A one-stop total service provider for the cosmetics industry, Nihon Kolmar creates everything from the printing, packaging and the contents of the final product for a wide range of cosmetic companies. Chairman Tomoji Kanzaki explains what sets it apart in the industry, how it protects itself from external shocks, and its aims to expand its US business and become the number one global contract manufacturer (CM) for the cosmetics industry.
What has been your impression of the effects of Abenomics and what action needs to now be taken to improve and further revitalize the economy?
Japan has been facing a declining economy for over 20 years, yet four years ago the government was replaced by the LDP party and the economy has begun to change. Since the implementation of Abenomics, the Nikkei stock level, which was about ¥7,000 back then, has increased by over threefold, to almost ¥20,000, and more recently stabilizing around ¥16,000. This is a clear sign that we are heading in the right direction and that the change of government has indeed had a positive effect on our economy. There are other factors to consider in addition, such as the burst of the Chinese economy bubble, as well as the plummeting oil prices, which have impacted our economy.
The minority parties may mention that Abenomics has not accomplished its goals and has not been effective, however, believe that this is not true and we are heading in the right direction. Even though the Japanese debt situation is extremely severe, with Japan being the most indebted country in the world, we need to mention that the Japanese debt is held with Japanese people. In the United States, this isn’t necessarily the case – the US debt being held by the international community. Therefore the real risks associated with the debt are more limited.
In the Japanese economy there is a very well-rounded balance between large corporations and those of medium and small size. Japanese SMEs encompass small town factories, however they possess extremely high-end technology that only they own. Take, for example, phone battery case manufacturers – this is one technology that is offered by SMEs. American corporations approach such SMEs in order to procure phone batteries and other technological devices. I believe that in Japan, what is happening is that large corporations are able to supply from these SMEs and enter the global market. But then, there are also countries like Korea with large companies like Samsung, who hold the number one position in the smartphone market. I’ve always had connections with the Korean market in the past as well; however, if you look at the Korean market, the technological advancement of the SMEs is not as impressive as it is in Japan, and all the core parts are made and imported from Japan. Therefore, if Japan stops doing business with Korea, or business is no longer achievable, then Korean products will not be able to be produced.
Established over 100 years ago, Nihon Kolmar is highly regarded and has built up an excellent reputation throughout the industry for its ability to consistently provide excellent quality across is wide product range. What in your view have been the key factors that have contributed towards the company’s extended success over the last century?
We function as contract manufacturer. Some people see us as well as an outsourcing option. Fifty-five years ago, when I began to work for Nihon Kolmar, the company was still very small, and served essentially as a destination for outsourced products. I realized that our business partners and our company accumulate all the know-how. So, what they would do is gather quotes from different companies, and at the end of the day take the offer from the company that had the lowest quote. I realized that businesses are like humans as well. You accumulate nutrients in the system so that you can withstand large shocks in the future, for example, the Lehman shock. So we went forth to accumulate our own know-how, and the products that we develop right now are 90% developed in-house. This way we limit the competition by offering extremely high-quality products. Our business partners opt for taking high-quality products and therefore this leads to our profitability as well. In turn, our profitability enables us to continue to invest in our R&D initiatives.
Another aspect that we are very careful about is to maintain stability within our corporation. We have about 350 business partners, and our largest business partners only account for about 10% of our operations. That means that we are very well diversified, and that if those business partners leave us and go somewhere else, the effects will be very limited to our business. Our sales channel is also highly diversified: our customers distribute in grocery stores, as well as department stores, through direct sales and online stores. The rise of internet shopping or online sales channels is allowing us to achieve a sustainable growth in our sales. With over 8,000 products that we are able to offer in terms of SKU (stock-keeping units), we are able to adjust to the prevailing style as well as the changing economic trends, and as a result, this is how we maintain our stability.
The Japanese cosmetic market is the world’s second largest behind the US. How would you evaluate the Japanese cosmetic industry today?
If you look at the Japanese cosmetics market and compare it before and after the Lehman shock of 2008, you can see that the market size was about ¥1.5 trillion prior to 2008, but shrank to ¥1.4 trillion in 2009. Since then, we have more or less been maintaining the same level, with the exception of last year when the market managed to pass again the bar of the ¥1.5 trillion. Yet I believe this growth comes less from the growth of the Japanese cosmetics market itself, but rather from the influence of outside factors, such as the Chinese tourists who come to Japan to purchase our products in large amounts, called bakugai (explosive Chinese purchasing). Inbound demand has grown this way, however I believe that the influx demand from foreigners is a temporary phenomenon.
Japan as you know has a very low birth rate, which means that the number of consumers within the Japanese market will remain limited, and therefore I believe that the long-term growth in Japan will be sluggish. If you look at some large cosmetic brands in Japan, their total sales revenue may be growing indeed, however a certain proportion of their revenue may come from the overseas market. If you look at the domestic demand over the last 10 years, you can see that their growth has been more limited, if not falling. If you want to maintain growth and this kind of revenue stream, it is important for companies to be consistently looking at emerging economies and enter emerging economies, like the Southeast Asian market for example.
