Case Study: Shiseido: Channeling Cosmetics in China

Introduction

Shiseido, the largest Japan’s cosmetic manufacturer, was founded by Arinobu Fukuhara

in 1872 when he opened Japan’s first Western-style pharmacy called Shiseido

Pharmacy in Tokyo. The company manufactured its own pharmaceutical products in

1878 before later moving to cosmetics in which it combined Western technology with

Asian ingredients. In 1923, Shiseido started a voluntary chain store system where the

stores were operated by independent owners. The store provided exclusive retail space

for Shiseido while the products were sold through consultative selling by trained staff

provided by Shiseido.

Shiseido established thousands of stores in Japan and remained the market leader

despite high competition from Western cosmetic companies. The company expended to

Taiwan, Singapore, Hong Kong, Hawaii and Italy in 1957. In 1980 it entered Germany

by setting up a wholly owned subsidiary. That was followed by Great Britain in 1986 and

France in 1990. In 1988 Shiseido entered the United States by acquiring Zotos

International and other foreign brands. For Shiseido oversea business was the key

driver for growth as shown in 2005 when foreign sales was 27 percent of the company’s

total sales.

Question 1

a) What are the functions performed by the distribution channels in

cosmetic products?

Distribution channels are a set of interdependent organizations involved in the

process of making a product or service available for use or consumption (Kotler,

P.,Keller, K. L., Ang, S. H., Leong, S. M. & Tan, C. T. (2009)). In the cosmetic industry,

the functions of distribution channels can be summarized as follows;

1. Provide exclusive retail space for the products.

2. Sell the products through consultative selling by trained staff.

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3. Act as information media which transmit the latest beauty information

including knowledge about skincare, fashion, and hair style trends.

4. Provide equipment to diagnose the customer’s skin condition scientifically.

5. Gather information about potential and current customers, competitors, and

other actors and forcers in the marketing environment.

6. Develop and disseminate persuasive communications to stimulate purchase.

7. Reach agreement on price and other terms so that transfer of ownership or

possession can be effected.

8. Place orders with manufacturers.

9. Acquire the funds to finance inventories at different levels in the marketing

channel.

10.Assume risk connected with carrying out channel work.

11.Provide for the successive storage and movement of physical products.

12.Provide for buyers’ payment of their bills through banks and other financial

institutions.

13.Oversee actual transfer of ownership from one organization or person to

another.

Question 1

b. How are some of these functions performed in Shiseido’s operation

in China?

The functions performed in Shiseido’s operation in China through the following channels;

1. Introduction of products at tax-free department stores and hotels in Beijing in

1981.

2. A technology cooperation agreement that manufactured shampoo and

conditioners in China under the brand name HuaZi in 1983.

3. A joint venture company, Shiseido Liyuan Cosmetic Company (SLC) in 1991.

●Joint venture between Shiseido and local company Liyuan Corporation, a state-

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owned enterprise.

●SLC developed a cosmetic brand only for Chinese consumers named

Aupres.Shiseido name was put in front, below the Aupes name.

●The brand was advertised in magazines and television featured local models.

4. A joint venture company, Shanghai Zotos CITIC Cosmetic Company (SZC)

in 1998.

● Joint venture between Shiseido and China International Trust and Investment

Corporation (CITIC).

●SZC produced medium-priced cosmetic brands such as Za, Pure Mild China,

UNO, ASPLIR, WHITIA and SELFIT.

● Sold them at special sales corners in department stores and at cosmetic

specialty stores through wholesalers.

5. A Japan-based subsidiary FT Shiseido Company Limited in 2003

●Sold its high-end toiletries by importing them directly from Japan.

6. Duplicate its successful Japanese voluntary specialty chain stores concept in

China in 2003.

7. Engage privately managed cosmetic stores to sell its products under SLC.

8. Started a holding company, Shiseido China Company Limited in 2004 to

support and oversee all businesses in China.

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Question 2

a. What are the advantages and disadvantages of selling cosmetic

products through door –to-door selling, specialty stores, department

store counters, and supermarkets and hypermarkets?

1. Door-to-door Selling

Door-to door selling is the most traditional form of direct marketing channel. It is a zero-

level channel where the manufacturer sells directly to the final customers. There are

many advantages and disadvantages of selling cosmetic products through door-to-door

selling as shown in the following table;

Table 1. Advantages and Disadvantages of Door-to-door Selling

Distributio

n ChannelAdvantages

Door-to-

door selling

Manufacturers’ View:

1. The promoting/ sales representatives can explain and

even demonstrate complex products.

