Kao Corporation Business Information, Profile, and History

Company Perspectives

Our mission is "to strive for the wholehearted satisfaction and enrichment of the lives of people globally" through the Company's core domains of cleanliness, beauty, health and chemicals.

Fully committed to this mission, all members of the Kao Group work together with passion to provide products and brands of excellent value created from the consumer/customer's perspective. In so doing, we "share joy with the consumer/customer."

History of Kao Corporation

Kao Corporation, often called the Procter & Gamble of Japan, is one of Japan's leaders in personal care products, cosmetics, laundry and cleaning products, hygiene products, diapers, and bath additives. Kao (pronounced cow-OOH) also manufactures and markets fatty chemicals, edible oils, and specialty chemicals, including aroma chemicals and toner for copiers and printers. The company has operations in more than 70 countries around the world, including the U.S.-based Kao Brands Company (formerly The Andrew Jergens Company), a marketer of personal care products under the Jergens, Bioré, Curel, Ban, John Frieda, and Guhl brands. Back home, Kao expanded in early 2006 through the acquisition of Kanebo Cosmetics Inc., one of Japan's leading cosmetics companies.

Early History

Founded in 1887 as Kao (face) Soap Company, Ltd. by Tomiro Nagase, the company introduced its first soap product in 1890, selling it with the motto "A Clean Nation Prospers." That same year Kao adopted its crescent-moon logo, which was similar to the Procter & Gamble Company's logo registered eight years earlier; thus began a longtime rivalry. By the end of the 1920s, Kao had developed coconut alcohol-based synthetic detergents, and after World War II, began manufacturing heavy-duty detergents.

From early on, Kao employed at least 25 percent of its workers in research, particularly in the field of surface technology. Early research in the properties of oils and fats, the basic elements in soap, allowed Kao to expand its product line quickly to include finishing products, polishing agents, waxes, insecticides, antiseptics, fungicides, and deodorants.

Kao's early success was made possible not only by its dedication to R&D but also by its unique network of proprietary wholesalers. In the early 1960s the company persuaded its wholesalers to establish jointly owned companies, called hansha, which would exclusively distribute Kao products. This system greatly simplified the usually complicated way that products moved from manufacturers to consumers in Japan, and provided Kao with competitive advantages, such as getting products onto store shelves faster and maintaining lighter inventories.

In 1971 Yoshio Maruta became president of Kao and continued the company's emphasis on R&D. Maruta, holder of a doctorate in chemical engineering and 16 patents, invented a process for producing aircraft lubricant from vegetable oil during World War II, when Japanese supplies of petroleum were low. An aggressive and charismatic leader, Maruta often was criticized for his domineering style that left little room for open discussion. He had a fierce respect for consumers, however. As one of his assistants told Forbes, July 25, 1988, "You can cheat housewives once, but not twice."

Series of Successful Product Launches

In the 1980s Kao's intense research operations paid off handsomely. In 1982 Kao entered the cosmetics market for the first time with its Sofina line of cosmetics, and rapidly advanced to the number two position in the Japanese cosmetic market, trailing only Shiseido Company, Limited. The following year the company's Merries brand of disposable diapers far outsold Procter & Gamble's in Japan, because Kao had developed a highly absorbent polymer that reduced diaper rash. Having expanded well beyond just soap, the company changed its name to simply Kao Corporation in 1985.

Kao's research in surface technology led the company into the electronics-software field as well. A research project on face powders resulted in the discovery of a dispersing system that was ideal for the management of magnetic particles spread over floppy discs, and Kao in 1985 established a U.S. subsidiary called Kao Infosystems Company to manufacture such discs. With the acquisition of West Coast Telecom in Portland, Oregon; Sentinel Technologies in Hyannis, Massachusetts; and the completion of a $60 million plant in Plymouth, Massachusetts, Kao Infosystems became in 1990 the largest North American maker of 3.5-inch floppy discs, although it was also consistently unprofitable. The company later branched out into CD-ROMs, hard disks, and digital audiotapes.

