Bain_Origin Strategy_V3

China Expansion Strategy

Kao Corporation

Team Origin Strategy

Bain Case Competition

May 2016

Agenda

Source: Origin Analysis Agenda

Executive Summary

Business Model

Market Insight and Improvements

Page 1

Page 2-11

Page 12-13

Page 14

Market and Products

Channel

Geography

P2

P7

P9

Implementation Timeline

Executive Summary

Source: Desktop Research, Origin Analysis 1Origin Strategy Consultants

Industry Trends

China appears as the largest

market and premium segment is

especially promising

Online shopping is growing but

conventional channels still dominate

Developed areas covers most of

color cosmetics market

Advanced OEM established in

China

Key Strategies

Introduce premium color

cosmetics into China

Focusing on offline laying out and

making online retail reliable

Select eight from tier 1 and tier 2

cities as our prioritized target

Temporarily cooperating with

international OEMs and investing

on factories in the long term

Segments

Market and

Products

Channel

Geography

Business Model

Logo

Main BusinessDaily chemical, cosmetics, health

care and industrial chemical

Size and

Position

Largest daily chemical company

from Japan

China BusinessEntering China early in 1993

Failing to make profits till 2013

Cosmetics

Business

2nd largest cosmetics company

from Japan, only after Shiseido

Acquiring Canebo, the 4th largest

cosmetics company in Japan

Client Profile

Chinese cosmetics market has a promising landscape

and is dominated by foreign brands

Source: Origin Analysis, Euromonitor, Nomura Research

1 The cosmetics market is expected to grow rapidly in 5 years

2Origin Strategy Consultants

359333312294274

389

0

200

400

2015 2018e2014

+17%

2013 2017e

+14%

2016e

3 China cosmetics products are dominated by foreign brands

197

72

135107

4

223

174171139

24

JapanUS France KoreaChina

2000

2014

2 The average spending on cosmetics still has room to grow

• The Chinese cosmetics market has delivered sustained growth with a

CAGR at 14% in the past 3 years and is expected to boom in the next 3

years with 17% growth rate

• Chinese average spending on cosmetics is nearly 6 to 10 times lower than

other developed countries such as Japan and France, indicating a huge

potential market for growth

• Foreign brands are the major players in Chinese market with Sino-foreign

brands and imported brands altogether accounting for 62% of the total

market share

China cosmetics market size (2013-2018e, Bn CNY)

Cosmetics consumption per capita (2000-2014, US$)

Distribution of brands’ nationality on China’s market (2014)

38%

21%

41% Chinese Brands

Imported Brands

Sino-foreign Brands

Market and Products│Analysis

Comments

Color cosmetics is expected to boom in China and

currently possesses a fragmented market

Source: Origin Analysis, Euromonitor, Kantar

1 Color Cosmetics has a relatively small market but stable growth rate


3 Color Cosmetics has a fragmented market in China

61%

85%

89%

43%China

Japan

France

Korea

2 China has a low penetration rate of color cosmetics products Comments

• China color cosmetics market is expected to reach ~¥ 33 Mn in 2019 with a

CAGR of 9.2%, reflecting a profitable landscape

• Compared with Japan, Korea and France that have already developed a

mature cosmetics market, Chinese market still has large room to grow

with only 43% of the penetration rate

• Except from L’Oréal (50%), the color cosmetics has a low concentration

market indicting the potential opportunity to gaining share

CAGR

+9.2%CAGR

+9.9%

272.8390.4

171.2

32.6294.0

184.012.8

2009

423.0

2014

21.2

2019e

Others

Color Cosmetics

China cosmetics market size (2009-2019e, Bn CNY)

L'Oré al,49.8%

Carlsan

Shiseido

Esteé LauderAmorePacficMary KayLVMHDiorChanel

Shanghai Feiyang

Western

Japan & South KoreaDomestic

Top 10 color cosmetics company shares (top 10 are 65% of total)

Penetration Rate of color cosmetics market (2015)


