Shiseido Company, Limited (4911) Earnings Call Transcript & Summary

Hello, everyone. My name is Mizuki Hashimoto, and I'm the Chief Brand Officer of the of Cle de Peau Beaute. I would like to thank you again for your interest on our brand and your participation in this session. I hope that this session will help you to further understand our brand, Cle de Peau Beaute. Before I begin the main part of this session, please allow me to briefly introduce myself. I joined Shiseido in 1997 right after graduating from University. And for the first half of my career, about 15 years, I was involved in to Shiseido's European prestige cosmetics sales business. In 2012, I was appointed to become the Managing Director of Shiseido Singapore, and stationed in Singapore for 3 years. And in 2015, I returned to Tokyo to work in Cle de Peau Beaute Brand team as Group Manager in charge of regional execution and started my journey with the brand since then. And so far, it has been a wonderful journey. Now I would like to start the main part of this presentation. Today, I would like to address 3 points that I'm showing you in this slide. First, in the brand overview, I will briefly touch on the genesis of the brand today as well as the brand achievements to date. In the second section, I will share our vision for future growth of the brand. And lastly, I will talk about the brand's commitment to sustainability. First, let's talk about the brand overview. First of all, what is the idea of our brand? What are our beliefs? Let me tell you about our brand idea and what we believe in. Cle de Peau Beaute is a brand that believes in the power of radiance that is inherent in each and every one of our customers. We define radiance not as the superficial glow of the skin, but as a positive force the highest expression of authentic beauty. We exist to help everyone connect with and unlock the power of their own radiance in their skin, in themselves, in the world. I hope you can see here that we are a brand that wishes to realize the society filled with positive power. And this is our brand vision, to be the most coveted global luxury beauty brand by unlocking women's potential in her skin, self and society through science and innovation. To achieve this vision, we are working tirelessly every day. Cle de Peau Beaute was founded in Japan in 1982. Current sales are around JPY 170 billion and the company sells its product in 26 regions and territories. With a global sales network of about 2,300 stores. Now we hold the #1 sales position in the prestige skincare market in Japan. Here are our main product lines and price ranges. First, in skin care, we have about 4 major franchises. Key Radiance Care, which is a regimen of serum, lotion and emulsion with a price range of about JPY 10,000 to JPY 25,000. Supreme, a line of product inspired by cosmetic medicine with the targeted solutions of programs related to aging in particular, with a price range of JPY 25,000 to JPY 40,000, La Creme, which is our iconic item and has a price range of JPY 60,000 to JPY 80,000 and the Synactif line, the pinnacle of Cle de Peau Beaute skincare line dedicated to purification and regeneration with a price range of JPY 12,000 to JPY 130,000. There are also cleansing and sun care some products, which I will not touch upon today. The complexion category consists of items such as primer, foundation, concealer, face powder with price range from JPY 10,000 to JPY 30,000. And the color makeup category consists of lipstick, eyeshadow blush, color, et cetera, with a price range of JPY 5,000 to JPY 10,000, which is priced at a relatively affordable price range within our product portfolio. Cle de Peau Beaute's globalization began in the late 1990s, primarily through its expansion into Asia, China and US. Then, after expanding into Russia in the early 2010s, in 2019, we began introducing our brand into Europe. We are entering into a phase where we will further strengthen our business fundamentals in Asia, while enhancing our presence in Europe and the United States. Let me break down our business a little bit. First of all, when we look at the sales by beauty category, skincare accounts for about 60% of the total sales and makeup accounts for about 40%. In the past, it was 70% skincare, 30% makeup, but the percentage of makeup sales has increased slightly due to the strong sales of recently released makeup items and the sales growth