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
3Origin Strategy Consultants
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)
Market and Products│Analysis
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
4Origin Strategy Consultants
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
Market and Products│Analysis
Color cosmetics companies are selling products based on the study of
customer preference and popular product categories
1 Customer preference: quality and function
5Origin Strategy Consultants
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
Market and Products│Analysis
Product Management: Premium products lead in entering the
market and execute with localized marketing strategies
Source: Desktop Research, Origin Analysis 13Origin Strategy Consultants
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
7Origin Strategy Consultants
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
8Origin Strategy Consultants
• 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
9Origin Strategy Consultants
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
10Origin Strategy Consultants
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
11Origin Strategy Consultants
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
Source: Desktop Research, Origin Analysis 12Origin Strategy Consultants
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
Source: Desktop Research, Origin Analysis 13Origin Strategy Consultants
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