Students and young company staff are major targets of color cosmetics market

and the overall spending depends strongly on their income level

Source: Origin Analysis, iResearch, Kantar, Baidu Research

1 “21-30” are prime make up buyers


2

Students

Ordinary whitecollar workers

EnterpriseExecutives

Professionals30%

21%

18%

15%

Income Level Use make -ups everydayOnly make up when the occasion

requiresDo not wear any makeup

<10,000 16% 62% 14%

10,000-12,000 20% 63% 22%

12.000-20,000 26% 62% 12%

20,000-40,000 37% 51% 12%

>40,000 42% 48% 10%

62%

7.30% 0.70%

20%

10%

30%

21-30 30-40 Others 15-20 10-15

• “21-30” is the prime age group for

color cosmetics consumers at 62% of

the total number

• Driven by fast developing economy

and more extensive popularity of

color cosmetics, the major consumers

have been trending younger at 15-20

years old (20%)

• Ordinary white collar workers and

students represent over 50% of the

consumers, for their common usage of

make up in frequent social contacts

and activities

• Consumers with a high level of

income show a higher usage rate of

color cosmetics products

Comments

3 High-income groups are heavy users of color cosmetics products

Age distribution of color cosmetics consumers Occupational survey of color cosmetics consumers

Main customers: students & ordinary employees


Color cosmetics companies are selling products based on the study of

customer preference and popular product categories

1 Customer preference: quality and function


2 Popular product category: BB/CC creams, Lipstick and Concealer

11%

19%

32%

44%

49%

49%

60%

64%

66%

Packaging

Quality/Function

Brand

Fragrance

Public Praise

Technology

Price

Ingredients

Natural/Organic

0

10

20

30

40

0 1000 2000 3000 4000 5000 6000

%V

alue

Gro

wth

Sales of Color Cosmetics 2014 (Mn CNY)

BB/CC Creams

Foundation

Concealer

Lipstick

Lip Liner/Pencil

Eye Shadow

Lip Gloss

Mascara

Powder

Eye Liner/Pencil

Source: Origin Analysis, Euromonitor, HKTDC

• Most consumers think of quality/function as the top priority

buying make ups, looking for efficient products as well as

safe and healthy products

• Consumers are starting to consider new dimensions like

“natural/organic” and “technology” as buying criteria

3 Hot products in China: popular categories combined with advanced conceptions

Brand Product Description

Canola honey lip

balm stick

The ingredient is extracted from the cole honey from Jeju, promoting for a

tight combination between technology and nature, with unique fragrance

and wealthy nutrition

Sulwhasoo

perfecting cushion

The product is known for its precious ingredients extracted from natural

herbs and performs well in oil-control, hydration and regeneration

Correcteur visage

concealer

The product is reputed for its high technology in controlling skins’ cell

viability, demonstrating a great function in anti-aging and wrinkle reducing

Top concerns when Chinese customers buying color cosmetics


Product Management: Premium products lead in entering the

market and execute with localized marketing strategies


Market and Products│Strategy

1 Enter the market by introducing premium product-line

1624

10

9

0

20

40

2014

21

5

2009

13

33

Premium

2019e

Mass3

Chinese color cosmetics retail value sales (2009-2019e, bn CNY)

• Focus on expanding color cosmetics market in China and utilize the high-

end of the products to achieve a top-down market penetration

• Introduce the mass products and achieve full product-lines in 5 years

+10.8%

+12.5%

2 Prioritize brands mix and accordingly facilitate promotion

Product

Position

Product

richness

Brand

recognition

Based on the market analysis of Chinese market trend, high-end brands such as Sofina

and Lunasol, with a rich product mix and a well-established brand name in China, could

be considered to introduce and expand in China in short term

Brands such as Sensai and Molton Brown are not suggested to introduce to China in the

short run for their weakness in brand position and brand recognition respectively

