Solutions for a Totally Optimized Supply Chain

J-Beauty brands have historically faced strong competition from Western and Korean brands, yet many of the active ingredients used by large international beauty products originate from Japan and its noteworthy ODM makers. There has also been a shift in consumer preferences towards Japan’s “less is more” philosophy, which emphasizes high-value products with fewer, more effective ingredients. What are the advantages of J-Beauty brands, and how do they compare to your regional competitors?

I think the advantages are due to the Japanese traditional philosophy of manufacturing, called monozukuri, which is about pursuing perfection. That pursuit of perfection is not just about the ingredients but also covers packaging. For example, Japanese manufacturers pursue perfection in the various conveniences and designs of the packaging, including the ease of opening or closing the lid.  Such attention to detail in manufacturing is the monozukuri philosophy, which comes from traditional Japanese craftsmanship. This attention to detail in manufacturing is not seen anywhere else in the world, so I believe that makes us number one in the global market.

What I would like to mention about competition from foreign cosmetics relates to imported cosmetic brands in Japan. For a long time, it has mostly been French brands, but in the last few years, Korean brands became market leaders. Korean brands have good products with good designs, but I think the thing that differentiates them is their marketing. That is not just true for the cosmetics industry. For example, K-pop artists are very good at marketing and targeting the global market, not just the domestic market. I think that is the superiority that Korean brands have over Japanese brands. As to how we can compete with those Korean brands, I think the Japanese products are not at all inferior to Korean products, and marketing capability is key. That includes the global strategy as well, but I believe a lot of Japanese companies are still focused on the domestic market. In contrast, Korea has long been promoting global marketing, and I think that is the reason they became the market leader.

The cosmetics market is set to undergo a phase of expansion driven primarily by two things. The first is the growth of younger segments like Gen Z and their leveraging social media to purchase cosmetics. The second is the increasing prioritization of products containing organic and natural ingredients. For example, this market is expected to reach USD 21.1 billion by 2030, compared to USD 10.5 billion in 2021. What evolution do you foresee in the world of cosmetics, and what do you think will be the main drivers for this?

Many makers have recently developed many functional ingredients for the cosmetics industry, and I think the keyword will be anti-aging, especially in Japan. We are seeing society aging, and with that, the need for countermeasures against wrinkles or spots is growing rapidly among women. In fact, not just for women but also among men, there has been a recent need for skincare or cosmetics, so the consumer sentiment has been changing rapidly. To address these needs, different makers have been developing ingredients for different beauty needs, and I think the need to become more beautiful will not go away. Therefore, as long as makers continue developing superior ingredients or new functional ingredients that can satisfy consumers, I believe the market will continue to grow.

Speaking of the population crisis, in the next 15 years, one in three people in Japan is expected to be over 60 years old. This labor shortage and the shrinking domestic market will be acutely felt by the cosmetics industry, yet it also creates an opportunity for health and cosmetic brands to create new solutions and to cater to that older population, as you just discussed. What strategies and innovations have your company employed in collaboration with your partners to cater to the desires of all consumers?

We are a distributor, so we rely on makers for development, but recently, we have collaborated with makers and our female staff for marketing, design, and product development. In the past, we were just focused on in-store promotion at drugstores, but recently, the younger generations mostly sought information through social media, so we are trying to leverage those platforms to promote our products by collaborating with retailers or makers. We are trying to identify the best ways to promote our products promptly to the targeted consumers, so although the declining population is a challenge for us, we are trying to strengthen and focus our marketing to the targeted consumers, and we are also trying to broaden the targeted consumer age ranges and include male consumers, who have increasing demands for skin care. With these approaches, I believe we can expand in the domestic market.

Wholesalers and distributors have historically been responsible for connecting buyers and sellers and ensuring distribution. However, because of the rise of e-commerce platforms, social media, and B2B digital communication channels, businesses and their customers are increasingly cutting out the middleman. As such, we’re seeing that wholesalers are increasingly offering added-value services, which include logistics optimization and collaboration for marketing, etc. How do you envision the future role of PALTAC, considering the increased prominence of those digital channels?

