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COTA 4923

コタ
Recent Updates
2022-05-10
Full-year FY03/22 flash update
2022-03-18
Acquisition and cancellation of series 1 share subscription rights
2022-02-18
Q3 FY03/22 earnings report update
Get in touch
77 Taishin-Arami, Kumiyama-cho, Kuse-gun, Kyoto, 613-0036, Japan
http://www.cota.co.jp/
0774-44-1681
Summary
COTA develops, manufactures, and sells hair care products and quasi-drugs to salons and distributors. Its sales mainly consist of toiletries (such as shampoos and treatments) but also comprise hair styling, hair coloring, and perm products.
Personal Products
Key dates
2019-12-27
Coverage initiation
Full Report
2022-05-10
Full-year FY03/22 flash update
2022-05-10
Q3 FY03/22 flash update
2022-01-31
1H FY03/22 flash update
2021-11-08
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Executive summary

Business overview

COTA develops, manufactures, and sells hair care products and quasi-drugs to salons and distributors. Its sales mainly consist of toiletries (such as shampoos and treatments) but also comprise hair styling, hair coloring, and perm products. The company also retails some of its mainstay products to consumers through salons.

In FY03/21, the company reported sales of JPY7.8bn and operating profit of JPY1.6bn, with resulting OPM of 20.9% (GPM of 75.6%, SG&A-to-sales ratio of 54.8%). Sales have increased for 23 consecutive years to FY03/21 and operating profit has increased for eight consecutive years (profit fell in FY03/13 on higher depreciation stemming from capacity expansion). The sustained performance is thanks to the company’s unique business model: It sells products exclusively to salons while providing free consulting services to improve salon management, thereby gaining member salons and boosting sales of its products as salon earnings rise.

In FY03/21, toiletries accounted for 72.1% of sales, hair styling products 17.8%, hair coloring products 4.0%, hair growing agents 3.6%, perm products 1.5%, and other products 0.9%. By region, Chubu accounted for 29.5% of sales; Kansai 21.9%; Kanto 19.1%; Chugoku-Shikoku 12.5%; Kyushu 10.5%; Tohoku 5.2%; Hokkaido 1.0%; and overseas regions 0.1%. COTA i CARE shampoo, one of the company’s mainstay products, is sold at the retail price of JPY5,000 for a 750ml refill pouch, which is higher than the average price for generic equivalents of major manufacturers sold at drugstores and supermarkets (JPY500–1,000 for 660ml refill pouch).

In line with its founder’s spirit, “modernizing the hair salon industry with salon management,” COTA seeks to expand its operations in tandem with growth at salons. The company’s products need to meet the performance demands of professional hair stylists and be of sufficient quality to ensure stylists feel confident in recommending them to their customers. COTA continues to develop products that meet this quality standard.

Hair stylists are ideally positioned to recommend shampoos and treatments to their customers because they constantly listen to their hair-related concerns. They can also demonstrate products and take time to fully explain their characteristics. Such personal interaction can lead to retail sales, boosting salons’ overall sales and profit (salons earn an estimated GPM of just above 30% on COTA product sales). The company contributes to the earnings growth of salons by supplying them with its products, which also has the effect of expanding its own earnings.

The Junpo Salon System (literally, “10-day Reporting Salon System”) has been another instrumental factor in increasing the number of salons carrying the company’s products. Under the system, COTA offers salons free consulting to help them modernize management and increase earnings as long as they agree to exclusively carry the company’s products (i.e., commit not to use rival products) and are eager to modernize their management. The total number of salons operating in Japan is estimated at roughly 254,000. With only a little over 1,600 salons having adopted the Junpo Salon System to date, there is ample room to expand member base. Sales to Junpo member salons (including via distributors) account for about 65% of COTA’s total sales. The company is actively cultivating candidates to become Junpo member salons.

Earnings trends

Full-year FY03/22 results: In FY03/22, sales were JPY8.7bn (+18.7% YoY), operating profit was JPY2.2bn (+32.7% YoY), recurring profit JPY2.2bn (+31.4% YoY), and net income JPY1.4bn (+19.2% YoY). Sales have increased for 24 consecutive years, operating profit and recurring profit for nine consecutive years, and net income for three consecutive years (despite booking an extraordinary loss). All of these were historical highs.

Company forecast for FY03/23: The company’s FY03/23 forecast calls for sales of JPY9.1bn (+4.9% YoY), operating profit of JPY2.2bn (+0.2% YoY), recurring profit of JPY2.3bn (+4.3% YoY), net income of JPY1.6bn (+12.5% YoY), and EPS of JPY66.19. It expects to pay an annual dividend of JPY20 per share (unchanged YoY: however, considering the 1.1-for-1 share split on April 1, 2022, this represents a 10% YoY increase in DPS).

The company plans to continue focusing on rolling out its unique business model, combining consulting-based sales through the Junpo Salon System with a salon retail sales strategy centered on toiletries. The aim is to further improve earnings at its salon customers and contribute to the development and modernization of the beauty industry. Despite the COVID-19 pandemic, demand for in-store sales at beauty salons has stayed solid, reconfirming the importance of this channel, and consumers are demanding increasingly high value-added products.

The company aims to continue expanding sales with the mainstay of its salon retail sales strategy, the COTA i CARE line, and its top brand, COTA COUTURE. In May 2022, it plans to launch a new hair growing agent, COTA Aging Grow Serum. Meanwhile, the company expects construction completion of its COTA KYOTO Lab. It hopes this will provide an environment for basic research to strengthen its product development capabilities further. It also plans to carry on with other initiatives aimed at growth, including obtaining and training personnel and investing in facilities.

Strengths and weaknesses

Shared Research understands COTA’s strengths are: 1) its system to sell products at higher prices than generic toiletries via exclusive salons, 2) its initiative to capture and retain salons as customers by helping them expand earnings and modernize management, and 3) its business model that tends to lead to repeat orders.

