Click to read the original article for details Kao is Japan's largest daily chemical producer and second-largest cosmetics manufacturer, founded in 1887. Its business covers 33 countries and regions, with subsidiaries in 18 countries. Its main business is divided into four segments: beauty care products, health care products, fabric and home care products, and industrial chemicals. In 2015, Kao Group's revenue was 88.3 billion RMB (calculated at the end-2016 exchange rate), with a market cap of 167.1 billion RMB at the end of 2016, and a TEV/2015 Total Revenue of 1.8. Industry Overview: Japan's daily necessities industry is categorized as follows. Kao's brand products cover daily sundries, body care, oral care, skin care, cosmetics, and hair care categories. (Source: Ministry of Internal Affairs and Communications, Japan Industrial Classification) The daily necessities industry is highly competitive. Due to an aging population, declining birthrate, and changing consumer awareness, domestic demand in Japan is shrinking. In recent years, the market size growth has slowed: in 2014, the daily necessities market was 300 billion RMB; in 2015, it was 305.6 billion RMB, with a growth rate of only 1.9%. The three giants in the daily necessities industry are Kao, Unicharm, and Lion. Kao's revenue is almost double that of the second-place Unicharm. (Source: Annual reports of each company) Growth Path: Kao Corporation was founded in 1887, originally as a Western goods store called "Nagase Shoten" (Kao Soap), selling American cosmetic soaps, Japanese domestic soaps, and imported stationery. The founder was Tomiro Nagase. Despite being a century-old brand, Kao places great emphasis on R&D and innovation. The R&D center is the core department of the Kao Group, encompassing basic research, product development research, and consumer research. Among its more than 6,000 employees, over one-third are R&D personnel. In 2015, R&D expenses were 3.12 billion RMB, consistently accounting for about 4% of total costs, higher than peers such as L'Oréal, Procter & Gamble, and Unilever. Kao in China: After entering the Chinese market in 1993, Kao suffered consecutive losses. At that time, the goal was to sell in 650 cities, but after 17 years in China, it had only developed a sales network in 90 cities. After 20 years of painstaking efforts in China, Kao finally decided to change its strategy and seek channel cooperation with local enterprises. Starting in 2011, Kao shifted its business strategy in other Asian countries. In the Chinese market, this manifested as: 1. Strategic cooperation with Shanghai Jahwa, a leading local daily chemical company, aiming to leverage Jahwa's nationwide distribution network. The two parties signed a sales cooperation agreement through their respective subsidiaries, Shanghai Jahwa Sales Co., Ltd. and Kao (Shanghai) Product Services Co., Ltd. The former was responsible for acting as the offline wholesale distribution channel for Kao's diapers, sanitary napkins, and laundry detergent. Within just one year, Kao achieved a 20% sales increase compared to 2011. The cooperation ended in 2016, but during the five-year cooperation period, Kao (China) consumer products business sales grew from 900 million RMB in 2012 to over 3 billion RMB in 2015, achieving 200% growth. 2. To adapt to a broader consumer base in China, in 2013, Kao invested in a production base in Hefei, which began production. Different from the Japanese market's focus on skin care, the domestic Kao products emphasize absorbency and breathability, shifting from high-end positioning to mid-end positioning to cover more consumers and markets beyond first-tier cities. 3. Kao is experimenting with new technologies in China and developing new products for the Chinese market. In 2015, Kao Japan formed a strategic partnership with Tmall Global, marking its first deployment in the Chinese market through cross-border e-commerce, fully introducing Kao diapers and other maternal and infant product lines. Business Analysis: Kao's consumer products business has over 60 brands and more than 1,300 SKUs, covering skin care, bathing, oral care, men's, home cleaning, pet, diapers, sanitary products, and other categories. In 2006, it acquired Kanebo, Japan's second-largest cosmetics company. Currently, Kanebo brands sold in mainland China include Impress, LUNASOL, AQUA, COFFRET D'OR, freeplus, and the open-shelf makeup brand KATE. Most of Kao's own brands are high-molecular chemical products. After years of honest operation, Kao China has established numerous high-quality brands, including Attack, Bioré, Curél, Feather, Laurier, Merries, Sifoné, Sofina, Kanebo, and ASIENCE. (Source: Kao Japan official website) Star Product Revenue: Merries diapers generate approximately 6 billion RMB. Kao's diaper market share in China rose from 3% in 2012 to 10% in 2015. Attack and Bioré together generate 5.4 billion RMB, with Attack's total sales in China around 500 million RMB, accounting for 1%. Kao has always strictly controlled its authorized channels. Even in Japan, Kao diapers are in short supply; Japanese mothers must present their baby's birth certificate to purchase limited quantities. Zhang Jianfeng, President of Alibaba Group's China Retail Business, stated that Kao enjoys a reputation as a "hard currency" in imported diapers in the Chinese market, and that strong overseas brands have absolute appeal to Chinese consumers. (Source: China Industry Information Network) For Kao, developing a new product requires meeting five principles: 1. Benefit to society: the product should be genuinely useful to society; 2. Creativity: it must contain creative technology; 3. Performance by cost: cost-performance must be superior to competitors; 4. Thorough research; 5. Distribution adaptability: ensure that product features are communicated to consumers at all distribution stages. These five principles determine Kao's product competitiveness and have created many classic brands in consumers' minds. Revenue Situation: As of the end of 2015, Kao Group's sales revenue was 88.3 billion RMB, with net profit of 6 billion RMB. Among this, beauty care products accounted for 36.46 billion RMB, health care products 16.84 billion RMB, and fabric and home care products 20.06 billion RMB, with these three segments accounting for over 83% of revenue. (Source: Kao annual report) Kao Corporation's revenue in Japan was 55.38 billion RMB, contributing over 62%. Other Asian countries contributed 12.2%, with the fastest year-on-year growth of 27.8%. Kao Group began expanding overseas as early as 1964, and after more than 50 years, overseas business still only accounts for 30-40% of the group's business. Expanding overseas markets has become one of Kao's key tasks. Since 2012, it has cooperated with local companies in other Asian countries to accelerate product penetration and scale growth, achieving rapid development in consumer products in China, Indonesia, and Vietnam. (Source: Kao annual report) Kao's Future Growth Strategy: 1. Expand overseas consumer products business In Asian and emerging markets, significant growth is expected in the future. The group will target "middle-income groups" as its target consumers, focusing on cleaning products such as laundry detergents, baby diapers, and sanitary products, leveraging the company's advanced technology to expand its business. In mature markets like Europe and the US, it will focus on developing beauty care business through high-value-added products. 2. Solidify fabric and home care business, accelerate profit growth in beauty care and health care As the largest profit source, the fabric and home care business will further strengthen its leading position in various sub-segments. In beauty care, the company will develop mid-to-high-end cosmetics. At the same time, it will seek further development in health care business by focusing on health and aging. 3. Strengthen chemicals business Through environmentally friendly innovation, seek leapfrog development in eco-friendly chemicals business, while strengthening synergy between the chemicals business and consumer products business. -END-