4 Design and launch new products based on domestic market trend

3 Make precision strategies for target customer

New

Product

Target Lock-on & Analysis Precision Strategies

• Invite brand spokesman that can well

represents a high-end life quality

• Set 20-35 years high-level office staff

as our target customers

• Advertisements should be largely

invested on social media that cater for

the interests of 20-35 age group

Premium products

are driving factors

leading color

cosmetics’ growth

Based on the study of

customer segmentation and

high-end product strategy,

our target customers should

be concentrated on 20-35

years high-level office staff

Based on preferences of Chinese customers,

the company launches and develops products

with advanced beauty conceptions

Online selling maintains a stable growth but department stores still dominate

1

Source: Euromonitor, Tmall 2016 Cosmetics Market Report

Online selling keeps growing


0%10%20%30%40%50%60%70%80%90%100%

02468

1012141618

2009 2010 2011 2012 2013 2014

Others

Internet Retailing

Direct Selling

Percentage ofInternet RetailingPercentage ofDirect Retailing

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

500

1000

1500

2000

2500

3000

3500

4000

2009 2010 2011 2012 2013 2014 2015e 2016e 2017e 2018e

GrowthRate

OnlineChannelPeneltration Rate

China Color Cosmetics Online Sale Scale in 2011-2018 (100 Bn CNY)

2 Offline Retailing is still the main distribution way

Comments

• Although the offline selling share is shrinking, department stores still

remain the major source of cosmetics. This may because department

stores provide delicate service and real makeup experience.

• China has emerged as the world’s largest digital retail market. Online

penetration rate and purchasing frequency increased across all city tiers in

2014, with notable patterns evolving.

* Online penetration is determined by dividing the number of households that purchased a certain brand from the online

channel at least once per year by the total number of households

Non-store (Online) Retailing Distribution of Beauty and

Personal Care by percentage value 2009-2014

33%44%

14%

9%

67%

Online Retailing

Health and BeautySpecialist Stores

Department StoreCounters

Others

Distribution of Color Cosmetics by Format and Category (2014)

Channel│Analysis

1

Source: Origin Analysis

Expand the online retailing channel

Mainly lay out more counters offline and expand the current online channel


• Optimize the official website to be more user friendly and realize its

online-shopping function

• Introduce part of premium cosmetic brands into Tmall so that Kao

can direct-selling on the platform

• Design customized smart phone app in the name of Kao.

Customers can operate flexibly on the app. e.g. book products which are out of sale in advance, share reflections with other users

2 Establish more offline stores and counters (prioritized)

• Open up 3-5 experience stores, to facilitate customer experience and

build brand image, so that customers can have access to most premium

products of various sub-brands of Kao

• Re-plan the store sites and establish more stores and counters in

the department stores and malls. e.g. Sofina has low store coverage

(only 14 sites in 3 provinces). Buyers tend to try the premium makeup in

the physical store before buying

• Cooperate with high-end beauty specialist stores like Sephora to

expand offline influence, take the advantage of their established

distribution channels.

Online Retailing

Optimize the official

website

Offline Sales Sell on B2C

platform, Tmall

Specially designed

mobile phones APP

Channel│Strategy

Developed Cities Contribute Most to Cosmetics Sales with Preference for

Japanese and Korean Brands and Offline Channel Opportunities

1

Source: Euromonitor, iResearch, iziRetail, Origin Analysis

East and North China take up 54% of the total cosmetics sales

29%

12%

25%

15%

20%East China

Mid China

North and Northeast China

West

South China

Cosmetics Sales by Region in 2014

3 Japanese and Korean brands are more preferred in tier 2 cities

41.90%

41.90%

39.30%

46.60%

40.80%

32.30%

31.80%

30.80%

36.60%

32.00%

84.40%

87.00%

84.30%

83.50%

82.10%

0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 120.00% 140.00% 160.00% 180.00%

China

Tier 1

Tier 1.5

Tier 2

Tier 3

Japan and Korean Local European and American

Color Make-up Brand Penetration by City Tier in 2014

• East, North and Northeast China are major markets of the cosmetics in China with

