TOKYO — Kosé Corp., Japan’s third-largest cosmetics company, is, like other beauty players and consumer goods makers, facing challenging conditions as Japan’s economy stagnates and the country’s shrinking population ages.

This story first appeared in the February 5, 2010 issue of WWD. Subscribe Today.

The Tokyo-based company trades almost exclusively in Asia and its portfolio includes prestige cosmetics and skin care brands Cosme Decorte and Sekkisei as well as licenses with Stephen Knoll New York, Jill Stuart, Anna Sui, Rimmel and Sonia Rykiel. Just recently, Kosé announced its foray into men’s beauty products through an agreement with Coty Inc. to manufacture and distribute Adidas-branded facial washes, deodorants and other goods.

Kazutoshi Kobayashi, president of Kosé Corp., acknowledged in a recent interview that Japan’s beauty market has been tough but there were signs of improvement at the end of last year.

“Some people might be saying that 2010 will be a bad year, but I don’t really believe that,” said the executive at the family-run company. “It will be tough to grow sales by 5 percent or something close to that but I don’t think sales will actually decrease.”

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Kobayashi noted the increasing polarization of the beauty market, explaining Kosé is seeing the most success with its high-end luxury products and more affordable, cheaper ranges for drugstores.

“There’s a lot of competition in the market because even nonbeauty companies have started making cosmetic brands and products,” he said.

The executive also said Kosé is experimenting with alternative distribution methods as department stores struggle to stay competitive. Japanese department store sales have been declining for more than a decade amid a stagnant macroeconomic climate and increasing competition from monobrand stores, shopping centers and fast-fashion brands. Many chains are closing underperforming units — just last week, Seibu announced it will shutter its historic flagship in Tokyo’s Ginza district.

“I think this year, there will be lots of new places to buy cosmetics,” Kobayashi said, adding that Kosé recently opened a store for Jill Stuart cosmetics in Tokyo’s Shinjuku train station. The executive also said the company is considering selling products online and at hair salons.

“The [Japanese] market is actually getting smaller, but for Kosé there are still many different areas we’ve not explored yet,” he said, speaking in a room adorned with an oil painting of his grandfather and the company’s founder Kozaburo Kobayashi. “By entering these new areas, we hope to counterbalance the shrinking of the market.”

Much like its larger rival Shiseido, Kosé is looking to broaden its international reach. Only about 10 percent of the company’s business is generated overseas in places such as Hong Kong, Taiwan, Mainland China, South Korea, Southeast Asia and Dubai. But Kobayashi said the company is interested in expanding to new markets such as Russia, Brazil and India.

Kosé is also interested in making acquisitions but hasn’t yet found the right target, he said. Last month Shiseido launched a $1.7 billion tender offer for California-based Bare Escentuals, giving it a greater presence in the U.S.

Kosé entered the Chinese market about 20 years ago, but Kobayashi said the company erred in coming in exclusively on the lower end of the market and it’s working to upgrade its image. Until now, the company made products exclusively for the Chinese market, but that’s set to change. Last year, the company launched its prestige Cosme Decorte line of skin care products and cosmetics in Beijing, and Kobayashi is pleased with the results so far.

“So now we think we’ll be selling Chinese consumers a lot of the same products we sell to Japanese consumers,” he said.

Although a host of international beauty players is descending on China, Kobayashi said he thinks Japanese brands have a competitive edge.

“Even though there are a lot of Western cosmetics companies such as Procter & Gamble and L’Oréal, which are also coming into the Chinese market, I think Japanese brands have some advantages like high-quality skin care products and a good record in research and development,” he said.

“Even at Japanese department stores like Ginza Mitsukoshi, the consumers buying the most luxury products are the Chinese,” he observed.

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