Kao has laid out a long-term plan to guide its growth through 2030, aimed at heightening its global presence and achieving JPY 2.5 trillion in sales with a 16% profit margin. The top-line target, implying 6.1% CAGR through 2030, looks challenging. Prospects of the newly established precision healthcare business look uncertain, given no precedent of product/service offerings to predict success. In contrast, the margin goal seems viable, given room to boost profitability of cosmetics and restore growth trajectory as well as margins of the baby diaper business. Its innovation endeavors and growth outlook of China and precision healthcare will play crucial roles in accelerating group growth, in our view.
The COVID-19 setback has eliminated efforts for reviving cosmetics growth, sending cosmetics profit margins back to 1% from the low teens achieved in 2019. Kao rolled out a new restructuring plan in 2021, targeting 15% profit margin by 2025 by boosting marketing investment funded by savings from cost cuts and an improved mix. The cost cutting initiatives, including integration of two business units managing beauty advisors and reduction in makeup product disposal, seem plausible. Meanwhile, it has accelerated expansion overseas, entering China’s travel retail market. Ramping up presence in prestige skincare— key to tapping China’s fast-growing luxury beauty care market–is urgent, but likely arduous. Skincare, including hand hygiene and sun protection, as areas where Kao stands a good chance of capturing rising consumption in Asia.
Product innovations, underpinned by Kao’s research and development capabilities in chemicals, will allow it to combat shrinking demand in its home market. Apart from Bio IOS, a surfactant using sustainable palm kernel pulp, and Fine Fiber, a novel technology for applying skincare, it launched My Kirei by Kao, the first attempt under new environmental, social, and governance strategies of the Kirei (“clean and beautiful” in Japanese) lifestyle plan, to cater to the growing need for ethical goods. Reducing plastic usage by developing products in 100% recyclable packaging by 2030 is one of Kao’s major ESG ambitions.
Opportunities:
- Expansion into prestige skincare and removal of beauty consultants from domestic mid-priced brands should help lift cosmetics profit margins and increase chances to accelerate growth in China.
- The new precision healthcare business would allow Kao to create its own ecosystem and further strengthens its product development capability with data collected from a broader customer base.
- The pandemic has changed Asia consumers’ hygiene habits, which creates opportunities for Kao to introduce handwash and sanitizer products into the existing Asia markets.