2. The profit or loss will be a lot of accurately judged.

3. There is opportunity to learn more about individual

consumers, their lifestyle and consumption behavior

so that company can respond with market offerings to

their need.

4. Potential sales representatives are easily available

every time and everywhere.

5. It builds long-term personal relationship so that will

reduce selling cost.

Customers’ View:

1. It offers good value to customers as there is no price

hike due to wholesalers or retailers.

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2. It id convenience to customers as the products would

be brought right to door step , and easy to bring other

individuals who need to be involved.

3. It allows the customers to try the products in privacy.

4. The customers can ask questions and get advice in a

relaxed environment.

Sales Representatives’ View:

1. It encourages and creates business opportunities and

activities thus improve local economy.

2. Initial distributors’ cost is cheap.

3. Creates job opportunities.

4. Flexible working schedule

5. Sales representative can excess to training and

support.

Distributio

n ChannelDisadvantages

Door-to-

door selling

Manufacturers’ View:

1. It offends some purchasers who do not endorse it as

they are saying it inhibits their private lives.

2. The company needs to well-train sales representatives.

3. Sales representatives turnovers are high.

4. This type of business is highly competitive.

5. Sales persons do not support company strategy or

unethical.

6. Lower initial commitment because of not career of

choice.

7. Seles persons cannot be monitored and managed

closely, especially in network direct-selling

organization.

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Sales Representatives’ View:

1. Salesperson travelling time and cost could be

significant.

2. Trapped in fraud of pyramid selling schemes.

3. Unsolicited visits could be viewed with suspicion.

4. Promoting this type of business can be very time

consuming

5. This type of business is highly competitive

6. Will get quite a bit of rejection before finding people

who will buy what you have to offer

7. Must good in training and management skills to build

net working.

2. Specialty Stores

In cosmetic business, specialty store is a small store specialized in a particular

brand of cosmetic products and related items. The store has an extensive numbers

and variety of the particular brand products that it specialized in. It also provides

well-trained staff from the product brand company. The staff role is as a beauty

consultant who fully responds to question about the products and skin problem. The

store also installs skin analyzers to diagnose the customers’ skin condition

scientifically. From producers’ point of view, cosmetic specialty stores have many

advantages. Shiseido has implemented this marketing channel system in Japan

since 1923 and it has expended the system throughout the whole countries where it

does its operation. The following tables show the advantages and disadvantage of

specialty stores in selling cosmetic products.

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Table 2. Advantages and disadvantages of Specialty Stores

Distributio

n ChannelAdvantages

Specialty

Stores Manufacturers’ Views:

1. Increase sales through well-trained personnel to assist

and inform customers about the products.

2. The high quality service help to build brand loyalty to

the company.

3. Products can be sold at relatively higher prices. The

target consumers are willing to pay the higher price for

the good services.

4. Value added services such as beauty consultation and

customer skin analysis and diagnosis.

5. All products under a particular brand are available.

6. Targeted market segments are huge.

Distributio

n ChannelDisadvantages

Specialty

Stores Manufacturers’ Views:

1. Need to well-train staff as the beauty and sale

consultants.

3. Department Store Counters

A department store counter is a display case in a department store where products can

be shown to the customers. The display case is located at designated areas within the

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department store. Cosmetics sold here are often high-end products. Usually, well-

trained beauty advisors will be there to assist customers with the products. The

following table show the advantages and disadvantages of selling cosmetics through

this distribution channel.

Table 3. Advantages and disadvantages of Department Store Counters

Distributio

n ChannelAdvantages

Department

Store

Counters

Customers’ View:

1. Customers have many product choices. Large range of

goods.

2. Convenience for customers all segments of customers

3. Cheaper prices because of bulk of buying by the

stores.

Distributio

n ChannelDisadvantages

Department

Store

Counters

Manufacturers’ View:

1. Manufacturers may be asked to pay ‘slotting fees’ to

the stores as payment for guaranteed shelf space for

particular products.

2. Competitions are high from other brands.

3. Manufacturers need to advertise heavily for new

products as the stores prefer to sell established

products.

Customers’ View:

1. Low quality service. Normally, department stores don’t

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have well-trained staff to assist the customers.