Regarding the supply chain, we are trying to innovate in logistics with regard to a core function of wholesalers - the ability to deliver products at low cost. We already had a new system installed in our Niigata regional distribution center, but now we are developing the new version of that system, which has twice as productivity as the Niigata model. As you mentioned, the market demands more than just delivering goods seamlessly these days. We need to digitally connect all upstream and downstream locations to provide information.

There are also challenges regarding excess inventory, shortage of inventory, or returned goods. If we are connected digitally, I believe we can solve these problems, but retailers, makers, and wholesalers are not currently connected by digital. I think this is the value we can provide for the retailers and the makers by connecting them digitally, thus improving the supply chain. I think the wholesaler is the one best positioned to deliver this value, so we would like to lead this innovation.

Niigata RDC

We understand that the role of wholesaler can evolve and that your company has become a supply chain engineering company that’s able to connect the different dots throughout the entire process.  Looking at your the SG&A expenses ratio in previous fiscal year compared to your biggest competitor in Japan, ARATA, yours were around 40% lower than theirs. How have you been able to achieve such an optimization level while being in a very similar environment and having a similar business model?

We have customized the entire logistics system, for example, we considered using material handling machines that could be purchased directly from the manufacturer, however, in our case we have worked with the manufacturer to develop a tailor-made machine and have designed our own distribution centers. Also, we have over ten patents related to the logistics system. Thus, our approach to logistics is different from our competitors. We now are trying to become number one by far.

Material handling machines

We are witnessing a trend in logistics where companies are partnering to improve supply chain efficiencies and sustainability. You have publicly mentioned the cooperation and collaboration with retailers and manufacturers are essential. This is exemplified by your recent technical partnership with Okura Yusoki to use AI case-cutting robots. Can you tell us more about this technical partnership and how it’s furthering, and are you looking to expand your partnerships or collaborations in logistics or in any other fields?

In terms of logistics collaboration, we can’t manufacture the automatic warehouse or conveyor, so we are trying to develop a material handling system by working with material handling makers, applying our innovative concepts to their ability to produce machines. By combining these two abilities, we are trying to develop something new for the logistics.

As for Okura Yusoki we have been working with them for over twenty years. We worked together to develop a new type of automatic warehouse, conveyors, and robots for logistics. When we co-develop with them, we use our know-how and software expertise. As I mentioned before, our new project to develop a next-generation logistics system, and we are trying to develop a new material handling system that is completely unprecedented. We are working on this with Okura Yusoki and some other manufacturing partners. With these collaborations, we are trying to create something that you’ve never seen.

PALTAC Corporation was founded in 1898, and you’ve grown into a leading wholesale distributor across Japan. You partner with over 1,000 manufacturers and 400 retailers. The company focuses on three key segments: cosmetics, daily necessities, and pharmaceuticals, and it faces significant competition from major distributors like ARATA and Chuo Bussan. In such a situation, what competitive advantages do you offer your clients, and which sectors do you believe will have the greatest potential for growth over the next five years?

Our competitive advantage is our significantly lower-cost logistics system. Over the next five years, we will continue strengthening this logistics system with further innovations, but I don’t think that is enough. In the Japanese society, which is now experiencing a declining population and an aging society, I’m not sure if that will contribute to this society on its own. My vision is to not limit the use of our improved logistics system to ourselves. We would like to let the other distributors use it as well so that logistics costs will be lowered for manufacturers and retailers. I think that would be a good contribution to society, so we would like to contribute to cost savings for the entire industry, including manufacturers, retailers, and wholesalers. Without innovations that can make such a contribution, I don’t think that we will be successful over the next five or ten years, so that’s going to be our mid-term mission.

Your PALTAC Vision 2027 sets some ambitious targets, aiming to boost net sales by 10.2% and increase the operating revenue by 10.4% compared to FY2024 (Year ended 31 March 2024) to JPY 30 billion. Financial goals include an ROE exceeding the cost of capital and achieving a payout ratio of 35%. or more. In the FY2024, sales rose to JPY 1.15 trillion, and operating income increased by JPY 2.7 billion to JPY 27.1 billion from the previous year. What specific strategies are you employing to achieve these targets?