The company’s weaknesses are 1) limited scope for accelerated growth in product sales (even for successful products) as exclusive sales through salons hampers rapid expansion in sales channels, 2) its lack of ability to capture and retain newly opening salons as its customers due to not-fully-developed brand recognition, and 3) an inability to actively pursue overseas expansion mainly due to the company’s relatively low domestic market share while some rival companies consider overseas business expansion as the next growth driver and are already chasing first-mover advantages overseas (for details, see the Strengths and weaknesses section).

Key financial data

Income statementFY03/13FY03/14FY03/15FY03/16FY03/17FY03/18FY03/19FY03/20FY03/21FY03/22FY03/23
(JPYmn)ParentParentParentParentParentParentParentParentParentParentEst.
Sales5,5455,8786,1866,5286,5526,7326,9927,4617,3258,6919,113
YoY4.3%6.0%5.2%5.5%0.4%2.7%3.9%6.7%-18.7%4.9%
Gross profit3,9034,1794,4334,6714,7884,9365,1865,6095,2296,207-
YoY-0.1%7.1%6.1%5.4%2.5%3.1%5.1%8.2%-18.7%-
Gross profit margin70.4%71.1%71.7%71.6%73.1%73.3%74.2%75.2%71.4%71.4%-
SG&A expenses3,0333,2653,4513,5423,5593,6213,7884,1393,6084,056-
YoY4.3%7.6%5.7%2.6%0.5%1.7%4.6%9.3%-12.4%-
SG&A ratio54.7%55.5%55.8%54.3%54.3%53.8%54.2%55.5%49.3%46.7%-
Operating profit8709159821,1291,2301,3151,3981,4701,6212,1512,156
YoY-13.1%5.1%7.3%15.0%8.9%6.9%6.3%5.1%10.3%32.7%0.2%
Operating profit margin15.7%15.6%15.9%17.3%18.8%19.5%20.0%19.7%22.1%24.8%23.7%
Recurring profit8818959601,1301,2331,3391,4001,4921,6572,1782,271
YoY-11.4%1.6%7.3%17.8%9.1%8.6%4.6%6.6%11.1%31.4%4.3%
Recurring profit margin15.9%15.2%15.5%17.3%18.8%19.9%20.0%20.0%22.6%25.1%24.9%
Net income6295346267678689719651,0361,1691,3941,568
YoY14.7%-15.1%17.2%22.4%13.3%11.8%-0.6%7.3%12.9%19.2%12.5%
Net margin11.3%9.1%10.1%11.7%13.3%14.4%13.8%13.9%16.0%16.0%17.2%
Per-share data (split-adjusted; JPY)
Shares outstanding (ex. treasury shares; mn shares; year-end)29.929.930.728.128.127.126.228.829.929.9-
EPS (JPY)21.017.819.527.334.039.340.139.544.654.266.2
EPS (fully diluted; JPY)-----------
Dividend per share (JPY)6.47.87.79.210.211.212.313.514.918.220.0
(JPY)Book value per share195207191228251263267269327366-
Balance sheet (JPYmn)
Cash and cash equivalent1,8922,4072,2263,1393,6634,0164,0435,0305,4375,819
Total current assets3,7314,3834,2855,1675,7635,9586,1157,2307,8138,563
Tangible fixed assets3,1632,9692,7562,5912,4882,4922,4102,3082,9033,587
Investments and other assets299362472470610715731715814869
Intangible assets8463441112481981451045666
Total assets7,2777,7777,5578,3389,1099,3649,40210,35611,58613,085
Short-term debt----------
Current liabilities1,0001,0801,1571,3201,3821,3941,5631,6541,8822,307
Long-term debt----------
Fixed liabilities4525125415966798268309581,1221,238
Total liabilities1,4521,5921,6991,9162,0602,2202,3932,6123,0043,545
Shareholders' equity5,8246,1855,8576,4217,0487,1447,0087,7438,5779,539
Total net assets5,8256,1855,8586,4227,0497,1457,0097,7448,5819,540
Total interest-bearing debt----------
Cash flow statement(JPYmn)
Cash flows from operating activities1,0328909501,1971,2271,3281,2021,3011,3781,660
Cash flows from investing activities-652-202-108-1,582-662-449-75-564-88-1,294
Cash flows from financing activities-158-174-1,024-203-241-875-1,100-300-332-434
Financial ratio
ROA (RP-based)12.1%11.9%12.5%14.2%14.1%14.5%14.9%15.1%15.1%17.7%
ROE11.3%8.9%10.4%12.5%12.9%13.7%13.6%14.0%14.3%15.4%
Equity ratio80.0%79.5%77.5%77.0%77.4%76.3%74.5%74.8%74.0%72.9%
Source: Shared Research based on company data; per-share data are adjusted for stock splits
Note: Figures may differ from company materials due to differences in rounding methods.
Note: The company carried out 1.1-for-1 stock splits on April 1, 2011, April 1, 2012, April 1, 2013, and April 1, 2014, a 1.2-for-1 stock split on April 1, 2015, and 1.1-for-1 stock splits on April 1, 2016, April 1, 2017, April 1, 2018, April 1, 2019, April 1, 2020, and April 1, 2021.
Note: Starting FY03/22, the company will be applying the revised Accounting Standard for Revenue Recognition (ASBJ Statement No. 29) and following the guidelines in the revised Implementation Guidance on Accounting Standard for Revenue Recognition (ASBJ Statement No. 30). The YoY percentage change in sales indicated in the company’s forecast for FY03/22 has been calculated against comparable sales figures for FY03/21 using the same revenue recognition standards.

Recent updates

Acquisition and cancellation of series 1 share subscription rights

2022-03-18

On March 17, 2022, COTA Co., Ltd. announced its decision to acquire and cancel all remaining series 1 share subscription rights issued on March 25, 2021 (with provisions to revise the exercise price and grant permission to exercise) on April 1, 2022.