4. Supermarkets and Hypermarkets

Supermarket is a large retail market that sells a variety of products such as food,

other household goods and cosmetics. In Ipoh for example, there are many

supermarkets such as Ocean and Giant. Hypermarket is the combination of

department store and supermarket as we can see from Tesco and Wall Mart. There

are many advantages and disadvantages of selling cosmetics through this channel

as shown in the following table;

Table4. Advantages and Disadvantages of Supermarkets and Hypermarkets

Distribution

ChannelAdvantages

Supermarket

s and

Hypermarkets

Manufacturers’ View:

1. Sales volume is high because customers buy in bulk.

2. Number of potential customers are huge because a lot

of people come to supermarkets or hypermarkets to

buy household items.

Customers’ View:

1. Price is cheap because the retailers buy in bulk.

2. It is convenient as cosmetics can be purchased while

buying household products.

Distribution

ChannelDisadvantages

Supermarket

s and

Hypermarkets

Manufacturers’ View:

1. Manufacturers may be asked to pay ‘slotting fees’ to

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the stores as payment for guaranteed shelf space for

particular products.

2. Competitions are high from other brands.

3. Manufacturers need to advertise heavily for new

products as the stores prefer to sell established

products.

Customers’ View:

1. Lack of service and sometimes no well-trained staff.

Question 2

b. How will the use of these channels vary with target market segments and brand strategies?

The choice of which marketing channels to use is essential to manufacturer as it

provides a mean for the firm to implement its marketing strategy. The marketing

strategy is derived from the target market segments and brand strategy of the firm.

Therefore, the choice of marketing channels will have to depend on the target market

segments and the brand strategies.

Target Market Segments

When deciding on the marketing channel, a manufacturer has to consider which

intermediaries can best reach out to the firm’s target market segments and satisfy their

purchasing requirements. Therefore, the use of the channels varies depending on the

target market segments of the company. The following table show how the channel use

varies with target market segments.

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Table 5. Target Market Segments and Marketing Channels

Segmentations Target Market Segments Marketing Channels Used

Geographic City , urban and suburban, all

countries except those involved

in wars, middle east, certain

African countries. Any climate

Door-to-door selling,

Specialty stores,

Department store counters,

Supermarkets and

Hypermarkets.

Demographic Medium income, middle class Door-to-door selling,

Specialty stores,

Department store counters,

Supermarkets and

Hypermarkets.

High income; professionals,

managers, executives,

businesspeople, upper class

Specialty stores,

Department store counter

Psychographic Innovators, thinkers, achievers

and experiencers.

Door-to-door selling,

Specialty stores,

Department store counters

Behavioral Regular occasion and special

occasion; quality, service and

speed; regular user, potential

user and first-timer; medium

user and heavy user; medium,

strong and absolute loyalty

status; informed, interested,

desirous and intended to buy;

enthusiastic and positive toward

Door-to-door selling,

Specialty stores,

Department store counters,

Supermarkets and

Hypermarkets.

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Brand Strategies

A company brand strategy is another factor to consider in choosing marketing channels.

In order the strategy to be effective, right marketing channels should be applied. A firm

can employ various branding strategies such as individual product names, blanket

family names, separate family names for all products and corporate name combined

with individual product names. The following table shows how the use of channels

varies with the firm brand strategies.

Table 6. Brand Strategies and Marketing Channels

Brand StrategiesMarketing Channels

Used

1. Individual names

The products are given individual

names . Example: Procter &

Gamble

(Head & Shoulders, Pantene,

Rejoice)

Department store counters,

Supermarkets and

Hypermarkets.

2. Blanket family names

Example :Hitachi

Door-to-door selling,

Specialty stores,

Department store counters,

Supermarkets and

Hypermarkets.

3. Separate family names for all

products

Example: Matsushita (Panasonic

for audio-visual products and

National for household good)

Door-to-door selling,

Specialty Stores,

Department store counters,

Supermarkets and

Hypermarkets.

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4. Corporate name combined with

individual product names.

Example: Sony (Sony Bravia,

SonyWalkman, Sony Playstation)

Door-to-door selling,

Specialty Stores,

Department store counters,

Supermarkets and

Hypermarkets.

Question 3

a. Why is Shiseido using voluntary specialty chain stores, besides

their counters at department stores?

Shiseido is using voluntarily specialty stores besides their counters at department stores

because of a few reasons. Firstly, the specialty chain store system has many

advantages as discussed in previous question. The company will increase the sales

through the service of the well-trained consultants that consult and assist the

customers. The quality service in the specialty stores also will help to build brand loyalty

to the company. In the stores products can be sold at relatively higher prices and

consumers are willing to pay the higher price for the good services.

