merchandising store market was critical, left them at around the 10th place in the country. Shiseido is yet to enter the Indian market in earnest, though they do have imported products for sale in luxury hotels and department stores via local distributors.

Although Shiseido has been successful in Asian markets, with the exception of Korea, it has fought way more difficult battles in the US market. In addition to the SHISEIDO brand that they introduced in the US more than 40 years ago, Shiseido has aggressively expanded by acquiring other domestic brands such as “Zotos,” “ZIRH,” and “NARS.” However, the US market is more price sensitive than the Japanese market, and North American operations have suffered losses for several years. In 2008, bold structural reforms, such as consolidation and elimination of US subsidiaries, reduced the losses. Nevertheless, business again became sluggish because of the impact of the global economic crisis caused by the crash in the financial markets. Shiseido acquired Bare Escentuals, a natural cosmetics manufacturer in the US, to rally its US business, and is expanding globally with Bare Escentuals’ “Bare Mineral” as a global strategic brand.

Shiseido began cosmetics sales in Europe with its 1968 entry into the Italian market. It entered the French market in 1980 through a JV with Pierre Fabre. France is, of course, the center of the fashion, cosmetics, and perfume industries, and is the source of the most up-to-date beauty information in the world. This meant that if Shiseido could be successful in the French market, the country in which top brands vie for business, it would be recognized in cosmetics markets throughout the world. In Europe, fragrances command approximately 30–40 % of the overall cosmetics market. However, this was a completely new arena for Shiseido at the time. Shiseido built a foundation there, in the heart of the fragrance industry, and is now beginning to attract the attention of the world’s perfume industry through collaborations with leading designers, image consultants, perfumers, and marketing directors. To respond to the uniqueness of the French market and successfully enter local markets, Shiseido created a subsidiary for a fragrance brand in France, “Beauté Prestige International,” and has recently implemented a strategy to make its entrance into the rest of Europe. For example, Shiseido purchased 100 % of Swiss resellers’ outstanding shares to strengthen operations there, and began sales in Switzerland in January 2010.

By capitalizing its overseas operations, overseas sales as of December 2011 accounted for 44.3 % of overall growth, spanning across 87 countries and regions. With 11 overseas factories and seven R&D centers in the US, Europe, China, and elsewhere, the company is actively pursuing a path of globalization.

The central theme of Shiseido’s global strategy is expansion into Asian markets. Sales in China, in particular, are of high priority because it is an enormous market with high growth expectation. With a population of 1.3 billion and high economic growth, China experienced active sales growth in its cosmetics market, growing into a formidable one. The world’s leading cosmetics manufacturers have begun producing cosmetics within China, thereby intensifying competition. Shiseido has performed well in the market despite this competition, and SHISEIDO has gained popularity as Chinese women have become more fashion conscious.

In sync with China’s reforms aimed at opening the country, the Chinese cosmetics industry has grown rapidly since the 1990s, continuing to experience double-digit annual growth to this day. In 1990, the size of the Chinese cosmetics market was a mere CNY four billion, as opposed to its 2011 growth of almost 30 times, at CNY 112.2 billion (Yano Research Institute (2012)). Japan’s cosmetics market in 2010 was approximately JPY 1.5 trillion, and it can be said that China is soon approaching this level. In addition, skin and hair care products are its major product lines, similar to Japan. Unlike European and US markets, makeup and fragrance products have a smaller share in the market, but are said to be the future engines for growth in the Chinese cosmetics market.

Shiseido’s entrance into the Chinese market goes back to 1981, when it sold imported products in ultra-luxury department stores and hotels after approval by the Beijing government. In 1983, with the finalization of the First Technology Cooperation Agreement with the Beijing government, Shiseido began production of the “Hau Zi” series of shampoo and conditioner products. Through this collaboration, Shiseido built a relationship of mutual trust with the Beijing government, resulting in the 1991 JV with the Beijing Liyuan Co., Ltd., through a request by the Beijing government, thus creating Shiseido Liyuan Cosmetics Co., Ltd. (SLC), with Shiseido Shiseido (China) Investments Co., Ltd., and Beijing Liyuan Co., Ltd. owning 40, 25, and 35 %, respectively, penetrating the Chinese market. At the time, cosmetics in China were sold by weight; however, Haruyoshi Fukuhara, the president of Shiseido at the time, unilaterally determined that the formation of the JV was the right thing to do. When the JV began in 1991, the domestically produced high-end cosmetics market was non-existent, and so Shiseido explored methodically the positioning of the cosmetics made by SLC within the market. Thus, the brand name of “AUPRES,” which had European connotations was set, and, as a way to ensure identification of product quality as a result of Japan’s superior manufacturing technology, “by SHISEIDO” was tacked onto the name. While the quality of these products was comparable to that of imported foreign brands, the prices were set at CNY 80–100, lower than the average CNY 200 of the imported goods. Cosmetics by local manufacturers at the time were sold at CNY 10–20, thus having concerns about its prices being too high. However, they stood firm, believing in the importance of its high-end brand strategy (Table 10.5).