Share subscription rights to be acquired and cancelled

  • Title of share subscription rights to be acquired and cancelled: COTA series 1 share subscription rights
  • Number of share subscription rights to be acquired and cancelled: 1,620 units (110 shares per unit)
  • Acquisition price: Total JPY818,100 (JPY505 per unit)

The series 1 share subscription rights were issued to raise funds for capital expenditures for an R&D facility (construction of a building dedicated to R&D) and investments in equipment for R&D. However, earnings in FY03/22 after the share subscription rights were issued surpassed initial expectations, leading to an accumulation of more cash on hand than planned. Further, strategic utilization of treasury shares had some positive impacts as well, including in increasing stock liquidity and the number of shareholders. After a comprehensive consideration of the market condition and future funding needs, the company has decided to acquire all remaining share subscription rights and cancel them in accordance with the terms of the issue of these rights. 

Funds raised as of the date of this release amounted to JPY765,574,590. The company plans to allocate the entire amount to investments in the R&D facility and equipment for R&D. 

This development will have no impact on the company's FY03/22 earnings. 

Trends and outlook

Quarterly trends and results

CumulativeFY03/21FY03/22FY03/22
(JPYmn)Q1Q1–Q2Q1–Q3Q1–Q4Q1Q1–Q2Q1–Q3Q1–Q4% of Est.FY Est.
Sales1,1562,8745,8007,3251,9773,6717,0248,69199.2%8,760
YoY----71.1%27.7%21.1%18.7%12.0%
Gross profit9202,0604,1585,2291,4132,6425,0666,207-6,207
YoY----53.6%28.3%21.8%18.7%18.7%
Gross profit margin79.6%71.7%71.7%71.4%71.5%72.0%72.1%71.4%-
SG&A expenses9351,7312,6173,6089721,8952,9254,056-4,056
YoY----3.9%9.5%11.8%12.4%12.4%
SG&A ratio81.0%60.2%45.1%49.3%49.1%51.6%41.6%46.7%46.3%
Operating profit-153291,5411,6214427472,1412,15197.1%2,215
YoY-----127.1%38.9%32.7%36.7%
Operating profit margin-1.3%11.4%26.6%22.1%22.3%20.4%30.5%24.8%25.3%
Recurring profit-103401,5591,6574527642,1612,17897.3%2,239
YoY-----124.5%38.6%31.4%35.1%
Recurring profit margin-0.8%11.8%26.9%22.6%22.9%20.8%30.8%25.1%25.6%
Net income-112351,0821,1693185371,5071,39487.7%1,589
YoY-----128.7%39.3%19.2%35.9%
Net margin-0.9%8.2%18.6%16.0%16.1%14.6%21.5%16.0%18.1%
QuarterlyFY03/21FY03/22
(JPYmn)Q1Q2Q3Q4Q1Q2Q3Q4
Sales1,1561,7192,9261,5251,9771,6943,3521,668
YoY----71.1%-1.4%14.6%9.4%
Gross profit9201,1402,0981,0711,4131,2292,4241,141
YoY----53.6%7.8%15.5%6.6%
Gross profit margin79.6%66.3%71.7%70.2%71.5%72.5%72.3%68.4%
SG&A expenses9357958869919729231,0301,131
YoY----3.9%16.1%16.2%14.1%
SG&A ratio81.0%46.3%30.3%65.0%49.1%54.5%30.7%67.8%
Operating profit-153441,212804423061,39410
YoY------11.3%15.0%-87.1%
Operating profit margin-1.3%20.0%41.4%5.2%22.3%18.0%41.6%0.6%
Recurring profit-103501,219984523121,39716
YoY------10.8%14.6%-83.3%
Recurring profit margin-0.8%20.4%41.7%6.4%22.9%18.4%41.7%1.0%
Net income-1124684787318219970-114
YoY------10.8%14.6%-
Net margin-0.9%14.3%28.9%5.7%16.1%12.9%28.9%-6.8%
By productFY03/21FY03/22
Cumulative (JPYmn)Q1Q2Q3Q4Q1Q2Q3Q4
Total sales1,1562,8745,8007,3251,9773,6717,0248,691
YoY----71.1%27.7%21.1%18.7%
Toiletries8712,1814,4725,5981,6532,9925,7517,042
YoY----89.8%37.2%28.6%25.8%
% of total sales72.5%72.3%72.7%72.1%79.4%77.3%77.0%76.2%
Hair Styling1965121,0951,3832465131,0921,394
YoY----25.5%0.2%-0.3%0.8%
% of total sales16.3%17.0%17.8%17.8%11.8%13.3%14.6%15.1%
Hair Coloring5413722031168152237329
YoY----25.9%10.9%7.7%5.8%
% of total sales4.5%4.5%3.6%4.0%3.3%3.9%3.2%3.6%
Hair Growing Agents431022272824292218261
YoY-----2.3%-9.8%-4.0%-7.4%
% of total sales3.6%3.4%3.7%3.6%2.0%2.4%2.9%2.8%
Perm215281114275180108
YoY----28.6%-1.9%-1.2%-5.3%
% of total sales1.7%1.7%1.3%1.5%1.3%1.3%1.1%1.2%
SUM: product sales1,1852,9846,0957,6882,0363,8007,3789,134
YoY----71.8%27.3%21.1%18.8%
% of total sales98.7%98.9%99.1%99.1%97.7%98.2%98.8%98.9%
Other16345673476988104
YoY----193.8%102.9%57.1%42.5%
% of total sales1.3%1.1%0.9%0.9%2.3%1.8%1.2%1.1%
Adjustments-45-144-351-436-106-198-442-547
By productFY03/21FY03/22
Quarterly (JPYmn)Q1Q2Q3Q4Q1Q2Q3Q4
Total sales1,1561,7192,9261,5251,9771,6943,3521,668
YoY----71.1%-1.4%14.6%9.4%
Toiletries8711,3102,2911,1261,6531,3392,7591,291
YoY----89.8%2.2%20.4%14.7%
% of total sales72.5%72.1%73.1%69.9%79.4%75.0%76.7%72.9%
Hair Styling196316583288246267579302
YoY----25.5%-15.5%-0.7%4.9%
% of total sales16.3%17.4%18.6%17.9%11.8%14.9%16.1%17.0%
Hair Coloring5483839168848592
YoY----25.9%1.2%2.4%1.1%
% of total sales4.5%4.6%2.6%5.7%3.3%4.7%2.4%5.2%
Hair Growing Agents435912555425012643
YoY-----2.3%-15.3%0.8%-21.8%
% of total sales3.6%3.2%4.0%3.4%2.0%2.8%3.5%2.4%
Perm2131293327242928
YoY----28.6%-22.6%0.0%-15.2%
% of total sales1.7%1.7%0.9%2.0%1.3%1.3%0.8%1.6%
SUM: product sales1,1851,7993,1111,5932,0361,7643,5781,756
YoY----71.8%-1.9%15.0%10.2%
% of total sales98.7%99.0%99.3%98.9%97.7%98.8%99.5%99.1%
Other1618221747221916
YoY----193.8%22.2%-13.6%-5.9%
% of total sales1.3%1.0%0.7%1.1%2.3%1.2%0.5%0.9%
Adjustments-45-98-207-85-106-92-245-104
Source: Shared Research based on company data
Notes: Figures may differ from company materials due to differences in rounding methods.

