1

Waseda University

Hirota Shinichi Seminar

Kobayashi/Shibata/Fan/Yamashita

Analyzed

Company

SHISEIDO Company, Limited

Security Code 4911［Tokyo Stock Exchange 1st Section /Chemical］

Investment

Recommendation

Sell

Current Price 1961Yen（8/22/2014）

Target Price 2211Yen (Range:2497~1718Yen)

1. Investment summary

2. Corporation Information

3. Source of competitiveness

4. Market Situation and Future Business Prediction

4.1 Market in Japan

4.2 Market in China

4.3 Market in United States

4.4 Overall Sales Prediction

5. Valuation

5.1 Valuation with DCF method

5.2 Multiple Analyses

6. Risk Factors

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1. Investment Summary

We expect that the target stock price of SHISEIDO is 2211yen by discount cash flow model (DCF),

which is 12 percent higher than the current stock price 1951 yen. So our investment recommendation is

BUY.

SHISEIDO’s main business is cosmetic business not only in Japan but also in foreign countries. We

focused on the business and made the investment decision. Because of the scale of cosmetic market and

the high possibility of growth, we especially focused on the business in America and China as foreign

areas.

First, we explain about the cosmetic business in Japan. We expect that the cosmetic business in Japan is

declining more and more for three reasons. First, SHISEIDO will lose the cosmetic market share because

of threat of new entrants. Second, web Beauty consulting business is considered not using the strength of

SHISEIDO, O・mo・te・na・shi mind. Third, there will be unnecessary personal costs.

Second, we explain about the business in China. We expect that it will be successful because cosmetic

market is growing rapidly and the purchasing power is getting bigger and bigger, which was born in

1980s. Although there is a risk factor of relationship between Japan and China, the sales of “AUPRES”

and “Urara” will grow.

Third we explain the business in the USA. The sale is increasing because of the growing of the cosmetic

market for pre-stage. However, Bare Escentuals, which was acquired by SHISEIDO in 2010, is not going

well. So, we put these things into consideration and conclude that the growth of the cosmetic business in

the USA will be the same as previous. Considering the expectation of corporate performance of three

main areas, our investment decision is BUY.

Sales distribution ratio of the whole business in Japan is

almost the same as global business. However, their

progresses of corporate performance are quite different.

Although the sales of the former is decreasing year by

year, the sales of the latter is increasing. Moreover, the

ratio of the cosmetic business to whole domestic

business is 85.6 percent, and the ratio of the cosmetic

Business structure

Cosmetic business in Japan

Global Business

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business to global business is 86.9 percent. From these facts, we could know that SHISEIDO’S main

business is the cosmetic business. In short, the whole corporate performance of SHISEIDO strongly

depends on the cosmetic business, so we focus on it in Japan and foreign countries. Indeed, there are a lot

of foreign areas where SHISEIDO expanding the business, but we mainly focus on China and the USA

this time for several reasons. First, sales volume in China is bigger than the other foreign areas and China

is listed as one of the most important areas according to medium-term management plan. Second, the

sales volume in the USA is the second biggest next to China and the USA is the base of Bare Escentuals,

which is a important factor included in management plan began from 2014.

Sales in Japan

The ratio of profit to sales

Sales

Ratio

(％)

(million yen)

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2. Corporation Information

In 1872, Arinobu Fukuhara founded the first Western-style pharmacy in Tokyo and Ginza called

“SHISEIDO”. The name comes from the book of Mundane Mutations, one of the Chinese Classics. This

means that SHISEIDO is composed of both the Western and the Eastern characters. In 1916, SHISEIDO

opened the first cosmetic shop and it introduced the chain store system in 1923. Then, from 1916 to 1926,

SHISEIDO changed the main business from medicine to cosmetic. After that, the ‘Miss SHISEIDO’

(present beauty consultant) was born in 1934 and it tried informing of the newest way of beauty treatment.

Moreover, in 1937 Hana-Tsubaki party (present Hana-Tsubaki club) was established and SHISEIDO tried

strengthening the connection between regular users and chain stores. In 1957, the sale of cosmetics was

started in Taiwan as the step to overseas operation. These days, SHISEIDO is developing business in 89

countries, which are mainly Asia or Western countries. It is also strengthening the sales through channels

except specialty stores.

3. Source of competitiveness

O・mo・te・na・shi mind is the strength of SHISEIDO. The complete reception by beauty consultants

illustrates it.