One of Kao's most successful introductions ever, Attack concentrated laundry detergent, came in 1987. Before Attack made its debut, Kao researchers collected dirt samples from around the world for four years in order to discover the bacteria that produces alkaline cellulose, an enzyme that cleans cotton. The researchers then spent two years synthesizing the enzyme through genetic engineering. The resultant detergent was four times as concentrated as cleaners that were then being sold; it was in fact the first concentrated laundry soap in Japan. Only six months after introduction, Attack commanded almost 50 percent of the Japanese detergent market. In spite of a price that was much higher than the competition, consumers appreciated the product's convenience--it was lighter to carry home and took up less space in the cabinet--and that it was better for the environment.

In 1990 Fumikatsu Tokiwa, who joined the company in 1965 in the research-and-development library, succeeded Yoshio Maruta as president. Around this time, Kao was the Japanese market leader in eight of its ten main product categories. It held more than half of the market in five categories: laundry detergents, fabric softeners, bleaches, skin cleansers, and household cleaners.

Aggressively Expanding Overseas

Beginning in the early 1970s, when Procter & Gamble (P&G) entered the Japanese market, Kao faced increasing competition at home from foreign companies. One of the company's responses to the encroachment of P&G, Unilever NV, and others into its home market was to turn the tables on the foreigners by aggressively expanding overseas itself. Kao began making serious moves into the U.S., European, and non-Japanese Asian markets in the late 1980s. The company's timing seemed particularly fortuitous when the Japanese bubble economy of the 1980s gave way to the prolonged recession of the 1990s. Nonetheless, Kao's overseas ventures met with only mixed results.

In 1988 Kao acquired the Andrew Jergens Company, headquartered in Cincinnati, Ohio, and placed it within its main U.S. subsidiary, Kao Corporation of America. High Point Chemical Corporation, a specialty chemical company based in North Carolina that was acquired in 1987, supplied the raw materials for the Jergens toiletry and skin-care products. A move into Germany was made in 1989 when Kao purchased a 75 percent interest in Goldwell GmbH, a manufacturer and marketer of hair-care and beauty products through professional hairdressers around the world. Kao gained full control of Goldwell in the early 1990s, and the subsidiary was later renamed Kao Professional Salon Services GmbH.

These acquisitions greatly increased the amount of revenues Kao generated outside Japan (to about 20 percent by the mid-1990s), but the company encountered difficulty building upon the acquired firms' previous successes. Jergens, for instance, in 1989 introduced a line of bath tablets called ActiBath in an attempt to adapt for the U.S. market a Kao product extremely popular in Japan. ActiBath flopped in large part because Americans take fewer baths than the Japanese and take their baths less seriously. In addition to the challenge of understanding a new culture, Kao also faced fierce competition in the U.S. market from the already entrenched Procter & Gamble and Unilever. This competition was quite evident in the 1994 launch of Jergens Refreshing Body Shampoo, a line of liquid bath soaps. On the surface a product with more promise than ActiBath, the Body Shampoo, soon after its launch, had to contend with two rival products: Unilever's Caress Moisturizing Body Wash and P&G's Oil of Olay liquid soap. Overall, Kao's American and European operations were money-losing ventures into the mid-1990s.

Kao's forays elsewhere in Asia were more successful, and were as a whole profitable. By the early 1990s the company was holding its own alongside P&G and Unilever in Hong Kong, Malaysia, the Philippines, Singapore, Taiwan, and Thailand. As the decade progressed, Kao took an increasing interest in the newly opening markets of China and Vietnam. Overall revenue generated from the region increased at a 15 percent yearly clip from the early to mid-1990s. Nevertheless, Unilever and Procter & Gamble's deeper (R&D and marketing) pockets tended to place Kao at a decided disadvantage even this close to home. P&G, for instance, spent four times as much as Kao did on R&D in the mid-1990s, and was quickly able to capture 50 percent of the shampoo market in China and Taiwan. Meanwhile, Kao's market shares in these Asian countries ranged from 10 to 20 percent.

