Case

Shiseido: Rethinking the Future

'WE NEED TO RETHINK WHAT a human is,' observes Seigo Matsouka, a consultant and conference leader, as he begins a four-day conference for 30 Shiseido division managers. Shiseido is Japan's largest cosmetics company. Yet its managers and the managers at many other Japanese companies worry that Japan's hierarchical business structure and its emphasis on consensus-based decision making will not serve their companies well in the future. Although Japanese companies have done well at improving existing products, they have not done as well at developing new products and markets. Thus, they need to stimulate their managers to think creatively, something they have not previously expected from their managers.

Why are successful Japanese companies suddenly so concerned? Consider Korika Shida, n 21-year-old student who is shopping at an upmarket retail store in a chic Tokyo shopping district. As Norika examines a tube of Shiseido's expensive lipstick, she turns up her nose at the price. 'I find good colours at places like this,' she sniffs. 'Then I go and buy the same product at a discount store.' Welcome to the new Japan, Even in a country known for its loyal, demanding customers, Japanese managers are learning that consumers have minds of their own. Changing consumer behaviour will require new marketing approaches.

Shiseido was the first firm to introduce western-style toothpaste to Japan - in 1888! It also opened Japan's first soda fountain in 1902. However, Shiseido developed its competitive advantage in the 1920s. During this period of high inflation, Shiseido worked out a unique arrangement with retailers. The retailers agreed to sell only Shiseido's cosmetics in exchange for a commitment that Shiseido would buy back any unsold cosmetics. With this understanding, Shiseido became both manufacturer and wholesaler, and developed a network of 25,000 Japanese retailers that sold its products exclusively. These shops represent about 50 per cent of all cosmetics and pharmaceutical outlets in Japan. The system allowed Shiseido to control distribution and develop a pricey image. Shiseido took this distribution channel and its high prices to annual sales of over 500 billion yen by 1990.

In April in 1991, partly in response to international trade pressure, Japan lifted its retail price controls on cosmetics, drugs and other small products priced under about £7. In other product markets, such deregulation had increased distribution costs and allowed foreign companies to challenge Japanese firms in their home market. However, Shiseido had already learned to contend with foreign competition. Western cosmetics companies, such as Clinique Laboratories, had earlier gained a 7 per cent share of the Japanese market by selling through leading department stores that traditional Japanese cosmetics firms avoided. Shiseido countered this threat by developing 'CL Shops' - cosmetic counselling centres, where employees provided more detailed advice to customers in fashionably redesigned retail settings.

Deregulation had also caused dramatic price cuts and fostered the rise of discount stores in other product markets. In cosmetics, entrepreneurs like Yukio Iliguchi responded by founding discount stores like Kawachiya Shuhaii (jompany. Before Shiseido cut off his supply, Higuohl drew crowds of shoppers by selling Shiseido products at a 30 per cent discount. Higuchi persisted by arguing that the belief 'that quality only comes at a high price is weakening'. Further, he noted, 'cosmetics will have to become cheaper as consumers become wiser'. Most Japanese observers agree. They note that consumers want competition and they want discount stores. Even supermarkets are increasingly introducing cheap, private-label cosmetics. Although new to Japan, these consumer buying and retailing trends are already well established in the USA and many western European markets.

Such changes represent a major shift that has left the previously well-cosseted Japanese consumer-product companies and retailers badly shaken. Shiseido has been responding to these changes in the environment on two fronts. First, it is cutting costs and refocusing on lower-priced cosmetics. Recently, it opened a highly automated factory that uses robots to carry out almost all the steps in making cosmetics. The plant produces as many cosmetics as one of Shiseido's factories, but with a third of the staff.

Second, Shiseido is looking for more growth overseas as its domestic market saturates and there are limited opportunities to expand home sales. It already has 21 subsidiaries and six factories in 30 countries. The company's goal is to increase international sales by 50 per cent to 100 billion yen by 1997.