29% and 25% share of sales respectively, due to their strong economy

• Tier 1 and tier 2 city market show higher acceptance to Japanese and Korean color

make-up brands with a penetration rate of 46.6%, higher than the national average

• Tier 1 cities own a well-established offline selling channel (shopping malls). Tier 1.5

cities also have channel opportunities with a large number of well-performed

department stores and a foreseeable growth in the scale of shopping malls

City Top 30 Department Stores Top 30 Shopping Malls

*Tier 1 23% 67%

*Tier 1.5 40% 23%

Tier 2 and 3 37% 10%

2 Distribution of *top (by revenue) shopping centers in 2015

Note: *Selected top shopping centers are those achieving revenue of over 2 billion in 2015

*Tier 1 city include: Beijing, Shanghai, Guangzhou, Shenzhen;

*Tier 1.5 city include: Chengdu, Chongqing, Hangzhou, Nanjing, Shenyang, Tianjin, Wuhan, Xi’an, Suzhou


North China owns 60% of top department stores

Southeastern China owns 77% of top shopping centersBy region

Future trend: 70% of top dept. stores starts upgrading to shopping malls

Geography│Analysis

Comments

19.90%30.60%

20.30% 20.30% 18.55%11.50%

22.60%20.90%

22.40% 23.40% 21.44%20.90%

25.10%23.40%

22.60% 26.00%26.22%

28.20%

32.40% 30.60% 34.80% 30.40% 33.78% 39.30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

China West South East North andNortheast

Mid

>8000 3000-8000 1000-3000 <1000

1

Source: CNBData, Tmall data, Origin Analysis

Online customer premium brands preference in 2015


High Low

• Besides Beijing and Shanghai, Zhejiang, Sichuan, Chongqing, Guizhou, Tibet also demonstrate high penetration rates for online cosmetics purchase.

• Tier 1 and tier 2 cities are the major market for the online premium cosmetics sales, taking up 71% of the total share.

• A substantial penetration of premium cosmetics sales from tier 2 cities as well as west market might result from a gap between demands for premium cosmetics and

offline shopping malls available in those markets.

• West China could be a promising market for premium color cosmetics since 30.6% of its consumers spend over 8000 CNY annually in color cosmetics.

20%

51%

19%

10%

Tier 1 Cities

Tier 2 Cities

Tier 3 Cities

Tier 4 Cities

Premium Cosmetics Sales by

City Tier

Premium Cosmetics *Penetration Rate by Region Annual Spend on Color Cosmetics by Region in 2014

2 West China market has largest share of upgrade consumption groups

Higher-tier cities in west China expects growth in premium color cosmetics

with substantial premium consumption demand

Unit: CNYComments

Note: *Penetration rate =Number of actual buyers/ number of potential buyers with access to purchase

Geography│AnalysisGeography│Analysis

City Index Total

GDP per

capital

*J&K culture

influence

*Fashion

sensitivity

*Lifestyle

Variety

Population

mobility

Service industry

growth

Overall

performance

Shanghai 4

Beijing 4 4 4

Guangzhou

Shenzhen

Hangzhou

Chengdu

Dalian

Changsha 4

Chongqing

Nanjing

…

Focus on a Chosen Group of Tier 1 and Tier 2 Cities as Targeted Market

Source: lit research, Origin Analysis

1 Screening flow of choosing the targeted market 2 Focus on tier 1 cities, Hangzhou, Shenzhen, Chengdu, Changsha & Dalian


334 municipal cities in China

Note: *Japanese and Korean (J&K) culture influence is rated upon index including audience rate of J&K TV programs,

popularity of J&K music and comics, number of J&K concerts held, etc.

*Fashion sensitivity is rated upon fashion magazines subscription, search frequency of fashion related key words,

introduction of fashion clothing brands, etc.

* Lifestyle variety is rated upon number of pubs, night clubs, KTVs, etc.