Seasonality: The company’s earnings tend to be skewed toward Q3 (October–December). November–December is typically the peak season for the hair salon industry as Christmas and year-end demand drives up customer traffic. The company strategically holds its COTA National Salon Sales Competition for partner salons in this period. The competition provides incentives to boost salon retail sales during this period (including awards given to salons with outstanding sales performance). As a result of these factors, Q3 sales tend to rise above those of other quarters.

Full-year FY03/22 results (out May 9, 2022)

Summary

In FY03/22, sales were JPY8.7bn (+18.7% YoY), operating profit was JPY2.2bn (+32.7% YoY), recurring profit JPY2.2bn (+31.4% YoY), and net income JPY1.4bn (+19.2% YoY). Sales have increased for 24 consecutive years, operating profit and recurring profit for nine consecutive years, and net income for three consecutive years (despite booking an extraordinary loss). All of these were historical highs.

Attainment rates

Versus the company’s revised full-year FY03/22 forecast (announced on January 28, 2022*), attainment rates were 99.2% for sales, 97.1% for operating profit, 97.3% for recurring profit, and 87.7% for net income, falling slightly short of upwardly revised figures.

*Revised full-year FY03/22 forecast (announced on January 28, 2022)
Sales: JPY8.8bn (previous forecast: JPY8.2bn)
Operating profit: JPY2.2bn (previous forecast: JPY1.8bn)
Recurring profit: JPY2.2bn (previous forecast: JPY1.8bn)
Net income: JPY1.6bn (previous forecast: JPY1.3bn)
Annual dividend: JPY20 per share (previous forecast: JPY18 per share)

Reasons for revision
Sales of toiletry products are upbeat, thanks in part to higher-than-expected take-up of COTA COUTURE, the company's new toiletry product line launched in May 2021, at distributors and salons. The company assumes that COTA toiletry products will remain in demand due to their high quality and high value-added, and indeed repeat purchases are high for both the new product line, COTA COUTURE, and the existing COTA i CARE line which is sold exclusively through salons. As a consequence, the company revised up its full-year forecast as both sales and each level of profit are expected to surpass previous projections. 

As full-year profit is expected to exceed the previous forecast, the company raised its annual dividend forecast by JPY2 per share of common stock, from JPY18 to JPY20.

External environment

The outlook for the future remained uncertain, with progress seen in the rollout of COVID-19 vaccines on the one hand while on the other hand a new variant emerged just as new infection numbers began decreasing from fall 2021. In the beauty industry as well, the impact of the pandemic on the customer count and performance of salons continued to warrant close attention. 

Sales

FY03/22 sales were JPY8.7bn (+18.7% YoY). Sales were strong for COTA COUTURE, a new hair and scalp care product launched in May 2021 (sales were JPY1.8bn versus company forecast of JPY1.6bn), in addition to solid sales of the COTA i CARE line thanks in large part to solid demand for toiletry products driven by a continued focus on in-store sales as a business model. 

By product category, sales of toiletries totaled JPY7.0bn (+25.8% YoY), hair styling products JPY1.4bn (+0.8% YoY), hair coloring products JPY329mn (+5.8% YoY), hair growing agents JPY261mn (-7.4% YoY), perm products JPY108mn (-5.3% YoY), and other products JPY104mn (+42.5% YoY). COTA provides various proposals to salons based on its business model of "consulting-based sales" centered on the Junpo Salon System (to enhance salon management), and focusing on salon retail sales of toiletries such as shampoos and treatments. For this reason, COTA's sales mix of toiletries, at over 70% of the total, is characteristically high compared to its rivals. 

