Cosmetics Market Japan 2008

Cosmetics Japan Market Reports

Japan Market Outline 2007 Japan’s Retail Market Is The 2nd Biggest Worldwide Nine Year Market Increase Due To Ease Of Regulations Distribution System New Opportunities For Cosmetics Makers Increased Popularity Of Imported Products Seido-Hin And Ippan-Hin Main Market Trends Solutions On Entering Japan’s Market Report References & Editors

© G&S International Japan 2007. All rights reserved.

Cosmetics in Japan

Japan Market Outline 2007 current market conditions

Japan’s cosmetic market ...

market in general

Japan’s cosmetic market is ...

    

    tastes & trends of Japanese

highly potential - but highly competitive slightly higher in its retail prices than other markets (US, EU) different in its distribution and retail system (than US, EU) different in ways to market and advertise a product or a brand

Japanese cosmetic consumers prefer ...           

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is the 2nd biggest worldwide increased by 170% on imported cosmetics since 2000 changed PAL (Pharmaceutical Affairs Law) in April 2005 is strict on importation and labelling guidelines has its main market in skin-care-items (~45%): cleansers, crèmes, lotions, bath items, gels, serums (effective substances), increasingly popular: beauty machinery, skin patches, spa & massage products, organic & natural cosmetics

products of foreign manufacturers (to local, except the big 5) products with very high quality (to lower mass market items) products of smaller product sizes than in US or EU (size, weight) products from well-sounding brands (name, image) products with skin-caring ingredients (Japanese consumers do have well understanding about ingredients, preservatives, etc) product contents that are jelly, soft, mild and smooth products with little smell (less use of fragrances) products with bright and light packaging (colours, weight, size) products with natural ingredients (to chemical ingredients based items) brands that steadily introduce new products brands with excellent customer services (store, after-sales-services, etc)

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Cosmetics in Japan

Decision makers from Japanese esthetic, nail, and chain salons, import trading companies, distributors, retailers and manufacturers are always on the search for innovative products, latest techniques, and newly-introduced services to be introduced to Japan.

Japan’s retail market is the 2nd biggest worldwide

Japan is the second-largest cosmetics market in the world after only the U.S.A. According to statistics released by the Ministry of Economy, Trade and Industry, the size of the Japanese cosmetics market reached US$12.5 billion/Euro 9.4 billion (ex-factory) in 2006. Today, treatments and services offered by esthetic salons are proactively introduced into other related facilities such as medical institutions, fitness clubs, and amusement facilities. Meanwhile the recent booming Spa market and the introduction of the market for men's beauty-related goods and services are making Japanese beauty market further enticing and expanding. In 2006, the number of esthetic salons in Japan counted about 18,000 and still the Japanese beauty market keeps showing steady growth. Successful introduction of your products and services to Japan additionally offers you the chance to expand your business beyond the Japanese beauty market.

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Cosmetics in Japan

According to the Cosmetic Importers Association of Japan, Japanese imports of cosmetic products reached around JPY 165.4 billion / US$1.38 billion / Euro1.03 billion (ex-factory) in 2006. This is an increase of 1.1% compared with 2005. The volume of import cosmetic products has been increasing for nine consecutive years since 1998.

Nine year market increase due to ease of regulations

One major factor behind the rising value of import cosmetic is the deregulation of cosmetics imports in 2001. Another factor is that more retailers than before outside cosmetics specialty stores are carrying import cosmetic products, such as large drugstores, convenience stores, general merchandise stores, variety shops and select shops. In order to make use of various channels, over 1,000 import-cosmetics companies are keenly looking for new products and sophisticated foreign brands. Due to strict import regulations, the Japanese market has long been considered a difficult one for foreign suppliers. Starting from 2001, new rules for import cosmetics are consistent with international standards. Prior approval for each individual product is not required, so that products containing ingredients already approved in Japan can be imported by just making a filing with the local prefectural government.

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Cosmetics in Japan Japanese cosmetics manufacturers can be classified into those that sell directly through their shops, those that sell through wholesalers, and those that sell door-to-door.

