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Kao teams with ‘Rolls Royce’ of hair care for makeover

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TOKYO — Cuban-born American hairstylist Oribe Canales is known to have 1,000 people on his salon’s waiting list. From the runway to the red carpet, anything he touches commands the spotlight.

Japanese consumer goods maker Kao hopes to attain a similar status in the cosmetics industry. In December, the company announced it will purchase the celebrity stylist’s namesake brand, Oribe Hair Care, for an estimated 50 billion yen ($441 million). For Kao, known for its conservative management style, it is the priciest foreign acquisition yet. 

“It looks like a daring move,” a senior executive from a rival maker said, following Kao’s announcement. The decision surprised investors, too. During morning trading after the Dec. 21 announcement, Kao shares fell 1.4% as concerns grew over the possibility that the deal would be a financial burden.

Despite the worries, Kao is betting big on Oribe, hoping the brand can jump-start its struggling cosmetics business. 

Founded by Canales in 2008, Oribe Hair Care sells high-end hair care products primarily to beauty salons. Pricey items — around $40 to $90 for a bottle of shampoo — are popular among wealthy American consumers. But despite the brand’s reputation as the “Rolls Royce” of hair care, its most recent sales figure, estimated at around $100 million annually, is less than promising.  

Meanwhile, Kao is performing solidly overall, thanks largely to strong sales of its mainstay products, such as disposable diapers and detergents. The Japanese maker expects to log a record profit of 200 billion yen or so in operating profit for the year through December. Kao shares are trading at around their all-time high.

Oribe Canales

In contrast, the maker’s beauty care segment, including skin care and other cosmetics, is a drag on performance. For the first half of 2017, the beauty business logged 4.1 billion yen in losses, with an operating margin ratio at 8.1%, well below the entire business’ 12.2%. Kao’s overseas hair care business is also slumping.

Missing the boat

Generally, the cosmetics market is booming in Japan, with Shiseido and Kose posting record profits as they leverage the popularity of their luxury brands. 

“Our business has not fully caught up with changing consumer preferences,” said Kao President and CEO Michitaka Sawada during a media briefing in August. Sawada also said the business was analyzing financial reports of rivals for the past 10 years, trying to identify differences with Kao.

Kao has been successfully growing its low- and mid-tier global brands of detergents and other consumer goods, but is lagging in cosmetics. To shore up this side of its business, Kao began aggressively buying foreign brands from 2000 and later, and acquired struggling domestic rival Kanebo Cosmetics in 2006.

Since then, Kao has avoided large acquistions in the consumer goods sector, in part to focus on putting the Kanebo brand on track. But the expected synergy that Kanebo was supposed to bring has not materialized.

Kao wants to raise its operating margin ratio to higher than 17% by 2030, from about 11% in 2015. Sawada is aiming to place Kao among the top three global consumer goods brands, after American giant Procter & Gamble and Anglo-Dutch conglomerate Unilever, both of which have market capitalization seven times and five times larger than Kao, respectively. The ambitious goals would not be realized without growth in its beauty care business.