Sales: breakdown by product category
By segmentFY03/20FY03/21FY03/22
Cumulative (JPYmn)Q1Q1–Q2Q1–Q3Q1–Q4Q1Q1–Q2Q1–Q3Q1–Q4Q1Q1–Q2Q1–Q3
Sales1,3883,1785,9587,4611,1562,8745,8007,3241,9773,6717,024
YoY16.8%17.4%9.4%6.7%-16.7%-9.5%-2.7%-1.8%71.1%27.7%21.1%
Toiletries1,0162,3514,4055,4718712,1814,4725,5981,6532,9925,751
YoY28.9%24.9%13.3%11.1%-14.3%-7.2%1.5%2.3%89.8%37.2%28.6%
% of total73.4%74.0%74.0%73.4%72.5%72.3%72.7%72.1%79.4%77.3%77.0%
Hair Styling2024599391,1831965121,0951,3832465131,092
YoY-1.9%5.3%4.3%-0.5%-3.0%11.5%16.6%16.9%25.5%0.2%-0.3%
% of total14.6%14.5%15.8%15.9%16.3%17.0%17.8%17.8%11.8%13.3%14.6%
Hair Coloring611462273275413722031168152237
YoY-24.7%-12.6%-14.3%-14.6%-11.5%-6.2%-3.1%-4.9%25.9%10.9%7.7%
% of total4.4%4.6%3.8%4.4%4.5%4.5%3.6%4.0%3.3%3.9%3.2%
Hair Growing Agents4395207253431022272824292218
YoY-4.4%-5.0%-3.3%-4.5%0.0%7.4%9.7%11.5%-2.3%-9.8%-4.0%
% of total3.1%3.0%3.5%3.4%3.6%3.4%3.7%3.6%2.0%2.4%2.9%
Perm266191123215281114275180
YoY-16.1%3.4%-2.2%-4.7%-19.2%-14.8%-11.0%-7.3%28.6%-1.9%-1.2%
% of total1.9%1.9%1.5%1.6%1.7%1.7%1.3%1.5%1.3%1.3%1.1%
Total product sales1,3483,1125,8697,3571,1852,9846,0957,6882,0363,8007,378
YoY17.1%17.7%9.5%6.7%-12.1%-4.1%3.9%4.5%71.8%27.3%21.1%
% of total97.4%98.0%98.6%98.6%98.7%98.9%99.1%99.1%97.7%98.2%98.8%
Other36638610116345673476988
YoY2.9%8.6%7.5%2.0%-55.6%-46.0%-34.9%-27.7%193.8%102.9%57.1%
% of total2.6%2.0%1.4%1.4%1.3%1.1%0.9%0.9%2.3%1.8%1.2%
Adjustments4333-45-144-351-437-106-198-442
Performance by product categoryFY03/20FY03/21FY03/22
Quarterly (JPYmn)Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3
Sales1,3881,7902,7811,5031,1561,7192,9261,5241,9771,6943,352
YoY16.8%17.9%1.6%-2.9%-16.7%-4.0%5.2%1.4%71.1%-1.4%14.6%
Toiletries1,0161,3352,0541,0668711,3102,2911,1261,6531,3392,759
YoY28.9%21.9%2.4%2.8%-14.3%-1.9%11.5%5.6%89.8%2.2%20.4%
% of total73.4%74.5%73.9%70.9%72.5%72.1%73.1%69.9%79.4%75.0%76.7%
Hair Styling202257480244196316583288246267579
YoY-1.9%11.7%3.4%-15.6%-3.0%23.0%21.5%18.0%25.5%-15.5%-0.7%
% of total14.6%14.3%17.3%16.2%16.3%17.4%18.6%17.9%11.8%14.9%16.1%
Hair Coloring61858110054838391688485
YoY-24.7%-1.2%-17.3%-15.3%-11.5%-2.4%2.5%-9.0%25.9%1.2%2.4%
% of total4.4%4.7%2.9%6.7%4.5%4.6%2.6%5.7%3.3%4.7%2.4%
Hair Growing Agents4352112464359125554250126
YoY-4.4%-5.5%-1.8%-9.8%0.0%13.5%11.6%19.6%-2.3%-15.3%0.8%
% of total3.1%2.9%4.0%3.1%3.6%3.2%4.0%3.4%2.0%2.8%3.5%
Perm2635303221312933272429
YoY-16.1%25.0%-11.8%-11.1%-19.2%-11.4%-3.3%3.1%28.6%-22.6%0.0%
% of total1.9%2.0%1.1%2.1%1.7%1.7%0.9%2.0%1.3%1.3%0.8%
Total product sales1,3481,7642,7571,4881,1851,7993,1111,5932,0361,7643,578
YoY17.1%18.1%1.5%-2.9%-12.1%2.0%12.8%7.1%71.8%-1.9%15.0%
% of total97.4%98.5%99.2%99.0%98.7%99.0%99.3%98.9%97.7%98.8%99.5%
Other3627231516182217472219
YoY2.9%17.4%4.5%-21.1%-55.6%-33.3%-4.3%13.3%193.8%22.2%-13.6%
% of total2.6%1.5%0.8%1.0%1.3%1.0%0.7%1.1%2.3%1.2%0.5%
Adjustments4-11-0-45-98-207-86-106-92-245
Source: Shared Research based on company data
Operating profit

Operating profit came to JPY2.2bn (+32.7% YoY). YoY sales growth pushed up the cost of sales, but owing to the company's ongoing efforts to improve cost management, the gross profit margin was flat YoY at 71.4%. While higher personnel expenses led to a YoY increase in SG&A expenses, the SG&A ratio improved 2.6pp YoY to 46.7% on sales growth. As a result, operating profit margin improved 2.7pp YoY to 24.8%.

Net income

Net income was JPY1.4bn (+19.2% YoY). The company expects to incur costs associated with a voluntary recall of some lots of COTA i CARE shampoo, and recorded an extraordinary loss of JPY158mn as a result.

