1. In The Eye Of
    The Beholder

    Investing in Japanese Cosmetic Companies

    Fourth Quarter 2019
  2. The Japanese spend more per person on skincare and cosmetics than any other country. Praveen Kumar, manager of the Baillie Gifford Shin Nippon Investment Trust, tells Gillian Christie what is different about Japanese cosmetic companies.

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    Marie Kondo, the Japanese decluttering expert, would have us scrutinise every object we own and keep only those that “spark joy”. For her, this is generally items with a simple design and a high degree of functionality. Similarly, Asian consumers prefer skincare products that are functional, natural and of the highest quality. So, I start by asking Praveen why the Japanese cosmetic companies spark joy for him as an investor?

    “These are businesses that are exposed to structurally growing markets, markets that can sustain at least five to ten years’ worth of growth.” And, specific to the cosmetic companies he likes: “They have a track record of developing hit products that are functional and target specific skincare conditions. More importantly, [these are] companies that have come up with a differentiated way of marketing and distribution.”

    Japanese consumers know what they want: “They have this intense focus on all things natural, so companies are not afraid of using some unusual ingredients in order to develop unique and innovative products.” But is human placenta not a step too far? He disagrees: “Japanese companies aren’t afraid to push the boundaries, that’s one reason why they’ve been so successful at coming up with innovative products. A lot of people might recoil at the thought of wearing a mask made out of placenta, but it’s in one of the most popular products in Asia.”



    For marketing purposes, aesthetics and functionality reinforce one another: “There is quite a big functional aspect to a lot of these cosmetic products, and consumers know that, and consumers want exactly that. What this means is instead of models you have wonderful packaging.” Marie Kondo would approve, I am sure, when he says: “They believe the packaging needs to be really good, really sophisticated.”

    While the Japanese already spend more per person on skincare and cosmetics than any other country, further growth is possible: “In Asia, there is growing recognition of taking pride in one’s appearance. This is a natural consequence of strong economic growth that has resulted in rising levels of wealth and disposable incomes, especially amongst the middle class. This is true not just of women but also for men and interestingly, in some major markets, the male grooming sector, albeit from a smaller base, is growing much faster than the female segment.”

    Kitanotatsujin Corporation’s Hyalo Deep Patch is an example of a high-tech product that smooths lines around the eyes – a popular choice with middle aged and older men in Japan. For Praveen, it illustrates the potential for Japanese companies to be leading players in the male grooming market globally, because of both: “the expertise that the Japanese cosmetics companies have developed in terms of producing functional products,” and the fact that: “they have a very good hold on the tastes of the Asian consumer – and obviously Asia counts for a vast chunk of the global population.”

  3. “There is quite a big functional aspect to a lot of these cosmetic products, and consumers know that, and consumers want exactly that.
    What this means is instead of models you have wonderful packaging.”
  4. With recognition of Japanese brands and tourism to Japan growing year-on-year, Asian consumers are prepared to pay a premium for ‘Made in Japan’. “One of the items where most of the money is spent when tourists come to Japan is cosmetics,” he notes. “There is an acceptance that Japanese cosmetics usually mean really high quality, functional products. Also, they are natural, so you can rest assured that they do what they say on the tin.”

    Consumer behaviour is changing: “People are increasingly relying on feedback from other users, mostly on social media platforms, and then deciding what cosmetics to buy. Especially among the younger generation of women, people are happier to shop for cosmetics online, again, relying on user feedback.” Therefore, the cosmetic businesses that Praveen likes are those that have tailored their business models to take advantage of online sales channels and/or that “identify a common skin condition and then try and work out whether there is a way they can solve this based on the technologies and the products they already have.”

    Praveen summarises the Japanese cosmetic companies’ investment potential as: “they have a good, solid track record of product innovation. Some companies also seem to have quite a unique business model in terms of how they market and distribute these products. And, from an investment perspective, cosmetics companies in general tend to be a lot more resilient to economic shocks.” No wonder then that Japanese cosmetic companies should spark joy for Praveen.


    Praveen Kumar was in conversation with Gillian Christie, a member of Baillie Gifford’s Intellectual Capital team. To hear more on the subject from Praveen, listen to the latest episode in Baillie Gifford’s podcast series Short Briefings on Long Term Thinking at bailliegifford.com/podcasts


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