By  on March 4, 1994

WASHINGTON -- A Japanese retailer's court victory over cosmetics giant Shiseido may well transform the face of the personal care industry in Japan to the benefit of U.S. cosmetics firms, analysts here say.

"This decision will open the Japanese market to mass retailing and create a two-tiered system where many cosmetics are sold off the shelf, while the prestige lines are sold from the counter, using the consultation system," said Emalee Murphy, a cosmetics international trade attorney with Bryan Cave, a Washington law firm.

This likely sea change was precipitated by last summer's decision by a Tokyo District Court that ordered Shiseido to resume shipping cosmetics to Fujiki, a mail order discount house.

In essence, the ruling gutted Japan's long-standing dictum that all cosmetics have to be sold to consumers at retail stores by " beauty consultants" -- cosmetics salespeople. "Shiseido had contracts with retailers that specified its cosmetics could only be sold through the consultation system and the stores could not sell these products to other retailers," Murphy said. "But when some stores breached this agreement and sold [to Fujiki], Shiseido stopped shipping."

The court ruled this action violated Japan's anti-monopoly law and ordered Shiseido to resume shipments. The cosmetics firm said it would appeal the decision, which it said jeopardizes its entire distribution system.

About 70 percent of Shiseido's sales are through independent retailers, with national chains and department stores accounting for the rest.

Meanwhile, last August, Kawachiya, a retailer, filed complaints against Shiseido with Japan's Fair Trade Commission, alleging it canceled contracts based on the fact that the store discounted cosmetics by up to 30 percent.

In October, Kawachiya filed additional complaints with Japan's FTC alleging Shiseido directed its divisions to stop shipping to the retailer. It also alleged Max Factor K.K., a division of Procter & Gamble, stopped shipping to the discount retailer.

An FTC ruling is expected by early 1995. Murphy noted the U.S. Trade Representative is pressuring Japan's government to eliminate an antitrust exemption that now allows companies to set and maintain retail prices for goods selling for less than 1,030 Yen, about $10.

Should the Tokyo court decision hold up and the FTC rule in favor of the retailers, the trade attorney said, "American cosmetics companies might be able to make better inroads with that market, since they won't have to deal with buying counter space and sales lady consultants. The market will grow because of the increased number of mass retailers who sell cosmetics."Ironically, what appears to be a looming abolition of price maintenance agreements in Japan could work against some U.S. beauty firms getting a solid toehold in this market.

"With the [price setting] agreements, profit margins on cosmetics products were quite high," Murphy said. "Margins are much lower in the mass market, so it will take a considerable effort to make money, even though it should be easier to get your product on the shelf there."

Court and antitrust agency rulings aside, she noted, Japan's regulatory environment still make it difficult for any foreign-based cosmetics firm to do business there. "It's near impossible to market any cosmetic in Japan that has innovative ingredients in it, because Japan treats them the way many countries treat innovative drug ingredients," she said.

As a result, she said, several U.S. cosmetics firms have reformulated their products at great cost to be able to sell in Japan.

Meanwhile, Louis Santucci, international vice president with the Cosmetics, Toiletry and Fragrance Association, said efforts to make the Japanese market more accessible to foreign cosmetics firms is part of a worldwide struggle to remake the face of trade. "Basically, the perception of how and where the consumer will buy goods is changing," Santucci said. "This year, for the first time, British department stores will be allowed to open for a few hours on Sunday," Santucci said. "But at the same time, the U.K. upheld restrictive distribution agreements by suppliers on retail customers of fine fragrances."

In addition, he said, virtually all consumer goods can be purchased in deep-discount French hypermarkets, "while in the U.S. prestige product manufacturers are able to block distribution by discounters by arguing copyright protections.

"The fact of the matter, though," he added, "is that it's not just Japan that's under pressure to change marketing practices. Almost everywhere there are efforts to re-look the way we've become accustomed to doing business."

To access this article, click here to subscribe or to log in.

To Read the Full Article

Tap into our Global Network

Of Industry Leaders and Designers

load comments
blog comments powered by Disqus