On November 13th, the topic of “Shiseido’s significant price drop for Hada Senka” trended on Chinese social media. According to Beijing Business Daily, consumers complained that a few years ago, a 50ml Hada Senka purchased through shopping agent cost over 600 yuan. Now, a 120ml bottle is priced at only 598 yuan at Walmart, and Li Jiaqi’s live broadcast offers a 50ml bottle for just 370 yuan. Shiseido’s substantial price cuts on some products have left consumers hesitant to buy, despite the positive aspect of lower prices.
Not only did this become a trending topic, but on the same day, Shiseido’s (4911.T) stock price plummeted over 14%, hitting a six-year low. Behind this new low was a significant decline in third-quarter performance. The disclosed Q3 report revealed that Shiseido’s net sales for Q3 were 228.2 billion yen (approximately 110 billion RMB), a 15.3% year-on-year decrease. Core operating profit was 8.8 billion yen (approximately 4 billion RMB), down 53% year-on-year.
Due to the Q3 performance decline, Shiseido revised its full-year performance forecast, expecting a year-on-year decline in overall overseas market performance except for the Japanese market. Post-adjustment, the projected net sales for 2023 are 98 billion yen, down 8.2% from the previous estimate of 100 billion yen. Core operating profit is anticipated to be 35 billion yen, down 31.8% from the earlier estimate of 60 billion yen, and net profit is expected to be 18 billion yen, down 47.4% from the previous estimate of 28 billion yen.
Q3 Performance
Full-Year Forecast
In the cold reception of Shiseido’s Q3 performance in the Chinese market in 2021, the company implemented a fundamental transformation in response to the challenges brought by the COVID-19 pandemic. The company focused on the long-term strategy, emphasizing the skincare sector and restructuring business portfolios to enhance profitability, especially in the Americas and Europe, the Middle East, and Africa regions.
In February 2023, following the pandemic recovery, Shiseido introduced a new mid-term strategy, planning to achieve profitability through active investments and structural reforms. The company aims to achieve a core operating profit margin of 12% by 2025 and 15% by 2027.
The financial report indicates that 2021 is the first year of Shiseido’s implementation of the new strategy. The company is working to strengthen brand assets through strategic marketing investments to achieve sales growth beyond market expansion and increase market share in various regions.
Looking at regional performance, the Japanese economy continues to recover from the pandemic, with increased outdoor activities and a gradual rise in inbound tourism spending. However, due to the rise in living costs, consumers in Shiseido’s domestic Japanese market remain cautious.
The recovery trend in Shiseido’s overseas cosmetics market varies by region, with the Chinese market slipping to become the second-largest market in Q3.
Established in 1872, Shiseido currently operates in about 120 countries and regions globally. In 1981, Shiseido entered the Chinese market as the first international cosmetics group. Over more than 40 years in China, Shiseido has become a comprehensive beauty company involved in research, production, sales, and services, becoming the group’s largest overseas market in 2017. Shiseido operates 26 brands (including cross-border e-commerce) in China, covering skincare, makeup, beauty instruments, and perfumes.
In Q3 of this year, Shiseido’s sales in the Chinese market declined by 9%, offsetting the 20% growth in Q2 year-on-year. Despite the Q3 decline, sales in the Chinese market grew by 4% in the first three quarters.
Quarterly Performance by Region
In terms of net sales, the Chinese market was Shiseido’s largest overseas market in the first three quarters, accounting for 24.7%, second only to the 26.5% share of the domestic Japanese market. In the first half of this year, driven by the “618” shopping festival, Shiseido’s Chinese market experienced a strong rebound, surpassing the domestic Japanese market to become Shiseido’s largest and fastest-growing market.
Regarding the Q3 downturn in the Chinese market, the financial report attributes it to both weak consumer demand and a reduction in purchases by Chinese consumers following Japan’s announcement of discharging nuclear wastewater. This led to a year-on-year decline in net sales in Q3, with the most significant impact on the net sales of the e-commerce channel.
The report also mentions that after Japan’s announcement of discharging nuclear wastewater, overall marketing activities in the Chinese market were restricted, including the suspension of August’s key opinion leader (KOL) live streaming and new product marketing activities.
As for performance in other regions, the duty-free retail markets in South Korea and China’s Hainan Island continued to be weak due to tightened regulations leading to retail inventory adjustments. In other regions, the cosmetics markets in Europe and the Americas showed strong growth in various categories.
Regarding the travel retail market, the financial report indicates that South Korea’s inventory is expected to normalize by the end of this year, while Hainan Island is undergoing retail inventory adjustments and is expected to normalize by the end of the first quarter of 2024, as the market operates normally with the recovery of tourism activities.
Historically, marketing expenses for beauty industry companies have been relatively high. Shiseido Group’s sales and management expenses increased by 3.7 percentage points to 69.4% in the first three quarters of this year. Among them, the largest proportion of marketing investment expenses increased by 2.3 percentage points to 25.1%, while brand development expenses decreased by 1.2 percentage points to 3.8%.
Sales and Management Expenses
In the face of the challenges in the Chinese market, Shiseido, as mentioned in its Q3 financial report released on November 10th, is transitioning from a growth model driven by large-scale promotions to a more sustainable model. The company focuses on enhancing brand value and product marketing communication that caters to consumer needs.
Regarding the changing Chinese market environment, Shiseido anticipates a return to normalcy by the end of the first quarter of next year. Shiseido will closely monitor rapid market changes and respond promptly. The current Chinese market exhibits a polarized consumption pattern, placing a greater emphasis on functionality and efficacy. Additionally, changes in consumer behavior have resulted in reduced stockpiling during major promotional periods. Meanwhile, the increase in the middle-class population in China’s third to fifth-tier cities has contributed to trade growth, and tourism from Japan, South Korea, and Hainan Island has fully recovered.
For the Chinese market, Shiseido emphasizes its ongoing strategic importance and aims to accelerate business transformation for sustainable growth and profitability. This includes focusing on channel profitability and SKU rationalization in terms of brand portfolio and marketing activities. Operationally, efforts will be made to reduce inventory, promote localization, and decrease outsourcing costs.
On November 13th, Yu Jian, General Manager of Kantar Consumer Index Greater China, told Pengpai News that Japanese beauty brands have faced a downturn in recent years. This is partly due to the relatively slow recovery of the beauty market in the Chinese market and the rapid rise and growth of domestic Chinese brands. Additionally, Japanese brands have recently been affected by the Fukushima incident, but “nuclear wastewater” is a black swan event for Japanese beauty brands.
Apart from Japanese beauty brands facing a downturn in the Chinese market, Korean beauty companies are also having a tough time in China.
According to the third-quarter financial report released on October 31st by Amorepacific Group, the third-quarter group sales were 963.3 billion Korean won, a 5.7% year-on-year decline, and operating profit was 28.8 billion Korean won, down 12.7% year-on-year. Among them, the Chinese market saw a double-digit decline.
Regarding the decline in performance of Korean beauty companies in the Chinese market, Yu Jian said that in the long term, Japanese and Korean brands have changed relatively slowly in recent years and have not kept up with the times. For example, the influence of Korean culture and Korean-style makeup on Chinese consumers has weakened in recent years, and the previously developed Korean shopping agent channels have also shrunk significantly due to the impact of the pandemic.
Regarding the future development of Japanese and Korean beauty brands in the Chinese market, Yu Jian stated that fundamentally, Japanese and Korean brands need continuous upgrades in products and channels. They should formulate localized strategies to adapt to the “new reality” of the Chinese market under the backdrop of consumption recovery.