The goods that represent 60 percent of sales of the cosmetic business in Japan are counselling cosmetics,

(million yen)

(％)

Sales in foreign countries

The ratio of profit to sales

Sales

Ratio

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and specialists of beauty treatment called beauty consultants (BC) recommend the most suitable

cosmetics to each customer, diagnosing their skins. SHISEIDO positions BC as the important thing to

raise the value of the brand. At present, there are more than 200000 BCs around the world (10000 people

in Japan and 7000 in China) and SHISEIDO invested huge amount of money to train BCs. Moreover,

they declared that staff reductions of BCs will never happen for the purpose of cutting personnel cost in

business structure improvement started in March 2013. No other competing companies do counselling

business as the same scale as SHISEIDO. In addition, it is difficult for them to do it because the personnel

cost will be very high and time to train BC will be very long. SHISEIDO has started its BC service from

1943 and already has the knowledge about the training, so we think that the costs aside from money are

not problems for SHIEIDO. However, for other competitors including overseas, those costs could be the

barrier of starting the same level of counseling service.

In global business, the same strategy is done as cosmetic business in Japan. Even in China, BC’s

counselling is done and 70 percent of sales are sales of pre-stage goods sold in specialty shops and

department stores. At “SHISEIDO Global Beauty Consultant Contest” in 2012(20,300 entries), two BCs

engaged in China business were won. In short, BC activity is expanded as a standard also in other foreign

areas.

In domestic market, sales of cosmetics in department stores has been decreasing as the number of the

population decreases. Therefore, we guess BC makes the profit of SHISEIDO in Japanese market shrink.

But in foreign countries, sales by BC is important and BC is the source of competitiveness especially in

China.

（unit：million yen）

SHISEIDO Pola Orbis

HD

Kao

①sales 762047 191355 1315217

②selling, general and administrative expenses 522487 136682 617792

③personnel cost 146361 22167 130265

Personnel cost ratio to sales（③÷①） 19.2% 11.6% 9.9%

Personnel cost ratio to selling, general and administrative

expenses（②÷①）

28.0% 16.2% 21.1%

Figure: in 2013

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4. Market Situation and Future Business Prediction

We predicted future SHISEIDO’s performance based on the analyses of the market in Japan, China, and

United States. We focused on these markets based on the sales ratio and the SHISEIDO’s future

management policies.

4.1 Market in Japan

<Growth Rate Prediction>

3.9% decrease (Equal to averaged decreasing rate from 2009 to 2013)

Because of cannibalization by newcomers in domestic market and decline of web beauty consultant

business as focusing business and wasting labor cost

<Over View>

Manufacture and sale are main business in domestic cosmetic business of SHISEIDO. SHISEIDO has

also expanded “health care” business which is to manufacture and sell nonprescription drugs and beauty

food, too.

In cosmetic business, SHISEIDO has expanded counseling sales, selling high and middle price

cosmetics by counseling in department stores and beauty specialist retail channel., and self-project. It sells

low price cosmetics which consumers can choose freely.

Shiseido Sales in Japan (million yen)

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<Market Situation>

Japanese cosmetic market size, which is 2300 billion, has unchanged for these years. It is unrelated to

Japanese GDP. The consumption of cosmetics per family has also unchanged for 10 years because

cosmetics are known as essential items in Japan. Besides, income difference is not so widened than the

other countries. Breakdown of sales of SHISEIDO is that skincare sales of business is 46.3%, sales of

makeup is 21.9%, sales of haircare is 18.4%, sales of fragrance is 1.2% sales of cosmetics for men is

4.8% and the proportion has unchanged for these years. Because of that, we can say that demand of

cosmetics will hardly change. Decreasing number of department stores because of Lehman Shock in 2008

causes shrink of cosmetics sales in supermarket. On the other hand, Internet cosmetics sales size is

growing rapidly because of the development of IT.

The competition of cosmetics market is getting intensified because of newcomers from other industries.

The needless of large facility investment depending on Internet sales by OEM, outsourcing until

manufacturing cosmetics, causes a lot of newcomers in cosmetic market. Pharmaceutical industry

companies from 1960s and companies in food industry from 1990s have made new entry to cosmetic

market because of high affinities for ingredients to make cosmetics. Especially, FUJIFILM entered to

cosmetic market and has sold 10 billion for 4 years. It causes to pay attention to entry to cosmetic market

and the competition is getting intensified. FUJIFILM applied the anti-oxidative technology,

AJINOMOTO applied amino acid, Suntory applied yeast, and EzakiGuriko applied glycogen which is

used in main business. These companies sell cosmetics related to main business intensively. So the threat

of cannibalization by newcomers will continue to exist in cosmetic market that can use OEM.