Jettisoning Information Products; Successful Bioré Launch

While the company's household products units defended their home turf from foreign invaders and attempted to gain beachheads overseas as vehicles for future growth, the information technology business continued to struggle thanks to fierce competition. By 1996 Kao Infosystems was still losing money. In response, a restructuring was initiated that year which initially involved the integration of operations in France and Germany into the subsidiary's facility in Ireland. In a second phase, facilities in the United States and Canada were restructured.

For the fiscal year ending in March 1996, Kao Corporation posted its 16th straight year of increased revenues and increased pretax profits. Kao found further success on the new product front with the April 1996 introduction in Japan of the Bioré Pore Pack, a facial skin blemish remover whose sales totaled Y10 billion ($75 million) in its first year. When these facial strips reached the U.S. market in the summer of 1997 through the Andrew Jergens subsidiary, they quickly became the most popular product in their category, with sales of $55 million in just the first nine months following their launch. In a prime example of Kao's global marketing strategy, the Bioré product was also successfully launched in the United Kingdom through Andrew Jergens and in continental Europe through a strategic alliance with Beiersdorf AG, a German skin-care company.

In June 1997 Takuya Goto moved into the Kao presidency, taking over for Fumikatsu Tokiwa who became chairman. Goto came from Kao's chemicals side, perhaps indicating that Kao's board wanted some fresh ideas from senior management. Goto, a chemical engineer, joined the company in November 1979 as a manager of a plant in Thailand. After moving up Kao's chemicals management ladder, Goto became general manager of the chemical business division and purchasing division in July 1994.

Goto was quick to restructure Kao's operations. In early 1998 the company cut its production of floppy disks in half and also liquidated its U.S. holding company, Kao Corporation of America. The three U.S. operating companies--Andrew Jergens, High Point Chemical, and Kao Infosystems--became direct subsidiaries of Kao itself. In connection with these moves, Kao posted a special loss of Y11.62 billion ($88.5 million) for fiscal 1998. As a result, the company recorded its first year-to-year decline in group net profits since Kao started keeping records of consolidated earnings in 1981. In May 1998 Andrew Jergens acquired the skin-care business of Bausch & Lomb, Inc. for $135 million, thereby bringing into the Kao fold Curel skin-moisturizing products and Soft Sense moisturizing lotion, and giving Jergens the number two position in the U.S. skin-care market, trailing Unilever. In December of that year, Kao took a step that at the time was unusual for a Japanese company: it withdrew entirely from one of its main operational areas. Kao completed its exit from the information technology business by selling most of the remaining assets to Zomax Optical Media, a U.S. compact disc maker. This divestment led to a further restructuring charge of Y23.88 billion ($198.12 million), taken in 1999. Despite the charge, the continued doldrums in the Japanese economy, and economic travails elsewhere in Asia, Kao managed to achieve record net profits of Y34.7 billion ($287.9 million). The following year, although profits jumped 50 percent, Kao saw its streak of consecutive years of increased revenues come to an end at 19 thanks to the sales lost through the jettisoning of the information technology business.

Growth Through New Products and Acquisitions

Its focus tightened to a three-legged core--consumer products, cosmetics, and chemical products--Kao continued to pursue both organic growth and growth through acquisition. In 1999 Kao introduced Healthy Econa cooking oil into the Japanese market. The product, touted to prevent the development of fat deposits, became a smash hit, despite a premium price tag, with sales reaching Y10.4 billion ($83.9 million) by 2001. Kao later expanded the Healthy Econa line to include food products using the oil, such as mayonnaise and salad dressing. Nationwide distribution of the oil began in the United States in 2004, under the brand name Enova and through a joint venture with Archer Daniels Midland Company.

