TOKYO DEREGULATION HAS COSMETIC EFFECT
Byline: Koji Hirano
TOKYO — In the year since the Japanese government began deregulating the domestic cosmetics market, the flood of discounted imported goods that some department stores executives feared has yet to materialize.
The door has been opened, however, to a fundamental, long-range change in the way cosmetics are marketed and priced in Japan.
Over the last four years, the Japanese government has encouraged price competition through a series of legal rulings. Then, last March 15, regulations were changed to make it easier for third parties to bring Western cosmetics into the country, theoretically paving the way for the growth of parallel imports.
Although mostly symbolic, another step will be taken April 1, with the expiration of a law barring discounting. During the last few years, the government had largely ignored the statute, while the country was gripped with consumerism and discounting began to flourish. But now the regulation will be cleared off the books altogether.
As one cosmetics executive put it, “The Japanese market is definitely on the way to deregulation.”
Another development could emerge by April. A cosmetics industry committee consisting of 15 companies — including Kanebo, Estee Lauder and Christian Dior — met here on Dec. 16 and began to study the effects of the deregulatory moves taken so far, with a goal of recommending further action.
The group is expected to reach some sort of conclusion next month. Some of the executives say they wonder how far the government can or will go in dropping barriers. Few experts expect a complete elimination of the rules.
Nevertheless, the gates have opened — if only a crack.
“After the deregulation, 30 parallel importers started business,” said Yoko Nakamura, director of the Office of Cosmetics Evaluation, Pharmaceuticals & Cosmetics Division in the Ministry of Health and Welfare.
Retailers can sell parallel imports more cheaply than typical stores working with manufacturers, since the discounters don’t provide expensive customer services like the in-store demonstration and counseling found in department stores.
The lack of service, anathema to retailing in Japan, is one reason cited by major companies like Shiseido for the need to discourage discounting.
But price has also become a politically charged issue in the last decade spurred by increasing numbers of Japanese traveling abroad and becoming privy to wide disparity in prices, particularly in duty-free shops with their steep discounts.
Imported cosmetics are shipped over great distances, and in many cases the products have to be reformulated to be sold in Japan, leading to increased costs.
According to a survey conducted early last year by the Ministry of International Trade and Industries, the price differential has narrowed but is still significant. If prices in Tokyo are indexed at 100, the price of the same product is 85 in France and 71 in New York.
“An executive for a foreign beauty firm once said that in order to sell the merchandise in Japan it should be as expensive as the consumers perceive it to be; it appears to have higher quality when the price is high,” said Noriko Furuta, an adviser for the Manufactured Imports Promotion Organization.
The initial steps taken last March appear to have had little effect, largely because safety standards remained firmly in place even though import restrictions were relaxed.
Under the old law, only the manufacturer and its Japanese agent could bring a particular brand into Japan, because the importer had to supply an official record of ingredients used in the products. The record was available only from the manufacturer.
Under the new regulations, if a product already exists in Japan, any third party can detail a product’s ingredients and import the item, provided it is properly labeled.
However, not just any merchandise can be gleaned off the international gray market and run through the import mill. Because the cell structure of Asian skin differs from that of Caucasians, the government has a long list of barred ingredients.
Under Japan’s Drugs, Cosmetics and Medical Instruments Act, 16 kinds of ingredients, such as formalin and mercury, are prohibited, and another 250, like salicylic acid, are restricted in usage. So manufacturers routinely have to reformulate their goods before exporting the items to Japan.
This has served to put a brake on liberalization and left some would-be importers frustrated. One of the most colorful and widely quoted figures among the discounters, Yukio Higuchi, president of the Tokyo-based Kawachiya Shuhan Co. Ltd., had stockpiled Western department store cosmetics worth $400,000 at wholesale in warehouses in Hong Kong, Singapore and the U.S. early last year, with a plan to start importing with the March relaxation and intending to discount the merchandise by 50 percent.
But instead, he sold off the cache.
“I have been authorized as an importer, but because there are few cosmetics that we can import to Japan due to the ingredients we have not been allowed to use in this country, I don’t import or sell cosmetics from overseas now,” he said. “As for skin care, almost no cosmetics can be imported because of the regulations on ingredients. The same thing happens on makeup.
“Consumers want to select their favorite color out of a wide variety,” he continued. “But under the present [ingredient] policy, only a few shades can be imported, which is not enough to attract the Japanese consumers.”
Higuchi, who says he has a dozen lawyers working for him, helped light the discounting powder keg in 1993, when he dragged market leader Shiseido before Japan’s Fair Trade Commission, charging price-fixing.
Shiseido, in turn, accused Higuchi of wrongfully wholesaling its products, a charge he denied.
The trade commission issued a letter in 1995, saying it had not found Shiseido guilty of wrongdoing. A civil suit, brought by Higuchi, is still pending.
He also has taken action against Kanebo, another major domestic manufacturer. But the slow pace of action has left Higuchi frustrated.
“It has taken too long for deregulation,” he said this week, asserting that all ingredient barriers should be eliminated. “I am expecting a total and speedy abolition of the regulation.”
Complete deregulation could occur by April 1, Higuchi said, but he doubts the government could move that quickly.
Higuchi added: “There have been many [Japanese] women who traveled abroad and tried the foreign cosmetics, which proved they are safe for their skin, but the Japanese government hasn’t allowed us to import them. It does not make sense. There’s no problem in importing fragrance in terms of ingredients, but the consumers here don’t wear it. The fragrance market is still small here.”
But some importers have stepped up their cosmetics retailing. Pasona, a Tokyo-based importer of off-price apparel, started selling imported cosmetics on April 28.
