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Shiseido: Channeling Cosmetics in China Essay

Introduction

Shiseido, the largest Japan’s cosmetic manufacturer, was founded by Arinobu Fukuhara in 1872 when he opened Japan’s first Western-style pharmacy called Shiseido Pharmacy in Tokyo. The company manufactured its own pharmaceutical products in 1878 before later moving to cosmetics in which it combined Western technology with Asian ingredients. In 1923, Shiseido started a voluntary chain store system where the stores were operated by independent owners. The store provided exclusive retail space for Shiseido while the products were sold through consultative selling by trained staff provided by Shiseido. Shiseido established thousands of stores in Japan and remained the market leader despite high competition from Western cosmetic companies.

The company expended to Taiwan, Singapore, Hong Kong, Hawaii and Italy in 1957. In 1980 it entered Germany by setting up a wholly owned subsidiary. That was followed by Great Britain in 1986 and France in 1990. In 1988 Shiseido entered the United States by acquiring Zotos International and other foreign brands. For Shiseido oversea business was the key driver for growth as shown in 2005 when foreign sales was 27 percent of the company’s total sales.

Question 1

What are the functions performed by the distribution channels in cosmetic products? Distribution channels are a set of interdependent organizations involved in the process of making a product or service available for use or consumption (Kotler, P.,Keller, K. L., Ang, S. H., Leong, S. M. & Tan, C. T. (2009)). In the cosmetic industry, the functions of distribution channels can be summarized as follows; Provide exclusive retail space for the products.

Sell the products through consultative selling by trained staff. Act as information media which transmit the latest beauty information including knowledge about skincare, fashion, and hair style trends. Provide equipment to diagnose the customer’s skin condition scientifically. Gather information about potential and current customers, competitors, and other actors and forcers in the marketing environment. Develop and disseminate persuasive communications to stimulate purchase. Reach agreement on price and other terms so that transfer of ownership or possession can be effected. Place orders with manufacturers.

Acquire the funds to finance inventories at different levels in the marketing channel. Assume risk connected with carrying out channel work. Provide for the successive storage and movement of physical products. Provide for buyers’ payment of their bills through banks and other financial institutions. Oversee actual transfer of ownership from one organization or person to another.

Question 1

b. How are some of these functions performed in Shiseido’s operation in China? The functions performed in Shiseido’s operation in China through the following channels; Introduction of products at tax-free department stores and hotels in Beijing in 1981. A technology cooperation agreement that manufactured shampoo and conditioners in China under the brand name HuaZi in 1983. 3. A joint venture company, Shiseido Liyuan Cosmetic Company (SLC) in 1991. ●Joint venture between Shiseido and local company Liyuan Corporation, a state- owned enterprise.

●SLC developed a cosmetic brand only for Chinese consumers named Aupres.Shiseido name was put in front, below the Aupes name.
●The brand was advertised in magazines and television featured local models. 4. A joint venture company, Shanghai Zotos CITIC Cosmetic Company (SZC) in 1998.
● Joint venture between Shiseido and China International Trust and Investment Corporation (CITIC).
●SZC produced medium-priced cosmetic brands such as Za, Pure Mild China, UNO, ASPLIR, WHITIA and SELFIT.
● Sold them at special sales corners in department stores and at cosmetic specialty stores through wholesalers.
5. A Japan-based subsidiary FT Shiseido Company Limited in 2003
●Sold its high-end toiletries by importing them directly from Japan.

6. Duplicate its successful Japanese voluntary specialty chain stores concept in China in 2003.

7. Engage privately managed cosmetic stores to sell its products under SLC.

8. Started a holding company, Shiseido China Company Limited in 2004 to support and oversee all businesses in China.

Question 2
What are the advantages and disadvantages of selling cosmetic products through door –to-door selling, specialty stores, department store counters, and supermarkets and hypermarkets?

Door-to-door Selling

Door-to door selling is the most traditional form of direct marketing channel. It is a zero-level channel where the manufacturer sells directly to the final customers. There are many advantages and disadvantages of selling cosmetic products through door-to-door selling as shown in the following table;

1. Advantages and Disadvantages of Door-to-door Selling Distribution Channel Advantages

Door-to-door selling Manufacturers’ View:

The promoting/ sales representatives can explain and even demonstrate complex products. The profit or loss will be a lot of accurately judged.  There is opportunity to learn more about individual consumers, their lifestyle and consumption behavior so that company can respond with market offerings to their need. Potential sales representatives are easily available every time and everywhere. It builds long-term personal relationship so that will reduce selling cost.

Customers’ View:

It offers good value to customers as there is no price hike due to wholesalers or retailers. It id convenience to customers as the products would be brought right to door step , and easy to bring other individuals who need to be involved.

3. It allows the customers to try the products in privacy. The customers can ask questions and get advice in a relaxed environment.

Sales Representatives’ View:
It encourages and creates business opportunities and activities thus improve local economy.
2. Initial distributors’ cost is cheap.
3. Creates job opportunities.
4. Flexible working schedule
5. Sales representative can excess to training and support.