of primers, which have been very successful as best-selling products. In terms of sales composition by channel, brick-and-mortar accounts for about 2/3 and online 1/3. And online business is having a faster growth in recent years compared to brick-and-mortar. In terms of geography, sales in Japan, China, and Travel Retail are high, accounting for 90% of total sales, with the remaining regions accounting for about 10%. As you can see, Cle de Peau Beaute is a brand whose main market is Asia, but we believe this means that there is plenty of room for growth in other markets in the future. Now let's talk about strategic priorities for our future growth as a brand. Our strategy for the future growth of the brand has 3 main pillars: First, our most important weapon, namely our product. We will continue to produce high-quality and innovative products. Secondly, to create an exquisite brand experience. We will strengthen our communication content and further enhance our in-store environment and in-store services, aiming to both strengthen our brand equity and increase our customer satisfaction. And third, we will accelerate the growth of the brand and strengthen the brand presence by pursuing operational excellence through a variety of brand solution tailored to characteristics of each region. First, regarding products, the sales composition is currently 60% skincare and 45% makeup, as I said. We have observed high growth, especially in high-priced skincare products in recent years. Even during the pandemic, skincare sales were steady. And the trend was favorable for high-priced skincare products in general. This is driven by the fact that many luxury fashion houses have entered in the luxury cosmetics category in recent years. In addition, a number of high-priced Indie brands have emerged, further intensifying competition in this luxury cosmetics category. Cle de Peau Beaute is one of Shiseido's brands that should take on the battle in this high-end market, and we will further accelerate product development in this area in the future. Now to dive in deeper into our product strategy. As I mentioned earlier, first of all, we will continue to focus on skincare, the core business, the brand, as we have in the past, to accelerate growth. In terms of areas, we believe it is essential to focus on the antiaging category and moisturizer, which are high-growth sales areas. Secondly, although we are a luxury skincare brand, we will continue to strengthen the complexion category, which is our unique strength that our other luxury skin care brands do not have. It is effectively functioning as a new point of entry with customers that is not limited to skincare, and we will continue to strengthen it as an important category for the brand. Finally, we will also strategically place our holiday collection and color makeup within our pipeline to help generate buzz and maintain the vibrancy of the brand. Let's talk about the second pillar, exquisite brand experience. This has 2 axes: aspirational brand contents and elevated brand experience. With luxury and science at the core, we will continuously communicate our brand values to increase brand equity and improve the customer experience at all customer touch points, which will lead to increased customer loyalty. Let me elaborate each of the access in detail. First axis, as for aspirational content, which focuses on luxury and science, is designed to communicate the value of the brand in an easy to understand and appealing way to customers. We will strive to tell the stories of our heritage, our passion for brand creation, our craftmanship, our commitment to sustainability, the efficacy of our products, the technology behind the products and the fascinating ingredients that make them work in an engaging way through outstanding creative. Rather than just telling you in words, I would like to show you some of our commission materials so that you can get a sense of the brand will view we are trying to convey. As a first example, I would like to show you a video of our iconic product La Creme. The video talked about the history of La Creme, its ingredients, it's exquisite texture and how it works in the luxury stone for our customers. The second example is a video that talks about skin intelligence, which is at the heart of our skin research, to convey our cutting edge science and deep understanding of skin. Let's take a look. [Presentation]