“We offer about 15 items at the shops in Kobe, Roppongi, Ginza, Harajuku and Makuhari,” said a spokesman for Pasona, referring to an assortment of mostly fragrances.
The merchandise includes Givenchy’s Amarige, Lancome’s Tresor, Cartier’s So Pretty, Versace’s Blue Jeans Man and Red Jeans Woman, and Ralph Lauren’s Safari for Men and Polo Sport.
The Safari women’s fragrance, which is regularly priced at $52 (6,500 yen) elsewhere in Japan, is sold at $42 (5,200 yen) in the Pasona Shops. Polo Sport, which usually is sold for $40 (5,000 yen), is $31 (3,900 yen) at Persona.
“In the Kobe shop, about 1,500 customers buy the merchandise monthly,” the spokesman said.
In addition, Pasona offers a service — helping consumers import cosmetics.
“We have about 200 items from 14 brands in a showcase,” the spokesman continued. “Consumers pick up one of our samples, then we help them to fill in the form to import the goods. We import the merchandise from cosmetics dealers in France, the U.S., Hong Kong and Singapore and send them to the customers.”
The brands featured in this special service include Chanel, Christian Dior, Elizabeth Arden, Yves Saint Laurent, Lancome and Clinique.
Most of the retailers find difficulties in parallel importing.
Japan’s long-running recession has tended to dampen consumer appetites, regardless of price breaks, and the market is well saturated with goods, heightening competition.
These negative factors have discouraged parallel importing. Also, the chain stores and trading companies have refrained simply out of fear that insufficient quantities of allowable merchandise could be guaranteed on an ongoing basis.
At Jusco, a major national chain with 240 stores, demand is not strong enough to make it worthwhile.
“Parallel importing is difficult when it comes to buying a certain amount of merchandise,” said a Jusco executive. “A certain amount of merchandise is required to be supplied regularly, if we are going to do a constant business.”
At Daiei, the nation’s largest chain, executives also seemed pessimistic.
“There are many negative factors,” said one officer. “We are not thinking of starting the import business for the time being.”
Although the major players are waiting to enter the game until the conditions are right, there is a consensus among cosmetics executives that deregulation will soon be the reality of the market.
One executive voiced doubt that much parallel-importing will be done under the present regulations, but he predicted “a flood” of cheap imports will one day drive down cosmetics prices from their current heights.
Moreover, the government’s initial moves, no matter how timid, have set the market on the road to complete deregulation, a prospect that drew defensive action from some Western companies last year, right after the rule change.
On April 15, Elizabeth Arden reduced the price of nine products sold here, including Ceramide skin care and Lip Spa lipstick, by 16 percent on average. A package of 60 capsules of Ceramide Time Complex, which had been priced at 13,000 yen, was reduced to 10,000 yen. A price of 8,500 yen for Ceramide Eye capsules was dropped to 7,000 yen. A tube of Lip Spa went from 3,200 yen to 2,800.
Sonia Rykiel also reduced prices, and Chanel had previously embarked on a strategy of price reductions that were motivated by a desire to become a bigger factor in the market.
Chanel took advantage of the strength of the yen against other currencies to sharply reduce the pricing of its French imported goods. However, with the yen in its weakened state, the company was forced to raise prices 7 percent last month, lifting the price of lipstick to $23 (2,900 yen), according to the company.
Richard Collasse, president of Chanel KK, said other Western companies are having a hard time reducing the price of their imported goods, considering the weakness of the local currency.
Instead of cutting prices across the board, the firms are snipping price tags on introductions at the time of the launch. “They are doing it without admitting it,” Collasse said.
While imported brands are affected by the change in customs regulations, they account for only a sliver — an estimated 6 to 8 percent — of the total $1.1 billion Japanese cosmetics market.
The key Japanese manufacturers, who control the bulk of the market, have been grappling with the more immediate threat of discounting. Since the majors offer rebates to retailers who make big purchases, a store can use the manufacturer discount to reduce retail prices and still make a profit.
Max Factor, which considers itself one of the domestic majors because most of its product development originates inside Japan, solved the problem last June by eliminating rebates, meaning every retailer got the same deal, regardless of how much they bought.
Asked how the market reacted, Mike J. Harrison, president of Max Factor KK, said, “It was very positive.”
Other companies, however, found other solutions. Shiseido led other Japanese giants in diversifying its marketing. Previously, the domestic companies distributed the same products at similar prices everywhere, regardless of channel of trade.
A $90 Cle de Peau lipstick from Shiseido could be found in a suburban cosmetics shop as easily as in a gleaming department store in the swank Ginza section of Tokyo.
In the last two years, Shiseido started introducing products conceived for different channels of trade, such as the S cosmetics line invented for department stores. Shiseido also turned outward from the highly competitive Japanese market with a plan to increase the overseas percentage of its business.
Even though the rule changes have led to less of a surge than expected in parallel imports, there has been an increase in foreign goods flowing into the country. According to the Japan External Trade Organization (JETRO), some imported cosmetics experienced a volume jump of 20 to 30 percent last year.
According to JETRO’s figures, from January through November of last year, imports of fragrances and toiletries jumped 22.5 percent to $109 million, while lip color products advanced 11.1 percent to $68 million.
However, because these figures include the goods imported by the cosmetics companies’ agents in Japan, the increase seems to have little to do with the deregulation of parallel imports, a JETRO official pointed out.
But the regulatory reform continues, if at a slow pace. Nakamura in the Ministry of Health and Welfare conceded, “In a sense the Japanese way of regulation is more severe than Europe and the U.S. The government is thinking of adjustment of the regulation from the international point of view.”