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Then the sales of Shiseido in Japan will depend on new web business that started in 2012. It is counseling

on web site like existing face to face selling in department store. It tried to expand Omotenashi mind, the

strongest point of Shiseido, on web business instead of sales in department stores.

But it is difficult to succeed in new web business because more and more people can choose cosmetics by

information on web by themselves and because the display of drugstore itself is becoming more

informative. That makes people enable to get enough information instead of Beauty Consultant to buy

cosmetics. So Omotenashi mind, the strongest point of SHISEIDO, will be no use.

Size of Cosmetics Market in Japan

Share of Shiseido in Japan

(million yen)

(％)

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In addition to the decrease of sales, the labor cost will increase because of the more investment in Beauty

Consultant, and we are afraid that it will cause the decreasing of investment in other divisions and decline

in business. SHISEIDO declares that they are not reducing Beauty Consultant, so it is difficult to reduce

labor cost. But the labor cost that is required for Beauty Consultant will decrease when SHISEIDO

expands web business. So surplus labor cost will be incurred in the future.

The profit rate increases rapidly in the fiscal year ended in March 2014 because last minute surge in

demand for the consumption tax increase. But profit rate has been decreasing for these years and we think

it will continue.

Therefore we expect sales of cosmetics in Japan will decrease 3.9%, which is equal to average decreasing

rate from 2009 to 2013.

4.2 Market in China

<Growth rate prediction>

+7.56%(Equal to 2009～2013’s sale’s growth rate)

Sales Prediction in Japan (million yen)

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＜Overview＞

In 1872, SHISEIDO was founded as a dispensing pharmacy. There are more than 130 years of history. Its

name “SHISEIDO” is derived from the Chinese classics meaning “The value that from All resources”.

As a global company, SHISEIDO started its cosmetics sales in Taiwan in 1957, and developed its

business all over the Asia. At that time, Beijing prefecture made production technology cooperation with

SHISEIDO in 1983 as the brand “HUAZI”. Since then, SHISEIDO has thorough studied Chinese

women’s skin and developed special cosmetics in the original with their philosophy of “Making Chinese

women more shine for their beauty”.

＜The market trend＞

The change of real GDP in China

(1980~2014) billion Yen

Size of Cosmetics Market in China

(million yuan)

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Since the global financial crisis in 2008, western market is shrinking and the world economy’s

dependence on China economy is increasing. China was little affected by global financial crisis in 2008,

and maintains its economic prosperity by expanding domestic demand.

According to the investigation of JETRO 2012, Chinese cosmetic market will continue growing

undoubtedly. Considering the shrink in domestic market in Japan, it’s an attractive market. Moreover,

Chinese cosmetics market made almost 10% growths every year since 2008 because of the expansion of

the middle class and women’s heightened sense of beauty. In 2012, the market size Made 9.6% growth to

123 billion Yuan (2013 Yano Research Institute)

From now on, the Improvement of 80’s generation (born in the 1980s) purchase power and remarkable

economic growth in inland cities will lead the whole cosmetics market keep growth as 10%, in 2014, the

market size is expected to be 147.5 billion with 9.5% growth from last year. It will keep growth at the

same rate in the future. Furthermore, the operating profit in Chinese market will be reduced since

SHISEIDO will focus on EC market by Web consultant and call center service which will reduce the

labor cost of BC compare with the traditional department stores service.

＜Future prediction＞

・Plus factor

There are three main plus factors of SHISEIDO in China market.

1. The brand development of “AUPRES・欧珀莱”which is best fitted to Chinese women’s skin

condition. In the most important market China, where population increase constantly, SHISEIDO made

brand marketing with China-only brands in different channels. For example, China-only brand

“AUPRES・欧珀莱” was made on the basis of the concept that “Making Chinese women more shine

for their beauty”. In addition, in case of specialty store channel, specialty store brands “Urara・悠

莱”and “PURE&MILD・泊美”keep its high popularity. As a whole, sales highly grow than the

cosmetics market.

2. Sales channel

In the primary market, while maintaining the prestige image in the department store channel, SHISEIDO

carefully selected specialty stores and develop the channel so as to penetrate the market. In department

store channel, AUPRES premium line was introduced to the Top sales store for improve its premium

image. Furthermore in 2011, SHISEIDO started “New frontier strategy” which connected real shops

and online shops, therefore its new web-marketing strategy began to be developed.