And here is our hero launch of the year, The Serum to be launched in the second half. Please look forward to it. So let me move on to the second axis for the brand elevated experience. As a luxury group brand, we recognize that the real-life brand experience of our customers is extremely important. And we are committed to enhancing the brand experience as our top priority, thereby increasing and the engagement with our customers by providing a one-of-a-kind experience that exceeds their expectations. First, through retail innovation, we will renew the retail experience, drawing customers into the world of a brand from the moment they enter our counters at the point of sale. Second, by enhancing the hospitality skills of our in-store staff, we will not only offer unique brand services but will also provide customers with an unparallel beauty experience with treatment services. As a luxury brand, we will create and provide unique experiences based on our co-values to build genuine relationships with customers, increased loyalty to the brand and maximize our customer lifetime value. Now that I have covered our brand strategy, I would like to talk about the major strategic direction of our brand operations in each region, which is essential to maximize our brand strategy. First, in Japan, our mother market, we will drive our business by creating new customer touch points and further strengthening our existing customer touch points. In China, we will accelerate growth by concentrating on high-priced items in our skincare lineup. In travel retail, we will not only accelerate our growth but also maintain a consistent brand image by synchronizing its activities with those of the Mainland market, while developing campaigns tailored to travel retail's unique environment. APAC is a mix of markets with different levels of maturity, but we will expand the customer experience and drive new customer acquisition in skincare. In the U.S. It has been a long time since we entered this market, but there is still room for growth. We will drive our business by improving customer experience through the introduction of new counters and by improving customer service tailored to the U.S. market. In Europe, we have just started to gradually introduce the brand since 2019, but we will continue to manage the brand in the short to medium term with a focus on productivity per store while establishing the brand's luxury presence through an exclusive sales network. From here, I would like to show you some specific examples of how each of these region is implementing the plan. In Japan, we renewed our existing Isetan Shinjuku store, one of our top counters with a new counter design last year and significantly refreshed our brand image. In addition, we have created numerous opportunities to meet new customers by opening the digital art installation created for skin intelligence global events to the Japanese public to create a buzz around the brand and to entice customers to visit our stores and by holding a pop-up events in Ometosando, Tokyo. In China and Travel Retail, we launched La Creme campaign in the first quarter of this year, featuring Zhang Ziyi, our global brand ambassador in China. In Travel Retail, La Creme campaign was based on the theme of travel. Radiance Transports You, while in Mainland China, under the theme of, Height of Radiance, La Creme and other leading products of the brand were promoted along with Zhang Ziyi's aspirational image. While using the same ambassador, the luxury image was holistically communicated to Chinese consumers, and we have been able to drive business growth. In APAC, we are enhancing the brand experience by strengthening our presence in pre-standing store in key malls as seen in this latest example in Malaysia. Through these activities, we are steadily improving brand presence and equity. Next is U.S. In the U.S., brand personalization is difficult in many department stores but in places where brand personalization is allowed such as Bergdorf in New York. The latest brand counters have been introduced to disseminate the brand image. In addition, in the U.S., we're actively developing exclusive in-store events for VIP customers in existing department stores to drive business and build brand love. The image you see here is of an in-store event utilizing our color makeup Director, Benjamin Puckey. Lastly, Europe. As I have already mentioned, Europe is still in the early stages of our entry into the market, but we are working to establish a solid brand management foundation by building the strong brand presence in flagship stores in each market and conducting operation that prioritize productivity per store to reflect their sales network. Finally, I would like to touch on the sustainability activities of Cle de Peau Beaute. As I mentioned at the beginning of this presentation, we are not only supporting the skin and our own radiance, but we are also supporting our customers to sign and achieve self-fulfillment within the community of society. In addition, we are actively promoting initiatives to realize a decarbonized society and to solve environmental issues. We are committed to contributing to society through sustainability action through our products and the empowerment of women. With regard to product sustainability, we will achieve our company-wide commitment by 2025 and make further progress by 2030. In philanthropic activity, we believe that education is the key to unlock women's radiance. Cle de Peau Beaute is committed to promote gender equality by providing more opportunity for women to receive education, especially in the field of STEM, where the representation of female students are marginalized due to traditional gender stereotypes. We have key 2 pillar activities. One is Power of Radiance Award and second is the partnership with UNICEF. In the Power of Radiance Award, we support women who have contributed in the field of women and growth education focusing on STEM by granting them an award and a plan to further their course in gender equality and empowerment of old women and girls. And as per our partnership with UNICEF, we have committed to 3 years collaboration with by contributing USD 8.7 million donation to support UNICEF's gender equality program, in which we will support girls through education, employment and empowerment to unlock their potential for the future. Regarding our product sustainability efforts, we will proactively adopt environmentally friendly materials in all products by 2025 and more than 80% of our products will be refillable, in line with Shiseido's sustainability policy. This year, Power of Radiance Award went to Reshma Saujani, who has dedicated herself to empowering girls in computer science through the founding of Girls Who Code, an international nonprofit organization working to close the gender gap in technology. Since its founding in 2012, Girls Who Code has built the largest pipeline of female and non-binary computer scientists in the world. I would like to show you a video, which calculates our past awardees of this Power of Radiance Award so that you can feel our commitment to this activity. [Presentation]