Secondly, the system also fit very well with company’s targeted market segments. Due

to economic liberalization, China has produced bigger segments of middle class and

upper class consumers. As a result, the cosmetic market is growing drastically from

US$1.5 billions in 2006 to US$2.3 billions in 2009. About 90 million women in urban

areas are willing to spend 10 percent of their income on beauty products. In order to

cater these consumer groups, Shiseido has to use another retail channel.

Furthermore, the system also fit well with the company’s brand strategies. Shiseido

uses multi brand strategies and the strategies need various right channel to perform.

Shiseido products are in growth stage while the brand name is already positioned well

in China markets. So, the specialty store system will help to maximize company’s

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revenue and profit. With the number of privately managed cosmetic stores is raising in

China, Shiseido see it as an opportunity to use the retail channel which is successful in

Japan. The use of the channel not only will improve its sales but also reduce

competition from other manufacturers as the privately managed stores might be used by

its competitors.

It was Shiseido’s strategic objective to use the voluntary specialty chain stores as its

channel because the channel was proven successful in Japan. However, there are a

few factors that prevent the company from using the channel earlier.

1. Development of infrastructure in China

Same as many Asia’s emerging markets, China also lack organized, centralized

delivery and transportation network. Often, goods are not handled according to

internationally accepted standard. Therefore, Shiseido distribution channel model

had been drawn based on the development of infrastructure in China.

2. Legal regulations and restrictions

As China practiced Socialist Communist doing business in the country would

face a lot of restriction and regulation. This could be seen when Shiseido first

entering the China market where it could only sold its products in department

stores and hotel, and only elite customers and foreigners were allowed to buy the

products. Later on, Shiseido was allowed to open a joint venture company, but

only with the state-owned enterprises. Only after a few years Shiseido was

allowed to open its own subsidiary in China.

3. Consumers lifestyle and population density

At the earlier stage when Shiseido entered the China market, consumers lifestyle

and preference were different. They rallied on Chinese herbal cosmetics. They

were not familiar with Western cosmetics. Later on they had changed after

Shiseido introduced its products to them, educated and consulted them with the

products, and manufactured the products locally of imported them from Japan.

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Question 3

b. What are advantages and disadvantages of each retail channel?

The advantages and disadvantages of the retail channels can be summarized in the

following table.

Table 7. Advantages and disadvantages of Department Stores and Specialty

Stores

Distribution Channels

Department Store

Counters

Specialty Stores

Advantages For customers

1. Customers have

many product

choices. Large

range of goods.

2. Convenience for

customers all

segments of

customers

3. Cheaper prices

because

of bulk of buying by

the stores.

For Manufacturers

1. Have well-trained personnel

to assist and inform

customers about the

products.

2. The high quality service help

to build brand loyalty to the

company.

3. Products can be sold at

relatively higher prices. The

target consumers are willing

to pay the higher price for the

good services.

4. Value added services such

as beauty consultation and

customer skin analysis and

diagnosis.

5. All products under a

particular brand are

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available.

Distribution Channels

Department Store Counters Specialty Stores

Disadvantage

s

For Manufacturers

1. Manufacturers may be

asked to pay ‘slotting fees’

to the stores as payment

for guaranteed shelf space

for particular products.

2. Competitions are high

from other brands.

3. Manufacturers need to

advertise heavily for new

products as the stores

prefer to sell established

products.

For Customers

1. Low quality service.

Normally, department

stores don’t have well-

trained staff to assist the

customers.

Manufacturers’

Views:

1. Need to well-train

staff.

Question 3

c. Which area should the company emphasize?

The company should emphasize in using voluntary specialty chain stores in urban

areas.

1. The products are in growth stage, so company will maximize profits.

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2. The cosmetics market is growing drastically ( from US$1.5 billions in 2006 to

US$2.3 billions in 2009).

3. Sizes of target segments are growing (Economic liberalization produces many

upper class and middle class consumers).

4. The brand name is already positioned in China markets

5. Competitions is getting higher.

Conclusion

Shiseido has used various market channels to penetrate its products in China due to

many constrains it has faced. With right channels supported by right strategic

objectives, brand strategies and marketing strategies, Shiseido will be successful in

China.

Source: Kotler, P.,Keller, K. L., Ang, S. H., Leong, S. M. & Tan, C. T. (2009)

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