On the acquisition side, the Andrew Jergens unit completed two further acquisitions during this period. In September 2000 the Ban line of roll-on and stick antiperspirants and deodorants was acquired from Chattem, Inc. for $166.5 million. Jergens next acquired John Frieda Professional Hair Care, Inc. in September 2002 for $450 million, Kao's largest acquisition yet. Based in Stamford, Connecticut, John Frieda specialized in high-end shampoo, conditioner, and styling products. Its annual revenues were approximately $160 million. In between these deals, Kao lost out in the bidding in mid-2001 for the Clairol hair-care business, which was being auctioned by Bristol-Myers Squibb Company. Rival Procter & Gamble won out with its offer of nearly $5 billion, besting Kao's bid, which was believed to have been approximately $4.5 billion. In May 2003 Kao strengthened its chemicals business through the purchase of the aroma and fragrance operations of Cognis Deutschland GmbH & Co. KG. for approximately Y4.7 billion ($39 million). Among the assets gained was Ambroxan, an aroma chemical with the scent of ambergris and a key ingredient used in soap, shampoo, and laundry detergent products around the world.

As Kao was building up its important North American business through acquisitions, the firm was also moving more aggressively into the burgeoning Chinese market. In 2001 four core products were selected for targeting to this market: face cleanser, feminine hygiene products, shampoos, and laundry detergent. The following year Kao (China) Holding Co., Ltd. was created as a holding company for its operations in China, and Kao increased its advertising in that nation. Then in 2004 Kao began selling Sofina cosmetics products in China. That same year, Andrew Jergens Company was renamed Kao Brands Company. The move was designed to reflect the increasing number of brands that were now managed by the U.S. subsidiary.

Following up on the success of its Econa oil, Kao in May 2003 launched Healthya Green Tea, whose high levels of tea catechin were said to reduce body fat. First-year sales totaled an impressive Y19 billion ($180 million). Also successfully launched was the Asience line of hair-care products, which debuted in Japan in the fall of 2003. In mid-2004 Goto ended his tenure as Kao president and CEO, shifting into the nonexecutive chairman slot. Goto's emphasis on cutting costs, improving profitability, and more effectively using the firm's resources paid off: during his seven years at the helm, Kao's profit margin jumped from 3.1 percent to 7.2 percent, while return on equity more than doubled, increasing from 7.5 percent to 15.5 percent. Succeeding Goto as president and CEO was Motoki Ozaki, who had been in charge of the Global Fabric and Home Care division.

Under Ozaki, Kao's emphasis on new product development did not abate. In September 2004, for example, Kao pursued two additional segments of the Japanese cosmetics market. The Alblanc line of skin-care products was launched for distribution through general merchandisers and drugstores, while the ORIENA brand was targeted at the mail-order market. During Ozaki's first year, Kao achieved its eighth straight year of record profits: Y72.2 billion ($672.1 million) on record revenues of Y936.9 billion ($8.72 billion). Pretax profits rose for the 24th consecutive year.

Acquisitions continued in the Ozaki era as well. In July 2005 Kao purchased Molton Brown, a U.K. maker of luxury bath, skin-care, and cosmetics products, for £170 million ($298 million). Then in early 2006 Kao completed by far the largest acquisition of its history, the Y427 billion ($3.7 billion) purchase of Kanebo Cosmetics Inc. The acquired company was the cosmetics arm of the financially troubled Kanebo, Ltd. Kao and Kanebo had two years earlier entered advanced discussions about a Kao takeover of the cosmetics business, but the deal fell through in early 2004. This time the deal was consummated, making Kao the second largest cosmetics maker in Japan and placing it in a better position to compete against market leader Shiseido. In Kanebo Cosmetics, Kao gained a company with annual revenues of about Y212 billion ($1.8 billion) that sold its products in approximately 50 countries worldwide and also had an extensive network of retail outlets. Plans were immediately made to move more aggressively into the cosmetics market in China. Kanebo Cosmetics continued to operate independently as a wholly owned subsidiary of Kao Corporation.

