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Tokyo Report: 'Big Two' cosmetics makers intensify rivalry

With Kao Corp. acquiring Kanebo Cosmetics Inc. earlier this year, the cosmetics market in Japan has moved into an era of intense competition between the "Big Two" rivals, prompting analysts to pay keen attention to how the new alliance will challenge the dominant market leader, Shiseido Co.

"We will become a very different company," Kao President Motoki Ozaki said when the firm officially placed Kanebo Cosmetics under its wing on Jan. 31. The aim is to break with the firm's existing image as a detergent maker by placing greater emphasis on cosmetics.

Kao is the biggest Japanese manufacturer of detergents and other articles of daily use. Profitability in the market for such items is falling, however, due to intensifying price-cutting competition. On the other hand, huge profits can be expected in the cosmetics market, where manufacturing costs are low and products with an established brand can sell at high prices.

Ranked fourth in the domestic cosmetics market at that time, Kao therefore acquired second-placed Kanebo Cosmetics in a bid to reinforce its earnings base by promoting a business shift toward cosmetics.

In fiscal 2005 that ended in March, Kao chalked up 85.2 billion yen in cosmetics sales. If Kanebo Cosmetics' sales are added, the figure rises to nearly 300 billion yen, equal to 80 percent of domestic sales at Shiseido.

To ward off the challenge of the Kao-Kanebo alliance, Shiseido has adopted a "mega brand strategy" of focusing advertising and sales promotion spending on a small number of core brands so as to develop them into top brands in the market. The new strategy marks a shift from Shiseido's diversified investment in a large number of small brands.

The first target brand under the new strategy was the "Maquillage" line of makeup cosmetics. Ads featuring Misaki Ito and three other actresses were released at a cost of 4 billion yen, with sales growing to 106 percent of the target figure.

Meanwhile, given the decreasing population of Japan, Shiseido and the Kao-Kanebo team are turning their attention overseas to expand their operations.

Shiseido leads the Kao-Kanebo alliance in overseas markets by a wide margin. While the alliance relies on such markets for only a few percent of its overall sales, Shiseido chalks up nearly 30 percent of its sales from there.

In particular, Shiseido has achieved a formidable presence in the rapidly growing market in China, where it plans to expand its current network of stores five-fold to 5,000 and to more than double its retail sales to 100 billion yen by fiscal 2008.

Nevertheless, the Kao-Kanebo team is resolved to close in on Shiseido by promoting its own operations in China and other markets.