Persistent threat: Kao expecting recovery from COVID-19 impact to be ‘extremely slow’

The company reported a 13.8% decline in operating profit as net sales decreased across personal care for the first half of 2020 due to the novel coronavirus (COVID-19) pandemic.

In the firm’s original forecast, it expected to see sales drop off in the third quarter and bounce back in the fourth quarter.

However, it has acknowledged that it would be “difficult to achieve”​ those goals given the current circumstances and has revised down its forecast.

“Now as we see the infections spreading again in Japan, we are expecting the recovery process to be extremely slow.​ We should view performance a bit more conservatively compared to the original scenario of Q3 being challenging and achieving a bounce back in Q4,” ​said Michitaka Sawada, President and CEO.

In the new forecast, Kao expected net sales to decrease by 4.8% to JPY1.43bn (USD13.5m) while Operation income was forecasted to dip by 10.3% to JPY190bn (USD1.78bn).

Additionally, the company is expecting the sales performance of its cosmetics division, which comprises of brands such as Kanebo, Freeplus, Curél and Molton Brown to fall by JPY12.bn (USD113.8m) in the second half.

On the other hand, the skin care and hair care business, which includes brands such as Bioré, John Frieda, Liese and Jergens has been forecasted to increase sales by JPY5.5bn (USD51.7m) due to the increase in demand for sanitising and hygiene products.

Kao noted that this revised forecast does not account for ‘extreme situations’ such as further lockdowns and store closures related to COVID-19.

“We truly hope that something like this doesn't happen and we hope we can see a gradual recovery. However, if this kind of scenario were to materialise, we think that the cosmetics business would be affected in particular. We feel this is something we need to think about,”​ said Sawada.

Tough times for cosmetics​

In the first half, the firm saw the biggest losses for its cosmetics division which plummeted by 20.7% like-for-like to JYP109.9bn (US$1.04bn) due to the decline in make-up sales.

Sawada acknowledged that the company would have to reform the cosmetics business moving forward.

“The Kao Group's cosmetics business has grown significantly over the past few years, when the top line, profits followed very well. However... we recognise the need to expedite structural reforms and undertake various measures.”​

As sales of colour cosmetics continue to dip, the firm said it would continue to reinforce its premium skin care brands such as Sensai, Est and Kanebo.

Additionally, Sawada noted that its number of beauty consultants in the cosmetics business has been not justified by the total sales, making the fixed cost ratio high.

The firm clarified that it not thinking about reducing staff to cut cost, noting that its beauty staff was a “key asset of the Kao Group”.​

Instead, it would push beauty consultants towards digital counselling to optimise its staff.

Lastly, the company said it would be working to improve its e-commerce distribution.

Currently, Kao China’s e-commerce sales account for 70% of the business, up 50% from the previous year.

In Europe, its e-commerce sales ratio of Molton Brown is at 75%, about four times higher than the previous year.

The strengthen of its e-commerce in China and Europe have managed to cover the decline in retail store sales through its e-commerce sales.

Moving forward, the company said it would work towards building up its e-commerce business domestically and explore D2C business models to boost the cosmetics division.