Distribution Channel Disadvantages
Door-to-door selling Manufacturers’ View:
It offends some purchasers who do not endorse it as they are saying it inhibits their private lives.
The company needs to well-train sales representatives.
Sales representatives turnovers are high.
This type of business is highly competitive.
Sales persons do not support company strategy or unethical.
Lower initial commitment because of not career of choice.
Seles persons cannot be monitored and managed closely, especially in network direct-selling organization. Sales Representatives’ View:
Salesperson travelling time and cost could be significant.
2. Trapped in fraud of pyramid selling schemes.
Unsolicited visits could be viewed with suspicion.
Promoting this type of business can be very time consuming
This type of business is highly competitive
Will get quite a bit of rejection before finding people who will buy what you have to offer Must good in training and management skills to build net working.
Specialty Stores
In cosmetic business, specialty store is a small store specialized in a particular brand of cosmetic products and related items. The store has an extensive numbers and variety of the particular brand products that it specialized in. It also provides well-trained staff from the product brand company. The staff role is as a beauty consultant who fully responds to question about the products and skin problem. The store also installs skin analyzers to diagnose the customers’ skin condition scientifically.

From producers’ point of view, cosmetic specialty stores have many advantages. Shiseido has implemented this marketing channel system in Japan since 1923 and it has expended the system throughout the whole countries where it does its operation. The following tables show the advantages and disadvantage of specialty stores in selling cosmetic products.

Table 2. Advantages and disadvantages of Specialty Stores

Distribution Channel Advantages
Specialty Stores Manufacturers’ Views:
Increase sales through well-trained personnel to assist and inform customers about the products. The high quality service help to build brand loyalty to the company. Products can be sold at relatively higher prices. The target consumers are willing to pay the higher price for the good services. Value added services such as beauty consultation and customer skin analysis and diagnosis.
All products under a particular brand are available.
Targeted market segments are huge.
Distribution Channel Disadvantages
Specialty Stores Manufacturers’ Views:
Need to well-train staff as the beauty and sale consultants. Department Store Counters
A department store counter is a display case in a department store where products can be shown to the customers. The display case is located at designated areas within the department store. Cosmetics sold here are often high-end products. Usually, well-trained beauty advisors will be there to assist customers with the products. The following table show the advantages and disadvantages of selling cosmetics through this distribution channel.

Table 3. Advantages and disadvantages of Department Store Counters Distribution Channel Advantages

Department Store Counters Customers’ View:
Customers have many product choices. Large range of goods.
Convenience for customers all segments of customers
Cheaper prices because of bulk of buying by the stores.
Distribution Channel Disadvantages
Department Store Counters Manufacturers’ View:
Manufacturers may be asked to pay ‘slotting fees’ to the stores as payment
for guaranteed shelf space for particular products. Competitions are high from other brands.
Manufacturers need to advertise heavily for new products as the stores prefer to sell established products.
Customers’ View:
Low quality service. Normally, department stores don’t have well-trained staff to assist the customers.
Supermarkets and Hypermarkets
Supermarket is a large retail market that sells a variety of products such as food, other household goods and cosmetics. In Ipoh for example, there are many supermarkets such as Ocean and Giant. Hypermarket is the combination of department store and supermarket as we can see from Tesco and Wall Mart. There are many advantages and disadvantages of selling cosmetics through this channel as shown in the following table;
Table4. Advantages and Disadvantages of Supermarkets and Hypermarkets

Distribution Channel Advantages
Supermarkets and Hypermarkets Manufacturers’ View:
Sales volume is high because customers buy in bulk.
Number of potential customers are huge because a lot of people come to supermarkets or hypermarkets to buy household items.
Customers’ View:
Price is cheap because the retailers buy in bulk.
It is convenient as cosmetics can be purchased while buying household products.
Distribution Channel Disadvantages
Supermarkets and Hypermarkets Manufacturers’ View:
Manufacturers may be asked to pay ‘slotting fees’ to the stores as payment for guaranteed shelf space for particular products.
Competitions are high from other brands.
Manufacturers need to advertise heavily for new products as the stores prefer to sell established products.
Customers’ View:
1. Lack of service and sometimes no well-trained staff.

Question 2
How will the use of these channels vary with target market segments and brand strategies? The choice of which marketing channels to use is essential to manufacturer as it provides a mean for the firm to implement its marketing strategy. The marketing strategy is derived from the target market segments and brand strategy of the firm. Therefore, the choice of marketing channels will have to depend on the target market segments and the brand strategies.

Target Market Segments

When deciding on the marketing channel, a manufacturer has to consider which intermediaries can best reach out to the firm’s target market segments and satisfy their purchasing requirements. Therefore, the use of the channels varies depending on the target market segments of the company. The following table show how the channel use varies with target market segments.