So we have entered in the second phase of our part is with UNICEF, and our ongoing partnership has contributed to increased brand trust and engagement from customers, internal and external stakeholders. This year, we have been able to visit one of our Country program and beneficiary, Bangladesh to witness how our support have been supporting the local initiatives and what kind of results it has yielded. Now I would like to show you a video of one of the support program in Bangladesh, which is called alternative learning program. This innovative program is providing the most vulnerable adolescent growth with training and mentorship opportunities, equipping them with the skills they need to join the workforce, earn their own income and make their own path towards a brighter future. [Presentation]

This will be the end of my presentation. I hope it helped you all to understand the beauty of our brand and its potential in the future. Thank you very much for your attention.

The first question is from a Kuwahara from JPMorgan.

Thank you so much. My name is Akiko Kuwahara from JPMorgan. My question is on the growth [indiscernible] allocation that probably priority is on Page 10 of the slide that showing the mix of the business -- the 2023 performance. How is the allocation or exposure going to change over the industry over the [indiscernible]? As you may remember, [indiscernible] there is a great possibility in other regions, just so the -- how China has grown and also how [indiscernible] be differentiated from other group and major brands in China, Travel Retail, the U.S. and Europe each other market. Are there [indiscernible].

So your question is how our geographic sales composition is going to change in the coming 3 years?

Yes. 3, 4 to 5 years, yes. And it would be great if you elaborate. We need a bit more that how you compete with global leaders at each markets.

Okay. Okay. Basically, I think 3 to 5 years, actually, it seems like a lot of time, but actually, it's actually not that much of time. So as you can see -- I think China and Travel Retail aggregated our sales composition is actually 50% to 60%. So I think -- it will be very difficult to change this landscape in a very short period of time. So 3-year will not suffice. But I think in the long term, what we plan to do is to really increase the sales volume in the Asia Pacific in some of the key countries such as Thailand and probably China, Thailand and some other countries, which we are still lagging behind the major competitors. And hopefully, we can turn around a little bit of the situation. But it's very difficult for me to give you exact percentage right now. Hopefully, gradually, we can change the trend. I think that's, as far as, I can go, if it is 3 to 5 years term. And as for the differentiation from major competitors, our competitive set when it comes to -- in the cosmetic industry, we take luxury skincare brands such as La Mer and La Prairie. We do sometimes see the high price range from Estee Lauder and Christian Dior as well, but that is purely for price reference and also product architecture point of view. So I think when we compare ourselves with those luxury skincare brands, I think I have also mentioned in our presentation. I think one of our biggest strength is that we do have a strong complexion category, which they do not possess. And also, we are quite successful as sort of a 3-axes brand, which has color category, which is relatively successful compared to those brands. So I would like to further build on the strength so that we can differentiate ourselves from those brands. I hope that I answering your question?

Let's move on to the next question. Oliver Matthew from CLSA Securities.

Hello. Thank you for your presentation. My name is Oliver from CLSA. About China, so could you just comment a little bit more how you plan to differentiate the brand in China from those other high-end brands. It seems that consumers like the brand and they think it's high quality, but maybe they're not seeing it yet as very unique. So could you talk a little bit more on your plans in China?

When you say when it's not considered unique, what is the -- what is the point of reference that you were taking. I think one of the difference that we do have from other competitive brands, such as La Mer and La Prairie, we are Japanese brand. I consider that as one of the competitive edge. We do have research and development that really goes behind our products and which is a differentiator from those brands as well. So I'm not sure whether I have answered your question or not, but other than that...

Maybe this Hero product strategy is -- how do you think that will make a further difference in China?

Okay. So what we see as a trend in China and also in the luxury skin care segment is especially the high-end products especially focusing on anti-aging properties are becoming even more -- more and more requested by the consumer. So our strategy in the coming years, especially targeting China is to really focus our product strategy within those fields. So which is in the coming 2 to 3 years product pipeline, which I'm not able to divulge today. But obviously, that's our plan. Just jump in a little bit to give some more context on Q1 results as well. I think we've talked about how volatile, the China market overall is developing and within that, the prestige seems to be somewhat facing some challenges that before we have not been facing. And however, despite all of that macro situation, what we did see as very encouraging is the clerical performance very much differentiated from the other brands. In first quarter, we were able to post double-digit growth despite the various Fukushima water release impacts that we have struggled last year through. And hence, we feel that the communication is very much solid so far and to be continuing on with those science focus, technological advantage and the prestige positioning overall is going to be our continued focus and strategy within the China market.

