Kao Group's Cosmetics Business in China down 5% in H1 2022

Abstract: On August 3, Kao Group released its financial results for the first half of 2022. Its total net sales in the first half were $5.4 million, up 8.7% year-on-year with its operating income fell 23.9% to $397million.

---

CHAILEEDO learned that in its earnings report, Kao said that in the first half of the year, the market environment remained vague with high prices of raw materials, especially petrochemicals. Difficulties such as sharp fluctuations in exchange rates, the situation in Ukraine, and COVID-19 have still existed. All made a negative impact on the Kao Group's production and operations. Its operating income has also never returned to positive growth in 2020 and continues to decline. However, in the case of its cosmetics business, it has maintained positive growth since turning around last quarter.

Specifically, Kao's consumer products business reported net sales of $4.1 billion, up 2.3% year-over-year and operating income of $246 million, down 20.1% year-over-year. Its operating margin decreased to 6%. Net sales growth rates of major companies (like-for-like growth) in China is -11%. The decline in profits was mainly affected by high prices of ingredients, rising logistics costs, and the lockdown policy in China. The Kao Group took simultaneous measures to minimize the impact by raising prices and reducing costs.

The four major businesses in the Consumer Products Business are Hygiene & Living Care, Health & Beauty Care, Life Care, and Cosmetics, all achieved low-single-digit growth. Among them, the cosmetics business sold $858 million with a YOY growth of 1% and operating income achieved $16 million with a growth of $20 million, a turnaround from the same period last year. Although its market recovery was still below However, its market recovery is still lower than expected. However, in China, despite strong growth in Q1. The cosmetics business decreased by 5% year-on-year in the first half of the year due to the closure of the COVID-19 in Q2.

In Kao’s Household and Personal Care Business, its sales achieved $3.3 billion with 1.9% decrease year on year and operating income was $230 million with a loss of $168 million. In Asia region, Kao stated that gained strongly in Q1 but the substantial impact from lockdowns in China in Q2.

In the second half of the year, the Kao Group expects price hikes in overseas regions to bring earnings growth of about $1.48 million and about $2.6 million in Japan.

However, with the rapid growth of high-end cosmetics due to consumer upgrade, the Kao Group did not seize the opportunity of high-end brands in the Chinese market like Shiseido, Kose and other Japanese companies. Lagging international processes combined with sales hindrances and soaring materials from the epidemic have seen Kao's profits decline year on year. Its net profit fell from $1.5 billion in 2017 to $811 million in 2021. On May 11, Kao announced its financial results for the first quarter of 2022. The company reported net sales of $2.7 billion, up 8.2% year-on-year and its operating income was $146 million, down 28.4% year-on-year.

In fact, the Asian market, especially China, has become a growth region emphasized by the Kao Group. In the 2020 financial report, the Kao Group said that it has increased its investment in China's e-commerce platform and its sensitive skincare brands Freeplus and Curel are performing well. During the China International Consumer Products Expo and China International Import Expo in 2021, the Kao Group's high-end cosmetics brand SENSAI was exhibited for the first time. On September 7, 2021, Kao announced the official launch of its high-end brand SENSAI in China.

Last month, Kao's Curél launched Curél's first Chinese-made product to address the skin concerns of young people with dry and sensitive skin for the Chinese market. According to the Kao Group, this product is the first anti-wrinkle product launched for Chinese consumers.

Kao, which missed the windfall, said it is accelerating its layout and will focus on its high-end brands and strengthen its promotion in China to further increase its market share in China in the next step by 2025.