Yu Okazawa, who guided interactions with the Beijing government during two assignments in China during the 1980s and 1990s, and who boosted marketing for AUPRES, remarked, “We constantly faked stoicism for the sake of our pride in those early years.” The company carefully researched high-end department store locations and customer demographics in an effort to make AUPRES the number one brand in cosmetic sales, only expanding its channels in a limited fashion. From these efforts, AUPRES became the top-selling brand at Yaohan, a department store catering to foreigners, and the products’ increasingly strong reputation led to many inquiries from retail stores. However, the company focused on gaining top market share within their used channels, and thus put off short-term retail expansion, taking pains to ensure the products’ establishment as a high-end brand. Okazawa also remarked, “At SLC, we were starting a factory, and would have very much liked to increase our points of sale to maintain high factory utilization, but we prioritized establishing ourselves as a high-end brand” (from a February 2010 interview). AUPRES was designated as the official cosmetic brand of Chinese athletes during the 2000 Sydney Olympics as well as the 2004 Athens Olympics, and is currently a widely popular brand sold throughout China.

While establishing its position in the high-end cosmetics market, Shiseido created a JV, Shanghai Zotos Citic Cosmetics Co., Ltd. (SZC), with Shanghai’s CITIC in 1998. This venture aimed to provide products to middle-class consumers. SZC, like SLC, began as an entity with both a sales group and a factory to roll out local production in China, and began by manufacturing and selling the “Za” brand for the Chinese market. Furthermore, SZC’s products did not use the Shiseido name anywhere to avoid damaging Shiseido’s image as a high-end cosmetics brand (note that the “S” in SZC stands for “Shanghai,” not “Shiseido”).

In 2003, the company created Shiseido China Co., Ltd. as a holding company for SLC, SZC, and other companies, and made SCH responsible for sales, while SZC specialized in the manufacturing of products for the middle-class market. This was made possible with China’s entry into the WTO, allowing foreign firms to create stand-alone sales companies. Za products were primarily sold in department stores, although, in 2004, the company began its specialty store business with the “Pure&Mild” product, exclusively made for the Chinese market. In 2006, the company further developed the “Urara” brand for its specialty stores. Through its specialty stores, SCH invested in sales efforts of its Za, Pure&Mild, and Urara brands without the Shiseido name, while simultaneously marketing SHISEIDO imported products in high-end department stores. In 2010, it developed a new brand, “DQ,” for sale at drugstores (i.e., stores that sell both cosmetics and pharmaceuticals), a distribution channel that was expected to grow in the future.

In 2001, Shiseido created Shiseido China Research Center Co., Ltd. (SRC) as a wholly owned subsidiary focused on R&D, leveraging the abundant Chinese medicine and beauty methods nurtured over China’s long history. This subsidiary is responsible for tasks such as discovering new materials in traditional Chinese herbal medicine and application of such materials for product development, researching cosmetics awareness and beauty practices among Chinese women, and developing products for the Chinese market. As of 2012, Shiseido’s Chinese subsidiaries (excluding Hong Kong) included the SCH holding company, with SLC, SZC, and SRC falling under it (Fig. 10.1).

Shiseido also invests heavily in CSR activities within China. Since 2005, the company has participated in state projects aimed at “improving the appearance of Chinese women” of all ages. Furthermore, Shiseido has supported tree-planting projects, the opening of the Hope Elementary School, and artists. Unique to the cosmetics industry, it has taught women with bruises, white spots, scars, and other serious skin troubles how to conceal them with cosmetics. In May 2010, Shiseido became the cosmetics industry sponsor of the Shanghai World Expo, the first Japanese company to be a sponsor for that exposition. As the cosmetics manufacturers selected by the Shanghai World Expo Coordination Bureau, Shiseido provided cosmetics, perfumes, and sunscreen to event personnel as well as instructions on makeup application.