Sales and gross profit (left), operating profit and OPM (right)
Source: Shared Research based on company data

Company forecast for FY03/23

FY03/21FY03/21FY03/22FY03/23
(JPYmn)1H2HFYFY *1H2HFYFY Est.
Sales2,8744,4507,3257,3243,6715,0208,6919,113
YoY-9.5%3.9%-1.8%-27.7%17.2%18.7%4.9%
Cost of sales8141,2812,0962,0971,0291,4552,484
Gross profit2,0603,1695,2295,2272,6423,5656,207
YoY-13.8%-1.6%-6.8%-28.3%12.5%18.7%
Gross profit margin71.7%71.2%71.4%71.4%72.0%71.0%71.4%
SG&A expenses1,7311,8773,6083,6061,8952,1614,056
YoY-11.3%-14.2%-12.8%-9.5%-40.1%12.4%
SG&A ratio60.2%42.2%49.3%49.2%51.6%43.0%46.7%
Operating profit3291,2921,6211,6217471,4042,1512,156
YoY-24.9%25.2%10.3%10.3%127.1%8.7%32.7%0.2%
Operating profit margin11.4%29.0%22.1%22.1%20.4%28.0%24.8%23.7%
Recurring profit3401,3171,6571,6577641,4132,1782,271
YoY-24.3%26.4%11.1%11.1%124.5%7.3%31.4%4.3%
Recurring profit margin11.8%29.6%22.6%22.6%20.8%28.2%25.1%24.9%
Net income2359341,1691,1695378561,3941,568
YoY-25.2%29.5%12.9%12.9%128.7%-8.3%19.2%12.5%
Net margin8.2%21.0%16.0%16.0%14.6%17.1%16.0%17.2%
Source: Shared Research based on company data
Note: Starting FY03/22, the company will be applying the revised Accounting Standard for Revenue Recognition (ASBJ Statement No. 29) and following the guidelines in the revised Implementation Guidance on Accounting Standard for Revenue Recognition (ASBJ Statement No. 30). The YoY percentage change in sales indicated in the company’s forecast for FY03/22 has been calculated against comparable sales figures for FY03/21 (*) using the same revenue recognition standards.

Company forecast for FY03/23

The company’s FY03/23 forecast calls for sales of JPY9.1bn (+4.9% YoY), operating profit of JPY2.2bn (+0.2% YoY), recurring profit of JPY2.3bn (+4.3% YoY), net income of JPY1.6bn (+12.5% YoY), and EPS of JPY66.19. It expects to pay an annual dividend of JPY20 per share (unchanged YoY: however, considering the 1.1-for-1 share split on April 1, 2022, this represents a 10% YoY increase in DPS).

The company plans to continue focusing on rolling out its unique business model, combining consulting-based sales through the Junpo Salon System with a salon retail sales strategy centered on toiletries. The aim is to further improve earnings at its salon customers and contribute to the development and modernization of the beauty industry. Despite the COVID-19 pandemic, demand for in-store sales at beauty salons has stayed solid, reconfirming the importance of this channel, and consumers are demanding increasingly high value-added products.

The company aims to continue expanding sales with the mainstay of its salon retail sales strategy, the COTA i CARE line, and its top brand, COTA COUTURE. In May 2022, it plans to launch a new hair growing agent, COTA Aging Grow Serum. Meanwhile, the company expects construction completion of its COTA KYOTO Lab. It hopes this will provide an environment for basic research to strengthen its product development capabilities further. It also plans to carry on with other initiatives aimed at growth, including obtaining and training personnel and investing in facilities.

Medium-term growth strategy

COTA does not release medium-term management plans that include numerical targets for specific years. However, it sets general targets for key financial indicators to achieve steady growth and sustainability: recurring profit margin (RPM) of 15% or higher; ROE of 10% or higher. Since FY03/15, RPM and ROE have consistently exceeded these targets, reaching 21.3% and 14.3%, respectively, in FY03/21. Shared Research understands the company strives to achieve RPM of at least 15% and ROE of at least 10% even during periods of earnings deterioration.

COTA has adopted a growth strategy centering on the Junpo Salon System and expansion of salon retail sales on the principle that success at its customer salons contributes to its own success. Specifically, the company: 1) captures and retains salons as customers by providing free management advice through its Junpo Salon System, and 2) promotes growth in salon retail sales of its toiletries such as shampoos and treatments to improve salon earnings and strengthen its sales.

Only just above 1,600 salons nationwide (0.6% of total) have become members of the Junpo Salon System to date. However, these form an important client base for the company, which derives roughly 65% of its sales from Junpo member salons. Raising the number of member salons should therefore support its growth over the medium term.

Junpo Salon System: A free consulting services system to support and enhance salon management. In keeping with its name (literally, “10-day Reporting Salon System”), the Junpo Salon System originally divided individual months into three blocks of ten days (first, middle, and last), and facilitated confirmation of progress versus targets, communication concerning problems, and the creation of improvement measure proposals based on performance data. The present version of the system sends/receives data via the internet, resulting in more timely analysis. The system grew out of the original Shuho Salon System (literally “Weekly Reporting Salon System”), which COTA launched in the early 1980s, shortly after its establishment. The system was developed to pursue its founder’s spirit of “modernizing the hair salon industry with salon management,” and the company’s investment in the system exceeded its initial capital stock. In July 1983, the company launched a computer-based version of the Shuho Salon System, which was groundbreaking at the time. Salons that agree to use the company’s products exclusively (i.e., commit to not using rival products) and are eager to modernize their management can become Junpo member salons, and as such obtain free consulting advice on how to improve their management.

Over the last five years to FY03/21, the company’s sales have grown at a CAGR of 3.5%. Over the same period, the number of Junpo member salons grew at a CAGR of 0.9%, so we can infer that other factors (such as sales growth at member salons) expanded at a rate of 3.5% as growth drivers. On a net basis, COTA added 18 Junpo member salons in FY03/18 (+1.1% YoY), seven in FY03/19 (+0.4% YoY), and none in FY03/20; in FY03/21 the net decrease in the number of such salons was 33. This was mainly because the primary goal of strengthening the sales force was to add to the number of partner salons for the time being.