Table 5. Target Market Segments and Marketing Channels

Segmentations Target Market Segments Marketing Channels Used Geographic City , urban and suburban, all countries except those involved in wars, middle east, certain African countries. Any climate Door-to-door selling, Specialty stores, Department store counters,

Supermarkets and Hypermarkets.
Demographic Medium income, middle class
Door-to-door selling, Specialty stores,
Department store counters,
Supermarkets and Hypermarkets.
High income; professionals, managers, executives, businesspeople, upper class Specialty stores, Department store counter
Psychographic Innovators, thinkers, achievers and experiencers.
Door-to-door selling, Specialty stores,
Department store counters
Behavioral Regular occasion and special occasion; quality, service and speed; regular user, potential user and first-timer; medium user and heavy user; medium, strong and absolute loyalty status; informed, interested, desirous and intended to buy; enthusiastic and positive toward Door-to-door selling, Specialty stores, Department store counters,

Supermarkets and Hypermarkets.

Brand Strategies
A company brand strategy is another factor to consider in choosing marketing channels. In order the strategy to be effective, right marketing channels should be applied. A firm can employ various branding strategies such as individual product names, blanket family names, separate family names for all products and corporate name combined with individual product names. The following table shows how the use of channels varies with the firm brand strategies.

Why is Shiseido using voluntary specialty chain stores, besides their counters at department stores? Shiseido is using voluntarily specialty stores besides their counters at department stores because of a few reasons. Firstly, the specialty chain store system has many advantages as discussed in previous question. The company will increase the sales through the service of the well-trained consultants that consult and assist the customers. The quality service in the specialty stores also will help to build brand loyalty to the company. In the stores products can be sold at relatively higher prices and consumers are willing to pay the higher price for the good services. Secondly, the system also fit very well with company’s targeted market segments. Due to economic liberalization, China has produced bigger segments of middle class and upper class consumers.

As a result, the cosmetic market is growing drastically from US$1.5 billions in 2006 to US$2.3 billions in 2009. About 90 million women in urban areas are willing to spend 10 percent of their income on beauty products. In order to cater these consumer groups, Shiseido has to use another retail channel. Furthermore, the system also fit well with the company’s brand strategies. Shiseido uses multi brand strategies and the strategies need various right channel to perform. Shiseido products are in growth stage while the brand name is already positioned well in China markets. So, the specialty store system will help to maximize company’s revenue and profit.

With the number of privately managed cosmetic stores is raising in China, Shiseido see it as an opportunity to use the retail channel which is successful in Japan. The use of the channel not only will improve its sales but also reduce competition from other manufacturers as the privately managed stores might be used by its competitors. It was Shiseido’s strategic objective to use the voluntary specialty chain stores as its channel because the channel was proven successful in Japan. However, there are a few factors that prevent the company from using the channel earlier.

Development of infrastructure in China

Same as many Asia’s emerging markets, China also lack organized, centralized delivery and transportation network. Often, goods are not handled according to internationally accepted standard. Therefore, Shiseido distribution channel model had been drawn based on the development of infrastructure in China.

Legal regulations and restrictions

As China practiced Socialist Communist doing business in the country would face a lot of restriction and regulation. This could be seen when Shiseido first entering the China market where it could only sold its products in department stores and hotel, and only elite customers and foreigners were allowed to buy the products. Later on, Shiseido was allowed to open a joint venture company, but only with the state-owned enterprises. Only after a few years Shiseido was allowed to open its own subsidiary in China.

Consumers lifestyle and population density

At the earlier stage when Shiseido entered the China market, consumers lifestyle and preference were different. They rallied on Chinese herbal cosmetics. They were not familiar with Western cosmetics. Later on they had changed after Shiseido introduced its products to them, educated and consulted them with the products, and manufactured the products locally of imported them from Japan.

Question 3

What are advantages and disadvantages of each retail channel? The advantages and disadvantages of the retail channels can be summarized in the following table.

For Manufacturers

Have well-trained personnel to assist and inform customers about the products. The high quality service help to build brand loyalty to the company. Products can be sold at relatively higher prices. The target consumers are willing to pay the higher price for the good services. Value added services such as beauty consultation and customer skin analysis and diagnosis. All products under a particular brand are available.

Distribution Channels
Department Store Counters Specialty Stores
Disadvantages For Manufacturers
Manufacturers may be asked to pay ‘slotting fees’ to the stores as payment for guaranteed shelf space for particular products.
Competitions are high from other brands.
Manufacturers need to advertise heavily for new products as the stores prefer to sell established products.
For Customers
Low quality service. Normally, department stores don’t have well-trained staff to assist the customers.
Manufacturers’ Views:
Need to well-train staff.

Question 3
Which area should the company emphasize?
The company should emphasize in using voluntary specialty chain stores in urban areas. The products are in growth stage, so company will maximize profits. The cosmetics market is growing drastically ( from US$1.5 billions in 2006 to US$2.3 billions in 2009). Sizes of target segments are growing (Economic liberalization produces many upper class and middle class consumers).

The brand name is already positioned in China markets
Competitions is getting higher.

Conclusion
Shiseido has used various market channels to penetrate its products in China due to many constrains it has faced. With right channels supported by right strategic objectives, brand strategies and marketing strategies, Shiseido will be successful in China. Source: Kotler, P.,Keller, K. L., Ang, S. H., Leong, S. M. & Tan, C. T. (2009)


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