Distribution System Importers & Wholesalers Consumer cosmetics preferences are showing a clear polarization to products that offer clear functional benefits (e.g., lipsticks that do not rub off easily, skin care products that fights aging and provide protection against ultraviolet rays) on one hand and products that are inexpensive but may not provide noticeable benefits on the other hand. Such clear needs or price orientation with no middle ground is leading to changes in the traditional retail and distribution setup. Retailers are forced to choose personal counseling and other value-added services to justify the higher prices or to shift to a self-service system for providing lower prices. Some importers distribute products through wholesalers, while others sell directly to retailers (e.g., department stores, supermarkets, drugstores). Few wholesalers also conduct business directly with overseas manufacturers, and some overseas manufacturers sell limited-edition products only to select department stores to target upscale customers. Cosmetics are rarely handled by the major trading houses.

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Cosmetics in Japan Door-to-Door Distribution Overseas manufacturers selling door-to-door operate in much the same manner as their Japanese counterparts. Offices across Japan distribute the merchandise to salespersons, usually women, who sell the products from their homes. Most overseas manufacturers start by distributing the products through an authorized Japanese agent to specialty shops and department stores. After making some headway, the manufacturers then set up branch offices or Japanese subsidiaries.

The removal of the resale price maintenance system and increased demand coming from younger consumers have led to the decline in consulting sales. Consumers now exercise their own judgment in choosing the products. This has resulted in increased cosmetics sales through mass retailers and direct mail.

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© G&S International Japan 2007. All rights reserved.

Cosmetics in Japan

New

Opportunities

For

Cosmetics

Makers

It is reputed to be very difficult for foreign cosmetics manufacturers to access the Japanese market. Indeed, Japanese companies hold almost 70 percent of their home market, with the leading five manufacturers (Shiseido, Kao, Kanebo Cosmetics, Kose and Pola), accounting for almost 49 percent of total value sales. However, cosmetics imports have steadily progressed during the last decade and a detailed analysis of the Japanese market shows new opportunities for cosmetics makers.

Japan is the third largest cosmetics market after the European Union and the United States. According to the European Cosmetic, Toiletry and Perfumery Association, the Japanese market reached a volume of JPY 2,239 billion in 2004 at manufacturing/ex-factory sale prices (MSP). At retail sale prices (RSP), total cosmetics and toiletries sales grew by 1% to JPY 3,323 billion in 2004, according to estimates. Cosmetics and toiletries have an important penetration rate. Japan is ranked only behind Norway globally in terms of per capita annual sales, with an average of USD 241 spent per person on these products in 2004. Certain cosmetics and toiletries are considered as essential, and consumers remain willing to spend on them even when the economic outlook is poor. Women consider some items as a must during their daily skin care regime, and wearing at least a little make-up when going out remains part of the culture in Japan. The importance of cosmetics in the daily beauty regime of Japanese

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Cosmetics in Japan women, as well as the growing interest of men in grooming products specially formulated for their needs, may explain that although the Japanese economy is experiencing only a rather slow recovery following a lengthy recession, cosmetics and toiletries sales have not been unduly affected by this weak performance. Face and body care products form the main and the most dynamic segment. Skin care products have been growing at an average of 5% each year since 2002. It is also the segment where competition is at the highest levels. The make-up segment has been relatively stable over the recent years, despite a succession of negative and positive years. Hair care products, the third main market segment, have been decreasing constantly since 2000 but just recovered last year. Foreign manufacturers may note with interest that despite their relatively small market share (2 percent of the total) fragrances may constitute a good opportunity for them. Contrary to other segments, the competition from domestic manufacturers is relatively lower. "Major domestic cosmetics companies have historically invested limited effort in fragrances, instead concentrating on other sectors. Japanese manufacturers usually do not have a wide range of fragrances in their portfolio and they usually propose them at prices slightly cheaper than foreign fragrances. Many Japanese consumers strongly associate fragrances to the Western way of life and therefore prefer top foreign fragrance brands. Since the size of the Japanese fragrances market is still very small compared to the domestic cosmetics market, it is costly to create new fragrances exclusively for the Japanese market. More than 95 percent of premium fragrances sold in Japan would be non-domestic brands.