Number of Junpo member salons (left), and sales ratio of member salons (right)
Source: Shared Research based on company data

COTA’s Education and Training Division, a specialized training unit that has been reinforced through restructuring, is using a training facility established in November 2017 to accelerate new sales staff training. Whereas it previously took about 10 months before new sales staff could engage in sales activities, the time required has been reduced to about four months due to revision and expansion of training content. The company says the training has boosted motivation, particularly among young sales staff, and has contributed to a reduction in employee turnover. In the short term, it is prioritizing new customer development over any increase in the number of Junpo member salons, as it works to plant the seeds for growing the member salon count in the medium to long term.

The company also aims to increase its GPM over the medium term. It has successfully increased productivity and improved its cost-to-sales ratio by revising production plans and processes based on highly accurate sales forecasts (in financial terms, contributions from a decline in depreciation have been an even larger factor). Going forward, the company intends to step up efforts to improve productivity and gradually raise GPM.

GPM decline in FY03/13: GPM fell sharply from 73.5% in FY03/12 to 70.4% in FY03/13, due mainly to an increase in depreciation as the company’s Kyoto plant came online at end-FY03/12. While sales expanded in FY03/13, operating profit was weighed down by the higher deprecation burden. However, the addition of the Kyoto plant sharply expanded production capacity, and the company’s capacity utilization rate stood at roughly 60% in FY03/19 (assuming 7.5 hours of operation per day), leaving ample room for further increases in production. This means that sharp rises in depreciation stemming from major capital investment are unlikely in the foreseeable future.

The company plans to increase SG&A expenses, mainly for R&D and personnel, but it hopes to maintain profit on a growth path over the medium term by keeping the rise in SG&A expenses below the growth in gross profit.

COTA could also possibly consider opportunities for inorganic growth via M&A. In our interviews with the company, the company indicated it has no interest in acquiring rival companies or M&A geared toward new businesses, but it will possibly consider business succession of distributors with strong regional networks. That said, the company has not made any acquisitions to date, and is not looking at any particular deals at present. As of end-FY03/21, the company’s cash and deposits held totaled JPY5.4bn and its equity ratio was 74.0%.

Capital policy

Acquisition of treasury shares, stock split

From the standpoint of paying out long-term, consistent dividends while pursuing a management path of steady growth, the company has conducted a stock split every year since 2011, while periodically making share buybacks and public tender offers for its treasury shares (in 2014, 2017, 2018, and 2021*). These four treasury share acquisitions total about JPY4.9bn. The aim of the stock splits was to improve market liquidity and expand the investor base by reducing the investment unit. For shareholders who held shares of the company before end-March 2011, their shares would have increased about 3.1 times by the end-March 2021, while the dividend has continued to increase in real terms.

*In February–March 2021, the company was notified by its largest shareholder, Eiwa Shoji Co., Ltd., of its intention to sell a portion of its holdings. In view of the impact on demand for its common stock, COTA purchased the shares as treasury shares (660,000 shares acquired for about JPY800mn).

Issuance of moving strike (MS) warrants to come out of treasury stock holdings

Following its fourth public tender offer for treasury shares (February–March 2021), the company in March 2021 issued treasury share acquisition rights to come out of its treasury stock holdings (with provisions on resetting strike price and provisions on permission to exercise) (Allottee: Morgan Stanley MUFG Securities). The issuance was for 6,600 warrants, which correlates to 660,000 potential ordinary shares (at 100 shares per warrant), and raised a total of JPY2,831,400. Of the funds raised through the issue, JPY1.0bn will be used to fund construction of a new research wing and JPY98mn will go to investments in R&D facilities.

Business

Business description

COTA’s core business consists of the development, manufacture, and sale of hair care products to salons and distributors. These partners use these products in their services and sell some of the company’s mainstay toiletries (mainly shampoos and treatments), hair styling products, and hair growing agents to consumers for home use.

Guided by its founder’s spirit, “modernizing the hair salon industry with salon management,” the company aims to expand its business by encouraging growth at salons. Hair stylists—the link between the company and consumers—spend much of their time interacting with their customers (end users) and listening to their concerns about hair, scalp, and hair styles. These customers have specific needs and a range of hair textures for which the stylists recommend the most suitable products. COTA internally develops and manufactures products that meet the quality needs of these professional hair stylists, enabling them to better satisfy their customers. Higher customer satisfaction drives salon retail sales of the company’s products, which supports salon earnings and helps salons become more stable. Earnings growth and stability at COTA’s partner salons tends to create sales growth for the company because the salons buy more products from COTA.

Sales and GPM (left), operating profit and OPM (right)
Source: Shared Research based on company data

Key products

COTA’s key products are toiletries such as shampoos and treatments. These are not only used by salons but also sold to consumers through salons, generating high sales. The company also develops hair styling products (such as sprays, waxes, foams, and mists), hair growing agents, hair coloring products, and perm products. It manufactures many of its toiletries, hair styling products, and hair growing agents in-house, but also outsources manufacturing of some products.

