Blueprint for a Cosmetics Empire

Back to Contents of Issue: September 2004

After the US, Japan is the second largest market for cosmetics in the world, a market worth about JPY1.4 trillion per year. It is a brand-conscious, fast-moving market, where a favorable review by a leading magazine and "kuchikomi" (word of mouth) by mobile young women can catapult a fresh brand into billions of yen in sales in a few years -- at least that's the vision of the cosmetic world's latest challenger, NSbrands.
by Terrie Lloyd
RIGHT AWAY, NSBRANDS CEO and founder Steve Bidinger can tell you that Japan is a unique market for cosmetics. For a start, a breakdown of market figures shows that Japanese women are more concerned about the quality of their skin and less about creating an alluring look or an ambience through the use of fragrances. The figures tell us that the product mix is roughly 60 percent skincare, 30 percent color cosmetics and 10 percent fragrance. Within the color cosmetics category, foundation (which is, in a sense, another type of skincare) accounts for more than 60 percent. In other words, Japanese women want to be appreciated rather than noticed. In the US, the share of color cosmetics to skincare and fragrance is reversed, while in Europe, the ratio of skincare and color cosmetics is roughly equal. Cosmetics industry "navigator" Bidinger notes another peculiarity of the market: While younger consumers use cosmetics for self-expression and attracting attention, as might be expected, by the age of 30 most consumers have moved to an "obligation" buying mode, where they wear makeup to go out because it is socially required. Thus, while color matters to the younger set, quality of ingredients and skin benefits are more important to older users. This, says Bidinger, explains why more mature Japanese consumers insist on learning everything about the products they want to use, and why the media has such an important role to play. If you feed that need for knowledge, the market is yours. Although most of the heaviest user group of cosmetics falls into the 18- to 40-year-old female demographic, Bidinger explains that local cosmetics marketing experts prefer to look at the Japanese audience in terms of lifestyle. "One consumer may have several lifestyle attributes. For example, a professional working woman may go to a department store on the weekend to test and listen to the benefits of a new skincare line. Here the person is demonstrating an interest in discovery and health benefits. And yet that same person can drop by her local pharmacy during lunch hour to pick up some mascara -- thus showing a practical aspect related to her socially active, mobile working lifestyle. As merchandisers, we have to learn how to match product to these shifts in lifestyle."x Learning about lifestyle segments is important in targeting your products properly. In the cosmetics world, these approximately map to pre-teens and teens, temp staff and part-time workers, professionals, working mothers and the mature audience. Although it may seem a good idea to get your product into every store possible, in fact, Bidinger advises targeting outlets to customers lifestyles as a much more effective way to allocate resources and demonstrator stock. For example, it would be no use placing a mid-market mature user skincare range in the Sony Plaza stores, where 70 percent of the customer base is aged 18 to 24 years. Market segment primer............................................................... The key to effectively competing in the Japanese cosmetics market is having an understanding of product positioning, the distribution and sales of the product, and how you fit into the food chain. Unfortunately, it appears that there is no reliable source of sales data for the Japanese cosmetic industry, unlike in the US, where a marketing person would simply go to Nielsen. Bidinger gives the example of Maybelline, once a direct competitor while he was at the helm of Bourjois. Although the brand had sales of at least JPY10 billion, it barely showed up in Japanese published market survey data. The Japanese market for cosmetics has an established strata of six brand segments. At the top are the prestige brands -- occupying about 10 percent of the overall cosmetics market -- which are sold in the top 200 department stores around the country. Sales are made from beauty counters, which require trained beauty advisors on hand to help consumers understand and sample a product. Foreign prestige brands control a large part of the luxury (department store) market, with names such as Lancome (L'Oreal), Chanel, Estee Lauder and Max Factor leading the way. Sales and profits are tremendous, allowing most of the foreign makers to build their own headquarters in the most expensive areas of Tokyo, such as Chanel's new JPY24 billion headquarters in the heart of the chic Ginza shopping district. Products in the premium segment typically range from JPY3,000 to JPY5,000 for color cosmetics and skincare. The average customer purchases 2 or more items for a total of more than JPY10,000. Being a prestige brand is hard work. Not only do the products need to be outstanding in their pharmacological qualities, but they need to stay in front of the consumers through substantial print advertising, beautiful counters and other forms of marketing. Prestige brands that drop their concentration on what the market wants are soon shunned by the department stores -- who are ultra-sensitive to the interests of their elite customers -- and either relegated to the back of the stores or kicked out altogether. Indeed, this is what happened to the Revlon brand back in the 90s, before it was repositioned as a mid-market, self-service brand. National high-end brands............................................................ The Japanese answer to the invasion of the foreign premium brands has been to create new marques with certain characteristics to match those of the best foreign brands -- then to push the products out not just through the nation's 300 department stores, but also through the 30,000-plus cosmetics, drugstores and general merchandising stores (GMS) around the country. This strategy has been surprisingly successful, with companies like Shiseido creating three high-end brands at the same time -- Pied Nus, Proudia and Elixir -- which have helped the company weather some otherwise disappointing financial results over the last couple of years. Shiseido, by the way, owns an impressive 25 percent of the entire Japanese cosmetics market. While you might think that selling a high-end brand in both upmarket department stores as well as thousands of local stores would dilute or even destroy a brand's positioning and value, Bidinger tells us otherwise. "Japan is unique in the cosmetics world in that it is a very fragmented market with brands appearing in all kinds of shops. To the extent that the consumers don't really notice where they are buying from, it's the brand image that compels the purchase." He adds that foreign brands stay in the top department stores because the beauty consultants are essential to the value proposition -- not something that can be delivered effectively from your local pharmacy. Lifestyle brands.......................................................................... The lifestyle or "make-up artist" brands represent self-expression and everyday professional use. Probably the most famous of these is the Shu Uemura brand, now owned by L'Oreal. This segment is quite small, and while the foreign companies have established a viable presence, the Japanese are fighting back successfully with a willingness to run out new lines with amazing frequency. Some of these experiments have literally saved the company, such as the hugely successful RMK line produced by Kanebo Cosmetics. Mid-market.................................................................................. A market segment that attracts much attention is the massive mid-priced mid-market, which is the battleground for Shiseido's Ettusais, L'Oreal's Maybelline and Chanel's Bourjois, out of a field of more than 20 players. These brands retail through more than 3,000 self-service stores such as drugstores and GMS outlets nationwide, focusing mainly on color products rather than foundation -- the exception being Ettusais, which has a strong skincare and foundation business. Most products in this segment sell for JPY1,000 to JPY2,000. Bidinger said something interesting about the Sony Plaza chain of 60 plus stores as a prime mid-market outlet. Among its clientele are "active shoppers," mainly women aged 18 to 25. These women visit a store two or three times every week, trying out new products and spending JPY2,000 to JPY4,000 per visit. As Bidinger notes: "They make ideal customers!" Mass market and direct sales..................................................... In the mass market, skincare and color cosmetics are sold in tens of thousands of stores, including cosmetic chain stores, drug stores, GMS outlets, supermarkets and convenience stores. Products are generally sold from a self-service wall display, and are priced at JPY1000 or so. Most of the major Japanese cosmetics manufacturers are active in this massive market segment, but the competition is fierce, and recently the Direct Sales companies, such as DHC (sells through Seven-Eleven) and Fancl (Lawson) are starting to make major inroads into the hot convenience store market. While overall cosmetics shipments have been flat or even decreased in the last five or six years, sales at convenience stores have been rising, and already account for more than 5 percent of total sales. The Direct Sales companies traditional sales route is through catalogs, TV ads, the Internet, phone sales and other forms of direct marketing. The right partner......................................................................... Bidinger knows how tough the Japanese market is, and that it's no place for a rookie start-up. That's why he decided early on to recruit some inside players as partners. As luck would have it, just as he was searching for his early stage investors, the Shu Uemura family sold out its ownership of Shu Uemura Cosmetics foreign holdings to L'Oreal in 2000, and completed the domestic side of the deal in 2003. In doing so, the 41-year-old son of Uemura, Hiroshi, wound up with time and some spare capital on his hands, and sunk JPY100 million into the new venture to become NSbrand's first outside director. The partnership turned out to be a shrewd one, as the Uemura family have deep ties in the Japanese cosmetics business thanks to Shu having been the first Hollywood makeup artist to set up his own cosmetics line and become a cultural icon back home. The Uemura family's business acumen was no disappointment either; before the sale, the company was in more than 100 department stores and 20 other countries. According to Bidinger, Uemura is more than just a passive investor. He knows products and brands well and works on the behalf of the company with his extensive connections with the department stores and salons. He gets NSbrands on shelves that might be denied to other new brands. He is also very helpful in generating attention from the media. When the Uemura connection is mentioned, doors open. The NSbrands strategy................................................................ A proven master of the mid-market brand, Bidinger's initial preparation in forming NSbrands was to create or represent a mid-market product that could be sold through his many contacts at such leading stores as Sony Plaza, Loft, and Marui. However, when he discovered the premium REN skincare brand out of London, it was love at first touch. Bidinger realized that there was a gap for a premium foreign lifestyle brand with health-giving characteristics, a growing trend in Japan fueled by the arrival of Aveda and others in the field. REN's value proposition to consumers is that the company pioneered the concept of advanced skincare formulations using potent but natural extracts and actives, completely avoiding synthetic compounds. This includes the use of natural ingredients for preserving the formulation, fragrances and coloring. As the REN product literature says: "CleanTM products work in closer harmony with your skin and help boost its natural function, ensuring it is better able to combat the stresses of everyday life, the environment and the aging process." If that sounds like a sure thing in stress-laden Japan, Bidinger is willing to place bets on it. Bidinger says that one reason the REN range will be popular here is because its stylish presentation, natural composition, and product line-up lend it a sophistication which can be compared with the Chanel, Lancome and Shiseido products. And yet, unlike other natural products, the "artsy" feel of the product and its packaging let consumers pamper themselves and enjoy something that is good for them. Sophistication and health benefits also make REN accessible to a broader audience than traditional brands. Bidinger sees his target as being everyone from young socially active women and men (who are becoming increasingly interested in their appearance) to working woman and mothers. REN even has a child skincare and shampoo line coming out which has been specially, but naturally, formulated for kids suffering from atopic skin -- a major problem in Japan, where, according to a Journal of Allergy and Clinical Immunology study in 2003, 24 percent of kids suffer from some type of skin affliction. Selling through department stores............................................. So now that Bidinger had a premium brand, his channel for sales was pretty much decided: department stores and upmarket boutiques. With Hiroshi Uemura's assistance, NSbrands is almost through negotiating to get into at least 100 department stores by the time it launches in late 2004. We asked Bidinger about the realities of dealing with a department store. The last decade has obviously been a tough one for department stores, and brands have to work hard to stay. With store margins of 35 percent on premium brands, he reckons that a department store wants to see minimum sales of JPY4 million to JPY5 million per month. Of course, the super brands are bringing in much more than that, up to JPY30 million per store per month. Multiply this by 100 and the sales levels are easy to calculate. So, while the first hurdle is getting into the stores, the second and much bigger one is staying there. Marketing.................................................................................... It should be obvious by now that the value of cosmetics largely depends on how the consumer views and understands the product. How does a small start-up like NSbrands take on the multi-billion yen ad budgets of the majors? Bidinger has decided that he wants to only talk to the audience actually shopping at the stores that he has lined up -- most of which are the upmarket and specialty stores such as Isetan, Sazaby's Estnation, and Sony's hot new Serendipity store in Ginza. His theory is that the intense population around the major centers of Tokyo, Nagoya, Osaka, and Fukuoka mean that there is a steady stream of willing and interested shoppers flocking to the leading department stores and boutiques. Therefore, the place to be is where the shoppers go. After a few months of launching the product into upmarket shoppers, NSbrands may launch REN in a broader range of outlets, including the ubiquitous and high-volume outlet Sony Plaza stores. Although there are at least 1,000 stores nationally that may eventually be potential sales points, NSbrands wants to initially limit distribution to no more than 100 shops -- allowing them to focus on the quality of consumer interaction and image building. As Bidinger says, "The objective is to provide high value to a very small number of stores, rather than providing low value to a broad segment." Marketing will be largely of the guerrilla variety, consisting of careful point of purchase presentation -- particularly paying attention to effective wall "gondola" displays and seasonal floor displays. According to Bidinger, previous research has taught him that many Japanese women enjoy browsing and discovering new products, and there are significant sales to be had creating a strong first impression. Of course, he intends to support the "discovery" with strategically placed beauty advisors and in-store events. In place of an advertising budget, Bidinger is focusing on PR. Japanese consumers love information, especially that which explains "how to" and what is popular. They are avid readers and are allowed to browse magazines in store for long periods of time without purchasing the magazine. They also rely heavily on "word of mouth" among friends and family. Thus the Japanese women's media is hungry for new stories and new products, especially those which can capture the imagination of consumers. And REN has such a strong story behind it that Bidinger's PR team has spoken to over 60 publications waiting for the product to debut. To support the print effort, he also plans a strong Internet and mobile Web presence to help curious shoppers find his stores and find out more about the products. @

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