Having built a very successful business in China, AXXZIA has set its sights on Southeast Asia and beyond.
Over the last 25 to 30 years, Japan has been competing against regional competitors in Korea, China, and Taiwan, especially in the field of cosmetics. The rise, for example, of K-beauty and Korean culture & music has seen people across Asia and the world adopt Korean-based brands. Despite this, Japanese cosmetics companies with a diverse range of products have large market shares. Could you give us your take on Japanese cosmetics and the position they hold in the market?
Cosmetic products are made of chemicals or synthetic materials, and Japan has always had an edge in material science or engineering. It has successfully crossed over to the top level in material engineering for the past decades. Thus, Japan's cosmetics that utilize materials from Japanese chemical or synthetic material suppliers are always at the top level. Cosmetics have something to do with culture and fashion. In the 1980s, Japan's electronics sold very well, and around that time, Japanese cosmetic companies made inroads into the foreign market, and they aggressively advertised their products. During that time, Asia perceived Japanese products and cosmetics as having outstanding quality. They paved the way for us as latecomers.
For example, one of the largest Japanese cosmetic companies has the technology for high penetration or good absorption for the skin, which is very difficult to achieve. It is meaningless if the skincare product does not penetrate the skin. There are three segmentations of cosmetics from different countries in Asia, particularly in China. Japanese cosmetics are known to be outstanding and high in quality, but the price is also high. South Korean cosmetic makers launch products in a very short cycle, one after another. It is interesting because they also adopt the latest trends in cosmetics. Meanwhile, Chinese cosmetics quality is improving, but they are still affordable.
The COVID pandemic greatly impacted the beauty sector, and in-store sales plummeted. All the makeup counters at Ginza were completely empty for at least two years. On the other hand, we have seen that it has a huge spur for e-commerce, providing an opportunity for firms to develop online-based media connections with their consumers. For example, recent Facebook data in the US said that 44% of consumers chose their cosmetics or skin care based on recommendations from friends, acquaintances, or colleagues on social media. In this age of digitally savvy, young users, especially millennials, how do you ensure your brand remains relevant? How do you touch with your audience about the qualities of your products?
In 2002, I started a beauty salon business, and at its peak, we had 50 salons named Grace. As we moved along in that field, I wanted to produce our products, so we started Le Ciel de L'aube in 2011. We began selling our products in Japan and China. On the one hand, we found it difficult to differentiate ourselves in the Japanese market; our sales in Japan did not grow much. On the other hand, any made-in-Japan products sold very well in the Chinese market, so we tried to appeal to customers with that. We also ran a B2B business in China by selling salon products for professional use. Because we added more beauty salons in China in 2016, our brand recognition improved, which prodded the requests from users for consumer-use products, not the salon or exclusive ones. Since the retail products we developed were selling well through our e-commerce channel, we shifted our gear to that kind of product.
AG drink, a beauty drink we developed in 2016 sold very well and further boosted our name recognition in China. One of the key things I would like to highlight about this product is the pro-aging ingredients, which is specifically for anti-glycation. The word or concept of “anti-glycation” had been known in Japan, but none of the available products in China contained that concept. We used that concept in our product development in China for retail users, which was well received by our Chinese customers and improved our recognition. From that point until before COVID in 2020, though we had several salons and strong e-commerce in China, our Chinese customers who enjoyed our products came to Japan as inbound tourists and bought our products. It was a very good cycle for our business.
The COVID-19 pandemic led to the lockdowns in Shanghai and stopped everything for our business. We were in the middle of preparing for an IPO, so I thought that it might have been the end. From our analysis of our sales, we found that there was no decline in our e-commerce sales. That made sense to us because when people stayed at home with nothing to do, they did more online shopping. Since our distribution network was active at that time, we decided to shift our focus and all management resources to the e-commerce business. Within a month, our sales recovered.
One month after the breakout of COVID, our sales increased by 20% to 30% year over year. By looking at that data, we decided to concentrate our management resources on e-commerce for the next three years.
In 2013, smartphones started to penetrate the market in China as e-commerce also began growing. Most of the smartphone users back then were young people, and shopping through online channels became a natural habit they acquired. Our business expansion in China was concurrent with smartphone penetration and e-commerce growth in that country. We only have a few retail stores for cosmetic products, and they are not really price competitive. Nevertheless, we are focusing our efforts on e-commerce.
Before COVID-19, our e-commerce channel generated 20% to 30% of our sales. However, once the pandemic began, our e-commerce share rose to nearly 50%. The Chinese cosmetic market is about three or even four times bigger than that of Japan. During the pandemic, the Chinese cosmetics market was active; whereas, the cosmetics sector of all other countries was struggling. Due to that, cosmetic companies around the world tried to enter China and try to capture the market share. Among the Japanese cosmetic companies, we were ahead of others in terms of entering the e-commerce market, giving us an edge over Japanese competitors. However, we not only need to compete with cosmetic companies in China but also from other countries in the Chinese market. One important factor of our success in that market is that we were fast to be localized. We tried to follow what a Chinese cosmetic company did in the Chinese market, which helped us localize our business.