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3. OMOTENASHI

Not only to sell commodities, has SHISEIDO had an excellent beauty consultant team which provides

sophisticated and comprehensive services to the customers. They try to strengthen the power of BC’s

service spirit called “Omotenashi”, for developing SHISEIDO’s global brand value.

Currently, the declining birthrate and aging population are gradually becoming obvious in China. In

general, the elderly people are considered to pursuing the cosmetics of anti-aging and also with high unit

price. This means that the declining birthrate and aging population social structure would be a factor to

promote sales for SHISEIDO in the future. However, SHISEIDO’s anti-aging products in China market

are undeveloped now, so we consider it will take a long period of time to take share within the elderly

people market. That’s the reason of not considering aging population as sales promotion factor in future

predictions of 10 years in China.

・Minus factor

1. The fluctuation of exchange rate

As a risk factor, the fluctuation of exchange rate has a huge impact on company’s oversea performance.

For instance, in 2008, even though the economy declined extremely, sales of cosmetics business in local

currency increased 7.3% because of high growth in China and America market. However, due to the

exchange rate shifted to Yen-strong, calculate with Yen, the sales turned to 1.1% decreasing as

260,915,000,000 Yen.

2. Competition

In China market, SHISEIDO has highly competition with western global brand like “Lancôme” and

“L'Oreal”. Moreover, since cosmetics have high preference, as a commodity, it’s highly monopoly. In

addition, the South Korean cosmetics are popular with its low price and high quality. Last, in the 2nd

and

3rd

level cities of China, the inexpensive Chinese cosmetics might also be a competitor and influence

SHISEIDO’s sales.

SHISEIDO’s share in China market is not affected so much by Korean cosmetics because they are

focusing on different targets. SHISEIDO’s main channel is a department store, which means that it is

focusing on the wealthy class. However, Korean companies are more focusing on the masses especially

youngsters. As a conclusion, Korean cosmetics would not be a direct competitor for SHISEIDO in China

market.

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3. Anti-Japanese

Followed by the influence of Anti-Japanese with the Senkaku Islands problem, SHISEIDO couldn’t take

positive promotion in the end of 2012, thus it only performs the same as the last year in local currency,

and only growth little bit in Yen-base. Except of their marketing investment, operating profit was lower

than expected because of the Anti-Japanese activities happened in September.

・Growth rate

We calculate SHISEIDO’s sales prediction in the future in China market according to following formula.

Sales=Sales of last year× Shiseido’s sales growth rate in China market (2008~2013)

Figure11: SHISEIDO sales prediction in China market (million Yen)

(million yen)

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In highly growing China market, SHISEIDO’s next step is focusing on E-commerce market. The

E-commerce market is expanding tremendously and has become almost 10 times bigger than 10 years ago.

SHISEIDO started business in websites and connected this business with their strength-BC. This Web

Beauty Canceling service would be the key point of SHISEIDO’s strategy in China.

4.3 United States Market

<Growth Rate Prediction＞

Expected Growth Rate：-0.9％

Based on the premium cosmetics market and the growth rate of share after the acquisition of Bare

Escentuals.

＜Overview＞

SHISEIDO has gone to US market in 1965.

They are mainly offering prestige product line in the US, which includes the brand SHISEIDO,

NARS(Make-up), BareMinerals (Foundation), and jean paul.

The following graph shows the Shiseido’s sales ratio in the US in 2013. Bare Minerals, which SHISEIDO

0

50,000

100,000

150,000

200,000

250,000

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

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acquired in 2010, consists almost 50% of the sales.

＜Market Situation＞

From 2008 to 2013, the average growth rate of premium cosmetics market in the US is 3.2%

According to Euromonitor International, this growth rate will still be continued because of the economic

recovery and the following increase of the consumption of the premium items.

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Looking at the cosmetics distribution channel in the US, department channel and beauty specialist

retailer’s channel are slightly increasing, which show that SHISEIDO can still take advantage of their

strength of BC.

The share of SHISEIDO in premium cosmetics market is 5.3%(2013), and its decreasing after the

acquisition of Bare Ecsentuals in 2010. The averaged share growth rate of Shiseido after the acquisition is

-2.9% (2013.)

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Looking at the SHISEIDO’s share by brand, the share of Bare Minerals is decreasing on the other hand

other brands’ share are stable. This clearly shows that the shrinking share of Bare Minerals contributes to

the decreasing share of SHISEIDO in the US market.

