Japan’s Shiseido touches up M&A strategy

Asia’s biggest cosmetics group shifts focus to AI and personalised beauty

Shiseido is reshaping its acquisition strategy following an ill-fated expansion into the US with a $1.7bn deal in 2010, as Asia’s largest cosmetics group by sales prepares for the possibility that ecommerce will upend the $465bn global beauty industry.

 Having spent decades selling their products at department stores and specialised shops, companies from Estée Lauder and L’Oréal to Shiseido are turning to start-ups to enable cosmetics to become connected and customised. Beauty companies are increasingly using artificial intelligence and smartphone apps to provide personalised skincare, to stand out from their rivals.

 The Japanese company has purchased three start-ups in the US in the past two years — MatchCo, Giaran and Olivo Laboratories — for undisclosed sums to acquire technologies in artificial skin, customised make-up and artificial intelligence. In March, French cosmetics giant L’Oréal bought ModiFace, a Canadian beauty tech company focused on augmented reality and AI. 

 “If we keep on doing things in the traditional way, our business will face decline,” Yoichi Shimatani, Shiseido’s chief research and development officer, said in an interview. “Customers now want personalised beauty.

” As part of its new initiative, Shiseido now offers a device called Optune, which is leased to customers for a monthly fee. Using a smartphone app, the system scans and analyses a user’s skin condition and mood and, also factoring in weather conditions, identifies a personalised mix of optimal skincare products.

Ecommerce is another growing business. Online sales made up just 7.8 per cent of the $465bn market for beauty and personal care goods last year but the segment has grown steadily from 4.2 per cent in 2012, according to Euromonitor.

 Shiseido expects ecommerce to account for 15 per cent of its global sales by 2020 compared to 8 per cent last year, with the key driver being China, where it expects the ecommerce segment to rise to 40 per cent. 

As the industry shifts, Shiseido plans to increase its R&D staff to 1,500 by 2020, up from 1,000 in 2014, by hiring experts in digital technology, AI and data science. 

 Shiseido has sharpened its focus on digital technology and ecommerce under Masahiko Uotani, who took the helm of the struggling Japanese group in the spring of 2014. Since then, shares in Shiseido have surged 321 per cent and annual sales topped ¥1tn ($9bn) last year for the first time since the company was set up in 1872, boosted by demand from Chinese tourists and surging sales of anti-ageing products. 

 Nevertheless, the group, which owns the Elixir and Maquillage brands, has yet to stem losses in the US. Last year it took a writedown of $623m on Bare Escentuals, the New York-based natural make-up company it bought eight years ago. 

 “The acquisition was carried out just before the final year of its three-year business plan so it was inevitable that the deal was viewed as a means to reach its numerical target,” said Wakako Sato, an analyst with Mizuho Securities. “Both the timing and objective were not appropriate.” 

 Under Mr Uotani, Shiseido’s mergers and acquisitions strategy had shifted from building scale to one focused on technologies that could be applied more broadly to existing businesses, said Ms Sato. “This shift in M&A strategy is evidence of a change in management mindset.”