In the last quarter century, Shiseido’s fortunes in China have multiplied from doing business in Beijing with only 60 stockkeeping units to a broad-based presence, spreading into midsized cities with a distribution of 1,000 stores in two different sales channels.

The startling progress of the company was outlined in a presentation authored by Tadakatsu Saito, corporate senior executive officer and chief area managing officer of China for the Tokyo-based Shiseido Co. Ltd.

Unfortunately, sickness prevented him from traveling to the summit, but his presentation was made by Heidi Manheimer, chief executive officer of the New York-based Shiseido Cosmetics (America) Ltd. She graciously stepped in and read Saito’s speech.

Shiseido’s strategy hinged on the realization that, unlike other kinds of products, cosmetics is a segment with strong cultural links. Shiseido executives, therefore, tried to enhance the perceived value of the brand by placing a high priority on putting down roots in China and encouraging goodwill among consumers. The marketing strategy centered on accentuating Shiseido’s quality, service and luxury image.

Much is at stake. Saito noted that the Chinese cosmetics market has been growing rapidly since the Nineties, and that this year total cosmetics sales in China were about 96 billion yuan, which is about $12 billion. When the different exchange rates are calculated, cosmetics sales in Japan are slightly more than 100 billion yuan, or about $13 billion. “The market is very close to Japan in size and, I think, will soon overtake Japan,” Saito stated in the speech.

Shiseido entered mainland China by doing business at Beijing Hotel and a handful of other local stores, selling a limited number of products, mostly skin care products and lipsticks. In 1983, the company launched the Hua Zi cosmetics brand after signing a technology transfer agreement with the city of Beijing. In 1991, a joint venture company, Shiseido Liyuan Cosmetics Co. Ltd., was established with the city. This paved the way for the launch in 1994 of the China-exclusive brand, Aupres.

Saito noted, “In the Nineties, accompanying the rapid economic growth of China after a shift to a policy of reform and opening up to the outside world, there was a rapid growth of the trendy class. Shiseido capitalized on this by establishing a cooperative company with the city of Shanghai [Shanghai Zotos Citic Cosmetics Co. Ltd.] to act as an additional hub for the East and South China regions where the reform and liberalization policy was proceeding most rapidly. Through this cooperative company we began producing and selling products with relatively modest price points.”

This story first appeared in the May 26, 2006 issue of WWD. Subscribe Today.

In 2003, Shiseido established Shiseido China Co. Ltd. and began expanding in the chain store business, beyond department stores, the previous focus. “From then, we began signing contracts with local cosmetics stores and conducting a community-based style of selling with different product lines from those sold in department stores,” Saito noted. “Therefore we currently conduct business mainly through two channels — department stores and cosmetics chain stores with our companies in Shanghai and Beijing.”

In pinpointing the reasons for Shiseido’s success in China, Saito pointed out that the cosmetics market there has been booming in line with “the tremendous growth of the Chinese economy in general” and said Shiseido was fortunate to find good partners, such as the cities of Beijing and Shanghai. “We were able to build a strong relationship of trust with these partners,” he wrote. “Also, we came in at the earliest stage and were able to gain the trust and capture the imagination of the consumers. And we developed Aupres, a line of cosmetics exclusively for Chinese women, which won high marks for quality.”

Aupres is sold through about 500 department stores at locally affordable prices and still ranks number one in sales volume, Saito noted. The line has been upgraded into a complete lifestyle brand, and its distribution has been expanded into “a direct sale retail system, which meant that our intentions at a manufacturer could be conveyed directly to our consumers,” he said, adding that it was then a rarity not to do business through a local wholesaler.

Shiseido’s emphasis on customer counseling “was very well received by customers. We still believe, and it has become one of our business philosophies, that great customer service is more effective than advertising,” Saito wrote.

He still sees three challenges: Overseas brands have made the market very competitive, “and we must take steps to establish ourselves in the proper position in the context of massive global competition.” Second, risk management is key in a country where scheduling delays can pop up from sudden regulatory shifts, the distribution systems remain unstable and customer relations are becoming more important. Third, intellectual property issues in the form of counterfeiting and outright copying remain a problem, although progress has been made since China entered the World Trade Organization. “We all should work together and support the Chinese government and their organizations in their efforts to overcome the problem,” Saito concluded.