These goals that are set in the 2027 vision are not considered to be too high, but thinking about the next three years, especially in the drugstores, we saw the big merger between drugstores last year. As a result, we are seeing a lot of potential M&A activity in the drugstore sector, so for the next three years, the environment for retailers might change dramatically. That could affect the numbers in our target. However, as I mentioned, we are now working on the new logistics system, and I think it’s going to take another three to four years to complete that, so for the period of the new vision, I think that’s going to be a time of preparation for a new business model. We are also working on the project to connect the supply chain through a digital network. I believe that’s also going to take about three years to develop the data and master, so although we announced the new medium-term management plan for the next three years, I think that period is going to be a preparation period for the next generation’s business plan.

Throughout our time in Japan, we have increasingly heard about the importance of internationalization. PALTAC has a strong presence in Asia, with a trade network with fifteen countries, and you have two subsidiaries, one in Indonesia and one in Vietnam. Could you tell us about your vision for your Southeast Asia operations, your specific focus on Vietnam and Indonesia, and what new plans or interests you have to internationalize or seek partners overseas?

The reason we established subsidiaries in Indonesia and Vietnam is that these are the countries with the youngest populations in Southeast Asia and have a lot of economic growth potential. Both countries are also very friendly to Japan and have a higher demand for Japanese cosmetic products, daily necessities, and over-the-counter (OTC) drugs. In the past, we exported these products using local distributors, but those distributors were unable to put together different Japanese makers’ products to distribute in the local markets, so we established our own local subsidiaries. Since establishing those subsidiaries, about 40 companies have been distributing their products through us, so we will continue to invest in these two countries going forward actively.

As for the internationalization strategy, we will continue to target the Southeast Asia region, and for the time being, we will be focused on expanding our presence in this region, but looking at countries like Indonesia or Vietnam, their infrastructure still needs to be developed. There are many traffic jams due to the underdeveloped roads, so it is still difficult for us to physically distribute the products, but in ten to fifteen years, I believe their infrastructure will improve significantly, and the market is going to be modernized. At that time, we will face a challenge to establish an integrated supply chain, but I think there is a business opportunity for us because I believe these two countries have a lot in common with Japan, in terms of the infrastructure or the size of the roads, for example. Thus, I believe we can use our knowledge of distribution in Japan in these countries, and I would like to function as an intermediary distributor in these countries. I believe they will find that to be really valuable in these markets.

The big strength of PALTAC in Japan has been this highly advanced and integrated logistics system, where you’ve been able to streamline the entire value chain. In those overseas operations, on the one hand, you have limits on the local infrastructure, but there’s also the fact that, at present, you won’t have a system that is as integrated and advanced as you have in Japan. Looking at the situation today, how are you able to compete in those overseas markets when you are lacking the one really strong advantage that you’ve developed here?

As you said, we have the know-how for the logistics system in Japan, but we don’t have the know-how to establish a similar system and logistics center in the overseas markets, so I believe the key is choosing a good company to partner with. A lot of Japanese cosmetics companies and food companies export their products, but at some point in the future, I believe they will face a challenge of the inefficient supply chain. Because of this, I think there will be an opportunity for us, and we can provide value to the supply chain. To achieve that, we need to look for a partner, which could be a sogo shosha (trading company) or a logistics company. In any case, we would like to work with a partner to bring the functionality of the logistics system that we have in Japan to other countries. I think that’s going to be the best way to expand in the overseas markets.

PALTAC is a historical company of Japan with more than 100 years of existence. As such, there has been a succession of different management teams and presidents. Considering this long history, what would you like to achieve during your tenure as president, before you hand the company over to the next generation of executives?

Simply put, I would like to achieve both the growth of the company and the happiness of the employees. In terms of growth, I don’t think that we should pursue the growth of PALTAC only, and if we do, we don't deserve to exist. Rather, we would like to contribute to the whole supply chain so that we can contribute the most value. I think that will be our mission as a wholesaler for the supply chain.

At the same time, I would like to pursue the happiness of our employees. We as intermediary distributors are really busy working behind the scenes.. However, given that context, I would like to make our employees happy by being proud of their work. Of course, we would like to be number one in earnings, and I would also like to be overwhelming number one in compensation for our employees.

For more information, visit their website at: https://www.paltac.co.jp/index.html