The next question will be from Mitsuru Koguchi, Mitsui Sumitomo Trust Asset Management, Koguchi.

Thank you very much for your presentation. For myself, I want to ask about sustainability, especially Power of Radiance Awards and partnership with UNICEF. So I have a question regarding those areas. It's a great initiative. With such a high-end brand, what is the meaning of you working on these activities as a high-end brand? And also these kind of activities, does it linked to -- I think it has a link to some kind of brand involvement along with that. What are these activities that you're doing? Is it correctly and rightfully penetrated to the brand so that it increases the customer's touch point and that people want to use a brand as a result of the sustainability activities. So how do you see these sustainable activities connected to your actual brand coming to the brands? For a high-end brand doing this kind of activity initiatives, what is the meaning behind that?

Already, I mean there are many brands that do various sustainability activities. And Gen Z or the younger generation, there are studies that say that the younger generation don't want to be affiliated to brands that don't do these kind of sustainability type of initiatives. And so we feel that it is essential for us to do something like this and so because we are a cosmetic company, and we, from a female women's angle or perspective, and as I have said at the beginning of the presentation, we believe in the Radiance from [indiscernible] belief to education. That's where we put our [indiscernible] perspective, and we want to bring that to the society. And that is why we have decided to take part in these initiatives. And so how much of these initiatives linked to our actual brand business or brand direction, I didn't speak too much about it in today's presentation. But every year in May, in terms of the UNICEF initiatives, we have a consolidated marketing. So the serum, we linked the serum, our Hero product. So if a customer purchases a serum, then they are indirectly contributing to these kind of social activities empowering women. So we do explain that. And as a result of that, a lot of our customers give us great feedback to the fact that we are taking part in these initiatives. And of course, we feel joy to that. But moreover, on top of that, what was wonderful or what delights us is the beauty consultants that sell at the storefront, we call it the beauty specialists at the counters or at the stores. We heard that they are more proud to be selling our products and to be affiliated with a brand that do these activities. So it's not just the external stakeholders, but even the internal stakeholders, it gives them a value. It gives some pride, a sense of pride to be affiliated to a brand that partaken in these kind of social activities.

Thank you. Now in the STEM area education, I haven't been that long since you've partaken in this, but in the future, it would be great to see some of these women work in Shiseido in the future, right?

Yes, that would be wonderful. If that could happen, that would be wonderful. Thank you very much. I support you guys.

The next question will be from Sato from Morgan Stanley.

Sato from Morgan Stanley. And you have been working in a Cle de Peau Beaute for a long period of time. And so since Mr. Uotani, the Chairman joined the Shiseido, he's a professional in marketing and he's also a professional manager of the business. And so for this high -- what was the benefits of Mr. Uotani being the Chairman for Cle de Peau Beaute before and after he joined. And also what are the challenges separate from the fact that Mr. Uotani as a chairman? What are the challenges are there?

I understand. So I'm going to respond to the benefit of Mr. Uotani, being part of Shiseido and then to Cle de Peau Beaute. Yes. So the globalization of the brand team is something that Mr. Uotani has been very serious about. And so it's been 4 years since he joined the branding and the brand team now is equipped with the wide range of nationalities and also, there's been major changes in the past few years. And I have a tangible feel of the change. In regards to the challenges of the Cle de Peau Beaute, this may be related to your first 2 questions. And relatively speaking, our market is Asia-centric still. And going forward, we would like to increase and expand the footprint in the U.S. and European markets.

What about the percentage of non-Japanese personnel within Cle de Peau Beaute organization. Are there any quantitative numbers?

So when we talk about the global human resources, my sense is to include via the Japanese personnel as well. So this is not a proportion of the different ethnicity or ethnic background.

Okay. So the China and Japan accounts for 90% of your business. So is there a wide range of nationalities? However, not heavily expanding on other markets. Being strong in China is one of the reasons behind our diverse background in our personnel. So there -- so you can say the same thing about the different brands.