We have established strong partnerships with Tmall and Douyin, two of the largest e-commerce platforms in China, enabling us to leverage their platforms for our business. Moreover, we have good sales agency networks in China. Given our close relationship and close communication with them, they respond to us 24/7 and 365 days. At our Japanese headquarters, 35 out of our 100 employees are Chinese, and they help us to keep close communications with our Chinese partners. Whenever changes happen, we can respond very quickly.
When it comes to cosmetics, quality is all that matters. If the quality is poor, customers will not continue to patronize the products. In the same vein, no matter how good the quality of the products is, if the consumers do not know about the products, they do not buy them. Marketing is crucial. We have good quality products and good marketers in China, which are important success factors. 90% of our revenue is from China. Of our sales in China, 70% is from e-commerce while 30% is from beauty salons. Beauty salons tend to buy something popular on social media. To cater to the customers' wants or needs, salons also purchase our products through the e-commerce platform. Therefore, almost all the sales from China are from e-commerce. However, we need to change now that the pandemic is over.
As a beauty company, moving forward, which other countries or regions do you feel the need to diversify your products into to ensure the long-term viability of your business?
I am trying to spread our products to Asia. To that end, we would like to be an international brand. I think a good balance of our sales would be 60% in China, 30% in Japan and 10% in Southeast Asia. During the pandemic, we listed our shares in Tokyo Stock Exchange and got upgraded to the Prime market, or First Section. Because we were not able to go outside Japan during the pandemic, we just paid more attention to e-commerce in Japan.
Since the pandemic effects have subsided, we will see a change in the situation and landscape, moving us to change our strategy. I think the Southeast Asian countries that have a favorable view of Japan may be the markets that are easy to penetrate like Indonesia, Malaysia, Singapore, and Thailand. At the moment, we are still thinking about how we can start our operation in those countries, whether through e-commerce or an agency. I think that Japan is the most important market to grow because our products in China have a premium image among consumers with a price range of JPY 8,000 to JPY 10,000 for cosmetics and JPY 20,000 for supplements. It is not easy to penetrate these into the Japanese market because products with such price ranges are only offered by major cosmetic companies in Japan. For the past 20 years, new or emerging cosmetic companies in Japan have been appealing to consumers with low prices. It is really hard to penetrate the Japanese market unless we have innovation & technology, or marketing & sales methods. M&A might be one of our options for us. Nevertheless, our strength lies in our human power from diverse nationalities, which allows us to be aggressive in making inroads into overseas markets. Moreover, we embrace diversity within our staff, not only with individuals of different nationalities, but also with different ages, genders, creating a vibrant and inclusive working environment.
Some of the benefits of prime listing are increased capital, higher liquidity, and exposure to international investors. As the president of this company, what kind of message would you like to send to potential investors? What are your expectations following this prime listing?
Listing our shares at Tosho Prime is just a milestone. Of course, being listed on the prime market allows us to increase funds and boost our name recognition, which helps us to form partnerships horizontally. However, we are shooting for higher targets, like achieving JPY 100 billion in revenue in 10 or 15 years and becoming a global brand from Asia. Now, we are aiming to expand to Asia, through which we can be a global brand. Later, we can also go beyond Asia, like the Middle East.
Could you give us your take on the difference between synthetic-derived formulas and naturally-derived formulas? Which do you think is better?
Both are fine as long as they are effective and safe. However, from a marketing standpoint, we need to sometimes emphasize naturally-derived ingredients. NMN is an ingredient used in supplements that is good for longevity. Researchers say that it works if NMN is produced through a natural fermentation process, but the efficacy is not so good if it is synthesized.
What is your strategy when it comes to R&D, and what is your current focus? Are you currently looking for partnerships to help you develop new products?
We used to have two OEM productions. Since we acquired Huit Laboratories in April 2022, we now have our factory. We built an R&D organization in December, and the role of our R&D team will continue to become bigger. To differentiate our products, we need to develop and build our know-how, expertise, and technologies. Our plan is to increase our R&D personnel and focus more effort on this aspect. Eventually, we would like to develop and produce every new product in-house. I think it is easier to find talent for R&D in Japan. P&G in the US allocates a relatively substantial portion of its revenue to R&D, and we will aim for that in the future.
What have been some of the advantages or opportunities of being from China in entering the Chinese market so successfully?
I have been running a business in Japan for years, so I know Japan very well. I can say the same for China because I am from China and learned how our business works there. There are unbalanced resources in China and Japan, but with my knowledge and experience in both countries, I can try to combine the strengths of each country’s resources.
The design of the products that Chinese consumers like as Japanese design has different elements from what Japanese designers consider as good design. Understanding both preferences, we can combine them. Thus, at exhibitions, our booths draw in a lot more Chinese buyers than others because we have been able to balance good Japanese design and what Chinese people believe to be good Japanese design. Since we know what Chinese buyers like, we can quickly decide on the marketing strategy when we launch a product in China. Japanese manufacturers or companies always look at things through the Japanese lens, so even when they see that the Chinese locals have a different idea, they cannot decide whether to follow the Chinese way.
Imagine we come back in five years to have this interview all over again. What dreams and goals for the company would you like to have achieved by then?
In five years, I would like to see our Southeast Asian business be stable with solid market share and sales. Everything is changing very quickly, so we need to foster and develop our personnel for the future. The average age of our senior management team is 50, and middle managers are around the 40s. Those at the working level are in their 30s or late 20s. In five years, the average age of our company will be younger than what it is today.