Weather woes: Kao Crop reports lower than expected 1H results due to ‘severe market environment’

06-Aug-2019 - Last updated on 06-Aug-2019 at 01:49 GMT

Kao Corporation has recorded lower than anticipated first-half results.

Kao Corporation has recorded lower than anticipated first-half results, with the firm placing the blame with factors such as adverse weather in Japan, stiff competition and lower consumption.

The company’s net sales decreased 1% compared to the previous year to Y721.4bn ($6.8bn). On a like-for-like basis, net sales decreased 0.2%. Operating income declined 4.8% to Y86.4bn.

The group’s consumer products business, which also includes cosmetics, skin care and hair care, saw sales increase of 1.3% to ¥595.9bn ($5.6bn). On a like-for-like basis, sales increased by 2%.

A mixed bag

Kao’s cosmetics business enjoyed strong sales, increasing 9.3% and 10.3% like-for-like. Operating income grew ¥7.4bn ($69.2m) to ¥14.7bn ($137.6m) due to the stellar performance of its brands.

Brands under Kao’s G11 portfolio, such as Sensai, Kanebo, KATE and Curél, performed strongly.

The company noted that sales of Curél and freeplus were especially strong in Japan and China and the brands grew approximately 30% and 50% respectively.

The growth of the cosmetics business was also attributed to the group’s enhanced activities in e-commerce and travel retail, as well as it efforts in digital marketing.

However, skin care and hair care was affected by market contraction attributed to adverse weather conditions.

Skin care and hair care sales dipped by 1.3% and 0.6% like-for-like. Operating income increased by Y300m due to effective use of expenses, said the company.

Kao launched a range of improved UV care products under the Biore brand, which increased sales and market share. However, the sales were lower than anticipated due to the adverse weather conditions in Japan.

Skin care sales remained steady in Asia but was affected by stiff competition in the Americas.

Michitaka Sawada, president and CEO, believes skin care sales were sluggish due to other external factors such as traffic restrictions during the G20 meetings in Osaka, as well as the ongoing demonstrations in Hong Kong.

“Resolution of the issue is yet to be seen but I hope it settles down soon. That is starting to have an impact by a few percentage points on sales,” said Sawada.

Kao attributed the decline of hair care sales to a shrinking mass market. However, it noted that sales for its hair colour products and Oribe remained strong.

Taking measures

According to Sawada, the business was trending positively in April and May before dipping in June, which saw adverse weather conditions in Japan and causing a drop in sales of products such as sun care and deodorants.

He added that expenses also increased in June, which affected its profit. However, he believes those expenses will have a positive impact on the company’s third quarter.

“Of course there are other reasons for this decline as well,” added Sawada. “We need to revisit the way we do business. So that we will be able to address and make up for various adverse situations, such as poor weather conditions as we can't blame the weather all the time. “

In light of this, the company formulated a strategy to offset the decline.

“We formulated strategies for Q2, such as growing sales by ¥10bn more than the original plan or to make expenses efficient as to offset negatives from the first half,” said Sawada.

He continued: “All we have to do now is to steadily execute on what we decided. We will obviously do what was originally planned but we have had discussions and the revisions were made. With that, we started July. However, July also suffered from poor weather in Japan and overall, it felt like consumption was down.”

Sawada added that the slowdown in consumption was greatly concerning to him, but assured that the company had measures in place to tackle the problem.

“Our mentality is to increase sales through other measures… we analysed the first-half numbers in numerous ways in order to formulate a strategy for the second-half.”

With these measures, the company has seen improvement at the end of July and the beginning of August.

“Seasonal factors have actually started to improve from the end of July and we've started to see this materialise in the last two days as well,” said Sawada. “But you never know, a typhoon may hit us. You can't just rely on weather.”