Structural Reforms and Strategic Diversification: The Kao Corporation Story

Structural Reforms and Strategic Diversification: The Kao Corporation Story

Staring Down the Barrel: Business Challenges for Kao Corporation

Kao Corporation, a Japanese consumer goods giant, is currently grappling with a challenging business environment. The leading personal care and household product company has been witnessing a decline in its business performance, primarily due to the underperformance of its overseas operations. This trend has led to a significant decrease in its market capitalization, thus putting the corporation in a difficult situation in the face of stiff competition from rivals such as Unicharm Corporation.

In response to these challenges, the company is considering implementing a comprehensive structural reform, which might include selling off its cosmetics brand. The urgency of the situation was underscored by Board Director Tetsu Nishiguchi during a briefing held recently where he emphasized the immediate need for Kao to transform its operations.

Mounting Financial Headwinds and the Need for Transformation

With increasing financial pressures, Kao Corporation is exploring the possibility of paring down its extensive portfolio. This move is seen as a strategic response to the mounting financial headwinds that have been jeopardizing the group’s performance. In a recent presentation to analysts and other market watchers, director Toru Nishiguchi underscored the necessity of urgent transformation as the most crucial step forward for the company.

While Kao Corporation is grappling with these challenges, it remains committed to its sustainability goals. The company aims to make a positive contribution to society and the planet, despite the pressing business difficulties it is facing.

Performance Analysis: The Hits and Misses

The company’s financial performance has been marred by several factors. For instance, the rising prices of raw materials have led to a slump in income in its half-year 2022 results. Additionally, the emergence of new Covid-19 variants, exchange rate fluctuations, and political disruptions like Russia’s invasion of Ukraine have further affected business operations. Consequently, Kao’s operating income decreased by 23.9%, and net income slipped by 25.6%.

However, it is worth noting that Kao’s consumer products business, which includes cosmetics and personal care, performed relatively better, marking a 2.3% increase in sales. The sales for Kao’s cosmetics arm also saw an upward trajectory, with a rise of 4.9% due to new product launches from global beauty businesses such as G11, the prestige skin care and make-up brand SUQQU, and make-up company Kate. These brands also witnessed significant sales growth in Europe.

Facing the Future: Strategic Reforms and Expansions

Despite the challenging circumstances, Kao Corporation remains steadfast in advancing its management strategy. The company is actively working on brand management reform, adjustments to selling prices, and capital allocation policy. However, the consumer products category performance varied across different geographical locations, with Japan marking a decline in sales by 1.4%, while sales in Asia and the US recorded an increase.

The company also revealed its plan to divest or discontinue 13 more cosmetics brands by 2024. This strategic move aims to allow Kao to allocate investment towards growth-driver brands and regional strategy brands. It is part of a larger plan, where Kao scheduled 28 brands for discontinuation, with 15 already been discontinued.

Alongside these structural reforms, Kao Corporation is also planning to expand its digital capabilities. The company established the DX Co-Creation Centre earlier this year to accelerate its shift to e-commerce. This move is seen as crucial in adapting to the changing market trends and consumer behaviors.

Final Words: Aiming for a High-Growth Trajectory

Despite facing several challenges, Kao Corporation is determined to get back on a high-growth trajectory. The company aims to bring its cosmetics business back to its pre-pandemic levels by 2023. To achieve this, Kao is engaging in structural reform, increasing marketing spend, and working towards reducing the cost of goods sold and fixed costs. Through these strategic measures, the company hopes to navigate its current difficulties and secure a bright future for its business.