Shanghai

• Differentiated marketing strategy

from competitors

• Upgrade service quality

• Integrated offline and online selling

channels

Chengdu

• Precise marketing targeted at

premium consumers

• Develop offline channels

3 Differentiated strategy based on city by city analysis

Competition Level

Brand name of Kao

Purchasing powerChannel availability

Premiumconsumption

growth

Shanghai

Chengdu

8 targeted market to prioritize in

Screen criteria 1: tier 1 and 2 cities+ top cities in

west based on market analysis

Screen criteria 2: Rating analysis of 5 relevant factors

See chart on the right

20 municipal cities in China

All cities

Potential

markets

Prioritized

markets

Take SH and CD for example:

Geography│Strategy

highest high average lower than average low

More advanced OEM factories are established in China, bringing in

more locally produced premium cosmetics


General roadmap for a foreign cosmetics company entering China

Example Export Trade Cooperation with OEMsInvestment: JV or Sole

ProprietorshipR&D in China

Products sold in Beijing Youyi

Store, 1981OEM cooperation with local

factory, 1984

Shiseido Liyuan Cosmetics Co. (JV

with Beijing Liyuan) , 1993

Shiseido (China) R&D Center,

2004

More International OEM opens their branch in China

Company Location Products Clients

CosmaxShanghai Color products AmorePacific,

Faceshop, FILA, LG,

L'orealGuangzhou Skin Care

KolmarBeijing Skin Care, Color and Health care Etude House, Face

Shop, AmorePacific,

Gaozi, BaicaojiWuxi Skin Care

Intercos SpA Suzhou Color Products Unknown

• More premium cosmetic products are made in China and sold

all over the world

• Advanced modern logistics ensures the quality of ingredients

during international transportation

• Construction or rental costs remain high given the overheating

housing market

• Domestic companies still fail to help their JV partner in R&D,

branding and marketing

New Factories opened by International OEMs in China (2014-2017)

2

1

Comments

Expanded Factory

New Factory

Business Model│Analysis

Done

Select qualified OEMs as partner in short term and step up

direct investment for the long run


1 Promising business model for Kao to expand its market in China

Kao Group (Japan)Advanced OEM in

China

Kao (China)

Company

Online Store

Counter

Experience Store

End User

Product Feedbacks

Sales Ideas and Campaigns

Products

Products

Manage

-ment

Products

Formula and Technique

2 Major competitors manages to improve in China – LG as example

Executive Strategy

• Select advanced or international OEMs, such

as Cosmax and Homar, to cooperate with in

short term

• Carefully inspect formula and ingredients, and

ensure the high quality of manufacturing and

product in China

• Invest on self-owned factory in China and

make premium cosmetics domestically and

independently, which is promisingly in three

years

• Establish R&D center in China and develop

new products according to specific needs of

Chinese customers, for the long run

New China

Factory in Plan

(Started in 2017)

New Luxury

Cosmetics Dept.

(Set up in 2016)

New Premium

Product

Channel

Optimization

Larger

Capability

New Focus

Organization201% 1st

Annual sales

growth (2014-15)

Ranking by cosmetics

sales on Tmall International

139

Counters numbers in

major cities

Business Model│Strategy

LG H&H

Strategy Implementation Timeline

Source: Origin Analysis 14Origin Strategy Consultants

2016 2017 2020 20212019

Launch products onto Tmall stores and sell directly

Optimize official website online stores Cooperate with premium beauty specialist stores such as Sephora

Open up 3 to 5 experience stores in major cities

Set up more counters and stores in malls and department stores according to geography priority

Select international OEMs in China to cooperate

Construct self-owned factory

Establish specialized R&D center

Enter the market with premium color cosmetics

Prioritize in best selling color cosmetics product types

Launch new products with organic concepts and high-tech application

Implementation Timeline

Focus on representative cities among chosen markets: Shanghai, Beijing, Hangzhou, Chengdu

Expand to other market

Expand to other chosen markets: Guangzhou, Shenzhen, Dalian, Changsha

2018

Short-term long-term

Business

Model

Geography

Priority

Channel

Optimization

Market and

Products

Documents

Bain_Origin Strategy_V3