Distribution channels for cosmetics can be classified into three groups: department stores, specialty stores, and drugstores. Shiseido has implemented a product strategy for each of these channels in China. High-end products such as the “Clé de Peau Beauté” or SHISEIDO are imported and sold at high-end department stores. AUPRES and its higher-end version SUPREME AUPRES, both made exclusively for the Chinese market, are sold in department stores. In addition, there are other brands, such as ELIXIR, HAKU, Pure&Mild, and Za, which appeal to a wider range of middle, class consumers than the aforementioned prestige brands; they are distributed through specialty shops and drugstores (Tables 10.6 and 10.7)

The primary battlefields for top class imported cosmetics, such as Estée Lauder, Christian Dior, Chanel, SK II, and Lancôme, are high-end department stores. Shiseido’s products that compete in this space are their global brands Clé de Peau Beauté (CPG) and SHISEIDO. The AUPRES category, developed for the Chinese market and manufactured in China, is targeted at a marginally lower demographic and priced not only for the well-to-do class, but is within reach for professional women on a budget. In 2006, Shiseido began to compete with premium products from European and US cosmetics manufacturers by selling Supreme Aupres in the CNY 180–480 price range at high-end department stores in Shanghai and Beijing.

AUPRES was originally developed to fill the enormous gap between high-end imported products and low-end Chinese products. However, with the successive entrance of foreign firms into the Chinese market, competition intensified with products geared more toward the masses than the top class products, such as L’oréal, Clinique, and Biotherm. In response, SLC completely redesigned AUPRES in 2008 to improve its competitiveness by targeting the “80s generation” (segment of the population that was born during the 1980s). AUPRES’ new concept was that of the “blooming beauty,” or “the inner energy of beauty held by Chinese women that would blossom through AUPRES.” To further demonstrate the brand’s exclusivity toward Chinese women, the company removed the “by SHISEIDO” logo from packaging when the product went on sale. Shiseido also used the consumption habits of the 80s generation by aggressively running promotions, particularly through word-of-mouth marketing. Shiseido promoted the strengths of its products through the Internet by having product ambassadors with clear, light skin record their opinions after using these products on blogs. Born during China’s “one child” policy, most people born in the 80s have grown alongside the spread of the Internet in the country. Their values and preferences differ from previous generations, and their consumption habits are said to be similar to Japan’s younger generation. They have no particular loyalty to luxury brands and value originality. Being very familiar with the Internet, their online shopping percentage is higher than that among other age groups, relying more on word-of-mouth than traditional commercials.

In 2004, Shiseido used its knowhow of specialty stores in Japan to begin a Shiseido chain store as its second pillar to the premium product business within department stores. Shiseido is currently developing markets in rural and small- and medium-sized cities in China’s interior through direct sales by these chain stores. The chain store business comprises small retail stores and roadside shops that primarily sell medium-priced products. Shiseido’s agreements with the chain stores are reviewed annually, and either side may terminate the agreement, although Shiseido aims to build long-term relationships of mutual trust. Shiseido provides marketing support and training to sales employees, while the stores are required to understand Shiseido’s products to bring its sales to constitute 50 % of the stores’ revenues and install point-of-sale terminals in the stores. Starting with an initial three stores in 2004, Shiseido expanded at a tremendous pace, with more than 6,000 stores as of October 2012. In the past, these stores sold products imported from Japan as well as the Pure&Mild brand, but began selling Urara in 2006, a chain store brand that was made exclusively for Chinese women. Urara is currently a flagship product at the chain stores.

China’s distribution channels are becoming more diverse, with channels such as superstores, drugstores, and convenience stores. Some drugstores are pharmacies with a pharmacist on duty, while others primarily sell toiletries. In the former, Drugstores are thought to be a promising distribution channel for cosmetics. For example, French Vichy entered the Chinese market in 1998, and currently holds contracts with 200 drugstores, through which it markets its products. Shiseido began selling the new “DQ” brand at drugstores in 2010 and is working on expanding the breadth of its channels.

Foreign brands are widely popular in the Chinese market. Foreign cosmetic manufacturers have a higher reputation for quality and reliability than domestic manufacturers, and foreign manufacturers, primarily P&G, Shiseido, L’oréal, and Estée Lauder, are competing for market share. For example, Estée Lauder has introduced its MAC and Bobbi Brown brands into the market, and P&G has done likewise with its SK II brand. Johnson & Johnson, L’oréal, and Shiseido have all created R&D centers in Shanghai. The cosmetics market in China is known to have several local brands, but the quality and brand name of those brands is in no comparison to foreign brands, leaving Shiseido to compete, for the meanwhile, with global western firms such as L’oréal, Estée Lauder, and P&G (Tables 10.8, 10.9, and 10.10).