Yes, there are different brands of different sizes. So we cannot generalize about the ethnicity diversity within as far as Cle de Peau Beaute is concerned, yes, we have global human resources.

And Mr. Yamanaka from SMBC Nikko Securities.

In the material that we saw after you joined after 9 years, the sales have almost quadrupled. China, Travel Retail specifically are being the drivers of the sales. So going forward, in Japan, you have been working on price hikes in Japan, and there's inflation and there's concerns around inflation, so the price is something that we talk about lately. But when we talk about the mid- to longer term, what is your pricing strategy? And even if you raise price, the luxury brand in Japan sales have not dropped. And in Japan, it said that the price has been going up, but the sales of the luxury brands and continued to go up. So I feel that if that is the case, what kind of environment for Cle de Peau Beaute, what kind of environment would have a negative impact for Cle de Peau Beaute? If you have any concerns or risks that you can think about around that, if you could share with us.

Okay. Let me start about the pricing first. As to the pricing, that will be one of the very important selective levers that we will use. So within a reasonable range, we will consider increasing price. We are a Japanese brand. So Japan price becomes a reference. But right now, the Japanese -- if you can look at the FX it's a bit of a struggle. So if we raise the price according to the FX, there could be kind of a reverse impact on the price. So we have to be careful of that. But having said that, every year, we do believe that we can continue to increase the price in a reasonable manner.

I'm sorry, can you repeat your second point? What is -- what would be a negative factor?

Yes, in luxury items, it said that luxury items are very sensitive to pricing. But even when the prices are increased, the sales aren't going down as much and that was announced in our last business presentation.

So then what do the demand will become a hurdle? What kind of environment could negatively impact? Outside of pricing, I can't really think of much. I just said that in the market right now in Japan, there's inflation. So people are tighter in how -- and their spending. But you don't feel that right now.

No, we don't feel that right now. So if we -- I think you're talking specifically, mainly about Japan. But if you talk about Japan from about last year, when are we going to raise price? We have been asked by consumers. So I feel like we kind of have the base to be able to raise the price. So from -- in April, we did raise the price, but the demand, yes, we did have the demand hike before the price increase. But after that, we don't see much of a fluctuation to the demand. So we feel that it wasn't that negatively impacted due to the price hike. This is the observation as of now.

As we only have 4 minutes to go, I would like to take the final question. This will be from [indiscernible].

This is [indiscernible] from Mitsubishi UFJ Trust Bank. I would like to ask a question in Japanese. And the sustainability commitment was covered towards the end of your presentation. And in that -- in comparison to other companies, what were the characteristics of Shiseido or uniqueness of, as you said, of sustainability. What can Shiseido do uniquely different from other companies in sustainability. Cle de Peau Beaute is an excellent brand that you are working on. And so the target of sustainability of cosmetics company is a bit different from other companies. I have an impression there's rather ambiguous, what will be the target in terms of data contribution to solving societal issues. And it's difficult for me to find a clear cut answer or view for that. So could you elaborate on the pathways or examples of your activities for Shiseido to contribute to resolving the society issues. If you could give me a clue that will be very much appreciated.

So I will talk about our product mainly. So the product sustainability means the primary packaging and the secondary packaging and how to be environmental friendly and how to reduce the burden on the environment. And so such approach will be the main topic. And this is the -- depends on how much effort we can make with our business partners. And we are -- well, how much contribution we can make to the society or the environment is all about communicating our willingness to be environmentally friendly. And Japan has this multi spirit, not to waste things and refill is permeated as a mindset. And however, when you look outside of Japan, we do have refill products, but in the mindset of the customers, that is not fully permeated. So even if we prepare the refillable products, I may be saying too much if I say that it is not accepted by the customers, but then the customers do not have developed a custom yet. That they will prefer to use their refillable products. So that's why we would like to be, say, persistent in a sense to convey the right message so that the consumers or the customers can understand that the refillable products are available as a leading company we expect that Shiseido Cle de Peau Beaute will keep working on this area so that this will be reflected in the acceptance by your customers as well.

This concludes today's session. Thank you once again for attending, and wish you all a good day or evening ahead. Thank you so much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]