Principal Subsidiaries

Kao Hanbai Company, Ltd.; Kao Cosmetics Sales Co., Ltd.; Nivea-Kao Company Limited; Kao-Quaker Company, Limited; Kao Shoji Co., Ltd.; Kao Infonetwork Company, Limited; Kao Logistics Company, Limited; Niko Seishi Co., Ltd.; Kao Professional Service Co., Ltd.; Kanebo Cosmetics Inc.; Kanebo Cosmetics Sales Co., Ltd.; E'quipe, Ltd.; Lissage Ltd.; Kanebo Cosmillion, Ltd.; Inogami Co., Ltd.; Kao (China) Holding Co., Ltd.; Kao Corporation Shanghai (China); Kao Commercial (Shanghai) Co., Ltd. (China); Kao (China) Research and Development Center Co., Ltd.; Kao Chemical Corporation Shanghai (China); Zhongshan Kao Chemicals Limited (China); Shanghai Kanebo Cosmetics Co., Ltd. (China); Kanebo (Shanghai) Sales Co. Ltd. (China); Kao (Hong Kong) Limited; Kao Chemicals (Hong Kong) Limited; Kao (Taiwan) Corporation; Taiwan Kanebo Cosmetics Co., Ltd.; P.T. Kao Indonesia; P.T. Kao Indonesia Chemicals; Kao (Malaysia) Sdn. Bhd.; Fatty Chemical (Malaysia) Sdn. Bhd.; Kao Soap (Malaysia) Sdn. Bhd.; Kao Oleochemical (Malaysia) Sdn. Bhd.; Kao Plasticizer (Malaysia) Sdn. Bhd.; Pilipinas Kao, Incorporated (Philippines); Kao (Singapore) Pte. Ltd.; Kao Consumer Products (Southeast Asia) Co., Ltd. (Thailand); Kao Industrial (Thailand) Co., Ltd.; Kao Commercial (Thailand) Co., Ltd.; Kanebo Cosmetics (Thailand) Co., Ltd.; Kao Vietnam Co., Ltd.; Kao (Australia) Marketing Pty. Ltd.; Quimi-Kao, S.A. de C.V. (Mexico); Kao Brands Company (U.S.A.); Kao Specialties Americas LLC (U.S.A.); ADM Kao LLC (U.S.A.); Kanebo Cosmetics U.S.A. Inc.; Kao Corporation (France) SARL; Kanebo Cosmetics France S.A.R.L.; KPSS - Kao Professional Salon Services GmbH (Germany); Kao Chemicals GmbH (Germany); Kanebo Cosmetics Deutschland GmbH (Germany); Kanebo Cosmetics Italy S.p.A.; Kao Chemicals Europe, S.L. (Spain); Kao Corporation S.A. (Spain); Kanebo Cosmetics (Europe) Ltd. (Switzerland).

Principal Competitors

Shiseido Company, Limited; L'Oréal SA; Lion Corporation; The Procter & Gamble Company; Unilever.

Chronology

• Key Dates
• 1887 Kao Soap Company, Ltd. is founded by Tomiro Nagase.
• 1890 Company introduces its first soap and adopts a crescent moon logo.
• 1982 Kao enters cosmetics market through introduction of the Sofina brand.
• 1985 Company is renamed Kao Corporation.
• 1987 Attack laundry detergent is introduced.
• 1988 The Andrew Jergens Company, based in Cincinnati, Ohio, is acquired.
• 1989 Kao gains majority ownership of the German firm Goldwell GmbH.
• 2002 Jergens acquires John Frieda Professional Hair Care, Inc.
• 2004 Andrew Jergens Company is renamed Kao Brands Company.
• 2005 Molton Brown is acquired.
• 2006 Kao acquires Kanebo Cosmetics Inc.