P&G primarily manufactures and sells detergents, toiletries, and cosmetics, and is the world’s largest consumer products company. The company entered the Chinese market in 1988 with sales of its Rejoy shampoo, and in 1989 with sales of its Olay brand skin care products. Rejoy enjoys approximately 40 % market share in China’s shampoo market, while mass-market Olay brand cosmetics are among the top ten in the Chinese market.

Estée Lauder, headquartered in the US, manufactures and sells cosmetics, skin care products, hair care products, and perfumes. It entered the Chinese market in 1993 with its flagship Estée Lauder and Clinque brands. It primarily imports high-end cosmetics. In February 2010, Estée Lauder’s CEO, Fabrizio Freda, remarked, “We currently sell in 40 Chinese cities, and are considering the sale of our products in 600 cities in the future. We will be making further investments in our skincare division, which is our most profitable business.”

The Chinese cosmetics market is concentrated along coastal regions such as Shanghai, accounting for 90 % of cosmetic sales in China. Western cosmetic manufacturers spend vast sums on advertising centered on large cities, promoting their brands in sales channels such as department stores, drugstores, supermarkets, hypermarkets (stores that combine supermarkets and department stores), and general stores. For example, in 2004, P&G bid the highest price to advertise during China’s Central Television’s prime time.

However, in September 2006, products in the SK II lineup (owned by P&G’s Max Factor) were found to have banned substances in them, forcing the company to accept returns and halt further sales. This incident stemmed from chromium and neodymium, the use of which is banned in China, being detected in nine SK-II products, resulting in directions from the Chinese General Administration of Quality Supervision, Inspection and Quarantine (ASQIQ) to quarantine products imported from Japan (SK-II was originally a sub-brand of Japan’s Max Factor that was acquired by P products sold in China under this brand were thus imported from Japan). Finally, the Chinese government issued a statement that the chromium and neodymium detected in these products were originally in the products’ raw materials, posing no threat to the human body. Still, the damage was done on SK-II’s brand image. After the Chinese government’s directives were issued that September, there were incidents of refund-seeking consumers causing damage to certain stores, and the media calling P&G, which did not respond to requests for refunds, a “Bàwáng,” or tyrant of the worst kind, which caused further problems.

This displays the necessity of heeding unforeseen risks caused by governments. Quality inspections on imported cosmetics have recently become more stringent, and as a result, new product introductions into the Chinese market are said to be substantially behind schedule. The fault also lies with the complexity of permits and licensing systems. Counterfeit goods are also a source of trouble for manufacturers. Shiseido has contracted with multiple law firms and to gather information regarding counterfeit products. After gaining sufficient numbers, it contacts the appropriate bureaucrats and government agencies, thereby seizing counterfeit manufactured products.

Despite the Chinese market’s many issues, its scale as the world’s largest cosmetics market is also expanding rapidly. Shiseido perceives the Chinese market as a pillar of its overseas strategy and is in the process of securing itself as a global cosmetics manufacturer representing Asia, while confronting the risks posed by China. Competing with western megabrands in the Chinese market can be perceived as a preliminary battle for business in other emerging nations, where much future growth in new cosmetics markets is expected.

This case study describes Shiseido’s business in China from the 1980s, focusing particularly on the company’s marketing strategy. Shiseido entered the Chinese market at the behest of the Beijing government and expanded its market by modifying its marketing strategy in response to changes in the marketplace. Shiseido’s first success in China came from the AUPRES brand, exclusively developed for that market. Because it was produced in China, it would have been more beneficial for the company to increase its number of retail outlets as much as possible to keep factory utilization high. Instead, it limited its channel growth to establish its image as a high-end brand. The company clearly differentiated the AUPRES brand from SHISEIDO, a global brand popular among the wealthy, and developed products in the middle segment between high-end imported products and cheap domestic products.

However, P&G, Estée Lauder, Lancôme, and other powerful foreign brands have also entered the market, making competition more intense. SHC is increasing its product line and executing marketing strategies for each product level. Unlike the western cosmetic manufacturers, Shiseido has developed its own unique channel in the form of specialty shops and aims to reach a wide range of consumers. It is a business model developed in Japan that has been imported to China. Additionally, Shiseido has recently begun selling its products in drugstores and over the Internet, increasing its products’ reach and distribution channels.

Using this case study, the following questions can be considered to further deepen the understanding of global strategy.