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In 2010, SHISEIDO acquired Bare Ecsentuals, the successful company which own the mineral make-up

brand BareMinerals. SHISEIDO wanted to complement their organic and mineral brand portfolio, which

was lacking in Shiseido at that time.

According to Transparency Market Research, the growth rate of Organic and Mineral cosmetics market is

expected 9.8% from 2012-2018.

With the growth of the market, many companies are entering to organic mineral cosmetics market, and

the competition in the US is becoming tougher.

The share of major organic cosmetics brand is decreasing because of this high competition.

Because of the disappointing performance of BareMinerals in the US, SHISEIDO has recorded huge

impairment loss, which became the main reason for the net loss of Global division of SHISEIDO in 2012.

The main reason for this performance is that their change of marketing strategy.

SHISEIDO has shift the marketing strategy of Bare Minerals from TV shopping and infomercial to TV

commercial to bring customers to department and beauty specialist retailer’s channel. The change was not

successful.

In response to this situation, SHISEIDO has announced that they will change the advertising strategy of

Bare Minerals by investing in direct marketing channel again.

However, the sales of direct selling channel in cosmetics market is declining and Shiseido can’t take

advantage of Omotenashi mind of BC in this channel.

Therefore, we predict that the declining share of SHISEIDO after the acquisition will be continued.

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＜Sales Prediction＞

We calculate future sales of SHISEIDO USA by this formula,

Future Sales：＝Sales last year ×Growth rate of US cosmetics market×Growth rate of share after the

acquisition of Bare Essentuals

We predict future sales based on the premium cosmetics market where SHISEIDO USA focuses on. Also,

we consider the growth rate of share after the acquisition of Bare Escentuals.

70000

74500

79000

83500

88000

92500

97000

101500

106000

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

米国内売上高 Sales Prediction in USA

(million yen)

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4.4 Sales Prediction

The following figure shows the sales prediction with all market including Japan, China, US, and other

market. In this prediction, we set the future sales of other market as stable, since we assume that the other

markets don’t have much effect on the sales.

Figure: Sales prediction with all market

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

Others

China

United States

Japan

(million yen)

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5.Valuation

5.1 Valuation with DCF method

We calculate target stock price of SHISEIDO by DCF method with 10 years FCF prediction and terminal

value after 10 years.

The following table shows our calculation/assumption of index for DCF.

Risk free rate 0.530% (Ten-years government bond yield on 7/24/2014.)

Beta 0.65%(Regression analysis using returns on riskless asset of TOPIX and

SHISEIDO stock from 6/1/2010 to 7/1/2014.)

Risk Premium 6%

Cost of Debt Interest Expense/Interest Bearing Debt

Effective Tax Rate 41.49% (Averaged rate of Total Corporate tax/ EBITA for 4 years.) *We

don’t include 2013, the year with abnormal impairment loss of Bare

Escentuals.

Depreciation

Expense

Averaged ratio of sales for 5 years

Terminal Growth

Rate

0% (Based on each country’s sales prediction.)

With this index, we used WACC to discount FCF, and the target price resulted in 2211 yen.

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5.2 Multiple Analyses

We also use the multiple analyses to measure the validity of the target price.

We used the information of POLA ORBIS HD and KOSE, whose main business is cosmetics.

The indexes we use for multiple analysis are PSR, PBR, PER, EV/EBITDA, EV/EBIT, EV/ Sales.

The multiple range results in min 1718 max 2497.

Max 2497Yen

Min 1718Yen

＜Target Price＞

Based on DCF method, the target price is 2211 yen.

Current Price 1961 Yen

Expected rate of return 12%

The target price is within the multiple ranges.

We conclude that the investment recommendation for SHISEIDO is BUY.

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6．Risk Factors

The thread of new entrants

There is a thread of the new entrants from different industry since the barriers to entry in cosmetics

industry is low. There is a possibility of losing the share of niche market.

The risk of currency exposure

There is certain risk of the changing rate of currency in the situation of import/export. Shiseido tries to

lessen the risk by establishing the manufacturing environment inside of each country.

The risk of changing price of raw materials

Shiseido has procurement places all over the world, therefore the price of raw materials can be affected

by each market price. The market price could be affected by the geopolitical risk, the change of

supply/demand balance, the climate change, and the change of currency rate. The change of the raw

material price could result in the change of the product prices of Shiseido.

The risk of improvement of diplomatic relationship

The diplomatic relationship between Japan and China is not in a good condition. The products which are

made in Japan are harder to sell in China because of the recent anti-Japan demo. If this relationship is

improved, the sales of Japanese product including Shiseido could be increased.

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