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Cosmetics in Japan

Increased popularity of imported products Since the implementation of the new cosmetics law in 2005 (PAL), the accessibility to the Japanese cosmetic market has greatly improved. Even if incomplete, the regulatory harmonisation with cosmetic rules governing cosmetic products in the European Union allowed to reduce red tape and to decrease administrative costs. As mentioned above, cosmetics imports have steadily progressed during the last decade. According to the U.S. Commercial Service, Japan's imports of cosmetics products increased by 9.4 percent in 2004. The share of imports compared to domestic production, which also includes the production by local subsidies of foreign multinationals, reached 11.3 percent in 2004. According to the Cosmetic Importers Association of Japan, imports of cosmetics products have been progressing at an average rate of 9.5 percent since 2001. Skin care, make-up and hair care products account for 70 percent of these imports. France and the United States are the main foreign suppliers of cosmetic products in Japan. The two countries contribute 60 percent of the total of imports. Other main suppliers are China, Italy, the United Kingdom and Germany. The most recent figures show that the total of imports slightly decreased during the first semester of 2005 compared to 2004. Main suppliers were affected very differently; imports from the US and the UK have decreased by 6.5 percent and 22.4 percent respectively, while France and China progressed.

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Cosmetics in Japan Despite the progress of foreign brands on the Japanese market, it is important to note that while exporting to Japan, foreign cosmetic makers have to cope with the complexity of the Japanese market. Even if the regulations have been simplified, the difference between products classified as cosmetics and those classified as quasi-drugs may turn into a headache for those falling in the latter category. It is also very important not to underestimate the importance of the language and cultural barriers. For instance, Japanese women, as most Asiatic women, consider their skin to be of a very different type than European ones. This is a very important fact to take into consideration, from product development to communication and advertising.

seido-hin and ippan-hin Another impediment is the complexity of distribution channels and business practices in Japan. Retail channels in Japan are usually divided in two main categories: seido-hin (selective/prestige channel) and ippanhin (mass channel). The first category, which includes department stores, voluntary chain stores (franchised stores) and certain high-end chain drugstores, is supplied directly from domestic manufacturers, the subsidiaries of foreign manufacturers or the importer. There are neither wholesalers nor distributors involved and this implies trained local staff to manage sales and logistics. As far as department stores are concerned, they usually only take care of providing space to selected brands. When they install a sales area in a department store, cosmetics companies incur substantial costs. In addition to decoration and other expenses, they also have to shoulder sales staff and advertising costs. These costs and business habits are usually considered an obstacle to the entry of new brands in this channel. 10

© G&S International Japan 2007. All rights reserved.

Cosmetics in Japan On the other hand, the mass channel (ippan-hin) is usually supplied from independent wholesalers. Other retail channels include door-to-door selling, direct selling and sales to professionals. As far as sales results are considered, drugstores perform well and are now the most important distribution channel in the country. Except for make-up, fragrances and skin care, they are leading the distribution of all products in the sector. Large multi-storey drugstores selling complementary products, such as health and diet foods, as well as cosmetics and toiletries and OTC medicines have been replacing small local pharmacies and the fierce competition between the various chains leads to a strong pressure on retail prices. These Japanese chained drugstores are usually located in very convenient places such as next to railway stations and inside large shopping malls. Alternatively, they are located in out-of-town developments with large car parks. Direct sales and door-to-door channels, which used to be the most popular distribution channels for cosmetics and toiletries, continue to see a decline in value share. According to JETRO this is to be explained by a change in social structures. "More women are staying in work after marriage, which is limiting recruitment of the sales personnel needed for door-to-door sales, as well as the number of consumers who are at home when such personnel call. Consumers also prefer to shop at retail outlets such as convenience stores and drugstores, where a wider range of products is available." Department stores have been strongly affected by the competition of chain drugstores, which have extended their offer of certain skin care and make-up items and have benefited from the increasing consumer preference for selfservice, rather than counter-service. "The increasing strength of competing channels makes it unlikely that department stores will increase their share dramatically in the future. The only sector in which department stores will continue to dominate will be fragrances, where there remain very few alternative channels for purchasing premium fragrance brands," forecasts the CIAJ.

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© G&S International Japan 2007. All rights reserved.