People think that when the demand in the local cosmetics industry goes down, contract manufacturers (CMs) also tumble alongside the market; but on the contrary, this translates as an opportunity for us, and a prevailing wind to move forward. If the Japanese cosmetics market shrinks, production volumes decrease, production fixed costs will be pressed upwards, production efficiency decreases, and therefore profitability decreases for cosmetics brands. So these companies tend to look at CMs to reduce their cost. Because we are able to maintain a good balance between our production efficiency and production volume, we are able to limit our production costs and therefore, for companies closing their factories, CMs are a realistic option.
Today a few large cosmetics manufacturers are closing their factory facilities; this is a strong trend that the industry is facing, both locally and overseas, and not only with the Japanese cosmetics players but also in the United States and in the European market too.
Cosmetics companies are increasingly looking into the global market to establish production facilities, especially in emerging markets; however this represents a certain risk for them to establish a new plant and manage fixed capital and human resources there.
CM companies like us, who are expanding production facilities into Southeast Asia, offer a good alternative to temper this risk by half, so that brand makers can focus their efforts onto the sales and marketing business. Also not managing production facilities makes it much easier for them to pull out from a market if things go wrong. In this regard as well, I believe that CMs offer a huge advantage and have plenty of growth opportunities going forward.
The biggest CM corporation today is Foxconn from Taiwan, which works with Apple. Foxconn focuses its efforts on production; they have 1.2 million employees, and their revenue mark is ¥15.5 trillion, which is more than what companies like Sony and Panasonic make. As you can see, Taiwan has become more famous with the acquisition of Sharp, which is going through bankruptcy; they are by far the largest CM corporation. They are also famous because they are the CM for Sony and Nintendo.
What hopes for future growth are placed on the US market?
In the US, Nihon Kolmar had a partnership with a company called US Kolmar, which started in 1968. US Kolmar was very effective helping us out with the sales operations as well as the technological aspects for our company. Our company, Nihon Kolmar, actually comes from US Kolmar: we took their name and marketed ourselves after them. We decided to dissolve this partnership some time ago, however we still have a friendly relationship with them through the form of information sharing, but no longer in a formal contract relationship.
We are very much interested in the US cosmetics market, and I believe there are very striking differences between the markets in the United States and in Japan. In the Japanese cosmetics market, skincare is the main focus area, whereas in the United States, people are more interested in make-up and hair care. This is predominately where the growth in the US comes from, whereas in Japan the growth is in the skincare field. I believe it is possible to enter the United States market with our skincare products, and products of similar nature, and I believe that the technology that we have will be useful in entering this market.
What is the type of message that Nihon Kolmar aims to communicate to a wider global audience?
We want to tell everybody that Nihon Kolmar is the number one Japanese contract manufacturer with a strong expertise in the skincare segment, but also capabilities to develop and produce a full variety of cosmetics products – ranging from make-up all the way to hair care.
We are a one-stop total service provider, encompassing all the processes of product manufacturing, from packaging, print and the containers being used, all the way to the final product. The final product can be delivered without any additional activities necessary.
Most of our competitors in our field only focus on producing the actual substance within the containers, and rely on a different party to do the printing and packaging. However, we at Nihon Kolmar take care of everything, which is why we call ourselves a total service provider. We take it a step further, as we have gathered a lot of information, we are able to obtain specific advice for sales and marketing, so this is what we are trying to push towards.
We develop and introduce our products to the US market as well, and I believe that our company can offer lots of advantages. We are considering investing further in the United States market as a matter of fact.
You joined this company almost 60 years ago and have played an integral role in the success and growth of this cosmetics giant. What does the future global Nihon Kolmar look like and what is the legacy you would like to leave in terms of a stable and growing NK?
At the end of this fiscal year 2015, which ended in March, we have marked a consolidated revenue of ¥29.5 billion, including our Chinese operations. In the past 12 years we have continuously been increasing revenue. Next year, we hope to reach ¥30 billion revenue, and in the long term we aim for ¥50 billion. Our goal is to be global number one cosmetics contract manufacturer. This is something we are relentlessly working towards and we will continue with the growth strategy we have in place right now.
Finally, what kind of final message would you like to address to the audience in the US?
Back in the day, both the United States and Japan were enemies during the war, but now we have established a partnership in all shapes and forms. This relationship, I believe, is something that we should embrace in the coming future. Because of the issues of the Japanese constitution, we are unable to form a formal military, and therefore national security is always an important topic in Japan. The support of the United States and the close relationship that we are able to embrace with them is essential for Japan. Together I hope that both nations can be a stronger part of the global society, and in order to achieve this, I would like the continuous support from the US.