In early 1994, the company shifted its marketing strategy in key overseas markets, particularly the USA, focusing more on skin care products and on splashy new print advertising. It renegotiated new locations in many urban centre shopping locations and refurbished its sales counters to project a 'new image', with more eye-catching displays that explained Shiseido's advanced skin-care programme. Shiseido also began to launch new brands for men and more new fragrances for women. Shiseido's managers in the USA noted that their refocusing efforts were on target with changes in that market. Industry observers point out that more and more executives from packaged-goods companies have taken over cosmetic company marketing programmes. They are discarding the sexy models in glamorous locales in favour of scientific-sounding claims. Ads like this one are becoming increasingly common: 'In just 21 days, fine dry lines and wrinkles are reduced by over 38 per cent'. Competitors are also stepping up the use of promotions (e.g. coupons, money-back guarantees) in order to gain new trials and sales.

A US executive suggests that these marketing changes reflect increasing consumer savvy. 'A consumer in the nineties is as smart as you can get,' one notes. 'She reads the labels, she understands how ingredients work, she wants products that truly perform.' Another executive adds that some of the industry's changes are in response to consumers who are more value-conscious. 'Even people with high incomes are very price-conscious.' These observations are echoed by one of Shiseido's European managers attending the conference. 'You can't sell something that they don't believe in. But it's not just about scientific claims, coupons or fancy sales counters either. We have to be chic and high-tech and not charge the earth at the same time; consumers want to feel good about themselves, but they don't want to be told they will wake up with bunches of wrinkles if they don't use these products!'

It appears that Norika Shida may not be much different from consumers in Los Angeles or London. But can Japanese cosmetic companies like Shiseido repeat Japanese successes in the global car and consumer electronics markets? Some analysts argue that western consumers see Japanese products as technically advanced and reliable, but short on 'soul'. That image is good for stereos, but not for body products. Besides, Shiseido has a tough tight ahead in markets abroad, where global brands, such as Revlon, L'Orcal, Estee Lauder, Christian Dior, Chanel, Clinique and Clarins and many others, including private labels, are already well entrenched.

Can cosmetic companies like Shiseido turn whimsical beauty products into natural, high-tech, essential products? The ageing structure of the population in many of its markets is already thrusting traditional cosmetic companies into turmoil. Do older consumers still want the same cosmetics that 20-year-old models promote? Can it succeed by stressing skin care? Will consumers continue to buy their cosmetics in department and speciality stores, or will they join the trend towards buying cosmetics in mass-me re hand is ing stores? How are channels changing in the company's target markets and how should it respond to these changes? Shiseido is spending almost 4 per cent of its sales on R & D, about double the amount that many of its western rivals spend. Is this the right strategy?

As Shiseido's executives struggle with these questions and try to understand their customers and markets, and how these are evolving, Seigo Matsouka repeats, 'So, what does it mean to be human?'

QUESTIONS

1. What are the key environmental forces that have impacted on Shiseido's cosmetic business in the last decade?

2. Why should Shiseido's executives gain a deeper understanding of consumers' characteristics and how these are changing?

3. Evaluate the company's response to these changes.

4. What marketing recommendations would you make to Shiseido as it seeks to increase sales in overseas markets?

5. What are the emerging market trends?

6. How might these impact on Shiseido's business in the future?

SOURCES: 'The softer samurai', The Economist (12 May 1990], p. 73; 'Pacing up', The Economist (13 July 1991), pp. 71-2; Louise de Rosaria, 'Make up and mend', Far Eastern Economic Jteciero (19 December 1991), pp. 70-1, 'Fragrance helps you live longer'. The Ktxmomist (23 October 1993), p. 86; Paillette Thomas, 'Peddling youth ~ets some wrinkles', \VdtIStnsetJoiinud (24 October 1994), p. Bl; Saeliiko Sakamaki, The mailing of Japan', far Eastern Ketmomiu Review (8 August 1996), p. SO.

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Responses

  • conrad
    Why should shiseido's executives gain a deeper understanding of consumer's?
    8 years ago
  • ave
    What recommendations would you make to shiseido as it seeks to increase sales overseas?
    4 years ago

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