Cosmetics in Japan

Main market trends Within the very specific Japanese environment, there are several trends and opportunities to take advantage of for cosmetics makers. Ageing is certainly the strongest characteristic of the Japanese society today. More than 30 percent of the population is over 60 years old already, and the country has one of the most rapidly ageing populations in the world. Ageing is likely to boost sales in certain sectors such as hair dyes (75% of hair colours value sales were accounted for by products to cover grey hair in 2003) or premium skin care products. As in many other countries, Japanese women and a growing proportion of men are ready to pay premium prices for products that can visibly reduce the external signs of ageing. "Developing specialised products targeting middle-aged and older consumers and branding that elevates companies and products above the competition will likely yield successful results, since middle-aged and older consumers in Japan are generally loyal customers who do not easily change from one brand to another." Spas, hot springs and sea therapies are also take advantage from the ageing of the Japanese population. There is a strong traditional habit of sea baths in Japan and baths in volcanic hot water springs are also appreciated for their health benefits. The Japanese government recently proposed financial incentives for the development of activities that could both address health needs of the population and contribute to the development of certain regional areas: hot springs and sea therapies are included in the scheme. In one of its latest reports, also identified as the following trends: - continuing interest for whitening products, as a fair complexion is still perceived as an important aspect of beauty; - decreasing use of lighter tones for bleaching hair; - polarisation of products, with the increased popularity of upper premium at one end, and other consumers (or the same consumers but for other products) more inclined to opt for mass products.

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© G&S International Japan 2007. All rights reserved.

Cosmetics in Japan

Solutions on entering Japan’s market Despite the high potentials of the Japanese cosmetic market, carefully planned and well-chosen strategies to enter the market are obligatory to gain sustainable sales and market shares. In one hand, Japanese cosmetic consumers are known to be quite choosy when selecting a purchase – on the other hand consumers are always heading out for new products and brands, and are constantly on the search for the most innovative, fashionable and new cosmetic item. Entering Japan successfully is mainly an issue of the ability and willingness of the foreign brand and manufacturer to adjust to the Japanese market requirements. Herewith it is important to estimate own strength and ability to perform as required by consumers in Japan. If a clear strategy is set (product range, sales channels, marketing tools e.g.) and the right partners to perform are found, potentially high sales can be achieved importing and marketing a foreign cosmetic brand to Japan on a long-term basis.

Main questions before starting to enter Japan:

Ingredients 1. Are all products conform to the Japanese legal requirements (PAL)? Business Type 2. Set up Japan branch -or- cooperate with a Japan distribution partner? Sales Channels 3. Which channels are most suitable for sales in Japan (retail, hotels, spas, salons, mail order, TV-shopping, internet, door-to-door, others)? After running checks on the import ability of the products (concerning the Pharmaceutical Affairs Law Japan – issued April 2005) to verify eligibility of imports, main issue should be to understand the importance of selecting a strategy on entering the Japan market. Foreign brands usually select within one of the two main possibilities: (A) importing through an importer / distributor or (B) establishing a Japan branch with Japanese staff. Both strategies include pro and contra points.

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Cosmetics in Japan

Japan Branch/ Flagship-Store

Japan Distribution Partner

Pro

Pro

 

ability to lead brand strategy in Japan higher profit margins Japan business

Contra  

 

lower initial business cost use of existing client base of JP partner

Contra

higher initial business cost longer market development period

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copyright protection issue JP partner’s in-house competing brands

After selecting the most suitable strategy for the foreign manufacturer, a sales-channel and sales-performance-goal plan for the first 3 years time of Japan distribution should be developed and discussed intern / with the Japan partner. Here again, strong and less strong points of the brand and its products concerning the ‘Japanese consumer taste’ should be fundamental within the strategically thinking and project planning. After the initial period, the manufacturer will register its products through its Japan branch / with its Japan partner and start sales through eligible venues in the Japan market. Also, media and advertisement agencies will be contacted through the manufacturers Japan branch / the Japan partner to start effective campaigns - increasing annual sales in Japan and developing steadily a well-known brand name and image among Japanese consumers.

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© G&S International Japan 2007. All rights reserved.

Cosmetics in Japan

Report References & Editors

JETRO Japan External Trade Organization TTC Tokyo Trade Center MHLW Ministry of Health, Labor and Welfare METI Ministry of Economy, Trade and Industry CIAJ Cosmetic Importers Association Japan JCIA Japan Cosmetic Industry Association JSCA Japan Cosmetic Supplier Association JPMA Japan Pharmaceutical Manufacturers Association JPWA Japan Pharmaceutical Wholesalers Association

G&S INT. LTD.

Mr. Takahashi

6-4-13 Soshigaya

G&S International Japan Representation

Tokyo Setagaya-ku

Phone +81-80-5519-1260

157-0072 Japan

Email [email protected] Web www.gs-int-ltd.com

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© G&S International Japan 2007. All rights reserved.