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Shopping from Japanese beauty groups is a sure way to beat the market, or at least it was a decade ago. In the six years to 2018, investors in industry leader Shiseido would have generated around nine times a return on their investment. The sector came with the added comfort of being low risk, known for its stable growth rates and high margins.
Today, the sector is performing poorly in a period when the broader market is trading near all-time highs. Operating margins have yet to recover to pre-pandemic levels. Activist interest is forcing companies to look for new sources of growth.
Shiseido shares fell 30 percent last year, lagging the benchmark Nikkei 225 index’s 30 percent rally over the same period. Its smaller peer, Kao, has barely matched the Nikkei’s gains.
This reflects weak gains in China, a key market for the Japanese. beauty and an even bleaker outlook. Kao’s net profit has fallen for the fifth consecutive year in the year to December. For Shiseido, which reported a 40 percent drop in its latest annual profit, China is its largest market, accounting for 24 percent of total sales.
The economic recovery after the pandemic has been slow. Unemployment among 16- to 24-year-olds, which remains at more than 15 percent after hitting a record 21.3 percent last June, has depressed consumer spending. Makeup has quickly disappeared from shopping lists. That decline has been exacerbated by Chinese boycotts protesting Tokyo’s decision to release treated water from a damaged nuclear reactor.
Longer term, the problem is that even once the economic recovery in China picks up, Japanese brands’ pre-pandemic share of local spending may not return. Chinese shoppers have increasingly turned to local beauty brands, with sales growing rapidly to account for about half of the $80 billion local beauty and personal care market. Exports of Chinese cosmetics and personal care products also began to grow last year.
Falling profits and share prices have attracted the attention of activists, including Hong Kong investment firm Oasis Management, which currently owns more than 3 percent of Kao’s shares. Oasis is considering submitting shareholder proposals to Kao next year to boost shareholder returns, which explains a rally in the stock in the past month.
A longer-term recovery would require diversifying beyond its key Chinese market, expanding market share in regions such as the Americas, which currently accounts for just over a tenth of the group’s sales. However, getting a new international look is not an easy task in terms of beauty.