Sales ratio by product (left), and sales by product (right)
Source: Shared Research based on company data
Performance by productFY03/13FY03/14FY03/15FY03/16FY03/17FY03/18FY03/19FY03/20FY03/21
(JPYmn)ParentParentParentParentParentParentParentParentParent
Sales5,5455,8786,1866,5286,5526,7326,9927,4617,324
YoY4.3%6.0%5.2%5.5%0.4%2.7%3.9%6.7%-1.8%
Toiletries3,5413,9094,0304,4394,5124,6864,9255,4715,598
YoY5.5%10.4%3.1%10.2%1.6%3.9%5.1%11.1%2.3%
% of total63.9%66.5%65.1%68.0%68.9%69.6%70.4%73.3%76.4%
Hair Styling9869381,2561,1291,2141,1771,1891,1831,383
YoY4.4%-4.9%34.0%-10.1%7.5%-3.0%1.0%-0.5%16.9%
% of total17.8%16.0%20.3%17.3%18.5%17.5%17.0%15.9%18.9%
Hair Coloring481459375484355383383327311
YoY-0.7%-4.4%-18.3%29.0%-26.7%7.9%0.0%-14.6%-4.9%
% of total8.7%7.8%6.1%7.4%5.4%5.7%5.5%4.4%4.2%
Hair Growing Agents237247251240254259265253282
YoY4.9%4.0%1.8%-4.5%5.8%2.0%2.3%-4.5%11.5%
% of total4.3%4.2%4.1%3.7%3.9%3.8%3.8%3.4%3.9%
Perm180167141136117126129123114
YoY25.2%-7.2%-15.9%-3.3%-14.0%7.7%2.4%-4.7%-7.3%
% of total3.3%2.8%2.3%2.1%1.8%1.9%1.8%1.6%1.6%
Total product sales5,4255,7206,0536,4306,4546,6326,8927,3577,688
YoY5.3%5.4%5.8%6.2%0.4%2.8%3.9%6.7%4.5%
% of total97.8%97.3%97.9%98.5%98.5%98.5%98.6%98.6%105.0%
Other1201571329798999910173
YoY-25.8%31.1%-15.9%-26.8%1.0%1.0%0.0%2.0%-27.7%
% of total2.2%2.7%2.1%1.5%1.5%1.5%1.4%1.4%1.0%
Source: Shared Research based on company data
Reference: Sales by region
Performance by regionFY03/13FY03/14FY03/15FY03/16FY03/17FY03/18FY03/19FY03/20FY03/21
(JPYmn)ParentParentParentParentParentParentParentParentParent
Sales5,5455,8786,1866,5286,5526,7326,9927,4617,324
YoY4.3%6.0%5.2%5.5%0.4%2.7%3.9%6.7%-1.8%
Hokkaido394456696774738281
YoY-12.8%27.3%23.2%-2.9%10.4%-1.4%12.3%-1.2%
% of total0.7%0.7%0.9%1.1%1.0%1.1%1.0%1.1%1.1%
Tohoku194241285318327344380380403
YoY-24.2%18.3%11.6%2.8%5.2%10.5%0.0%6.1%
% of total3.5%4.1%4.6%4.9%5.0%5.1%5.4%5.1%5.5%
Kanto1,0631,2201,3801,5261,5811,6221,6871,7451,483
YoY-14.8%13.1%10.6%3.6%2.6%4.0%3.4%-15.0%
% of total19.2%20.8%22.3%23.4%24.1%24.1%24.1%23.4%20.2%
Chubu1,6141,7691,7601,8501,7911,8351,9632,1362,290
YoY-9.6%-0.5%5.1%-3.2%2.5%7.0%8.8%7.2%
% of total29.1%30.1%28.5%28.3%27.3%27.3%28.1%28.6%31.3%
Kansai1,3801,3141,3851,4131,4371,4691,4461,5661,701
YoY--4.8%5.4%2.0%1.7%2.2%-1.6%8.3%8.6%
% of total24.9%22.4%22.4%21.6%21.9%21.8%20.7%21.0%23.2%
Chugoku and Shikoku483514555578619678733808973
YoY-6.4%8.0%4.1%7.1%9.5%8.1%10.2%20.4%
% of total8.7%8.7%9.0%8.9%9.4%10.1%10.5%10.8%13.3%
Kyushu739747744758714694699728819
YoY-1.1%-0.4%1.9%-5.8%-2.8%0.7%4.1%12.5%
% of total13.3%12.7%12.0%11.6%10.9%10.3%10.0%9.8%11.2%
Overseas2924161312128129
YoY--17.2%-33.3%-18.8%-7.7%0.0%-33.3%50.0%-25.0%
% of total0.5%0.4%0.3%0.2%0.2%0.2%0.1%0.2%0.1%
Source: Shared Research based on company data

R&D: Focus on development of high-quality products with long product lives

In accordance with the changing market, the company concentrates on developing high-quality products that are environmentally friendly and gentle on the body and hair. It has adopted a structure under which its Product Development Committee studies market trends, prices, raw materials, quality, and product concepts, and relays its findings to the various development teams of the Research Division. The development teams develop products from a consumer perspective, using only raw materials confirmed to be safe (i.e., unlikely to cause allergic reactions or other conditions). For the company’s business model to succeed, its products must be highly appraised by hair stylists who serve consumers with a wide range of hair types (stiff or soft hair, etc.), hair damage, and other factors. COTA’s research and development structure focuses on developing products that exceed the performance typically demanded by professional hair stylists.

Ingredients of cosmetics, including hair care products, are required to be disclosed under the Act on Pharmaceuticals and Medical Devices, making it difficult for companies to differentiate themselves on ingredients alone. However, other factors such as mixing sequence, stirring methods, and temperature management can have a significant impact on quality. For example, the company uses different production tank shapes for each of its products. Production techniques can become a differentiator since they are difficult to trace through chemical analysis.

COTA spends ample time on study and research in order to develop products with long product lives, and only launches major product updates every 10 to 15 years. In some cases, however, it adds products with new functionality to existing product lines during this period. For example, the company released the first generation of its COTA i CARE product line in June 1999, and the second generation in February 2012. The product line has continued to enjoy stable sales growth even in recent years, and we understand the company has not observed any sharp declines in its competitiveness even long after its first major renewal.

COTA i CARE sales
Source: Shared Research based on company data
COTA i CARE shampoo lineup
Source: Company website
COTA i CARE treatment lineup
Source: Company website

COTA conducts its core research in collaboration with external research institutes and universities. As of end-FY03/20, its basic research themes were 1) confirmation of the effects of nanomaterials on hair, 2) confirmation of the effects of surfactants on hair, and 3) establishment of measuring methods for the evaluation of the physical properties of hair and hair aging processes.

The company books JPY300–400mn in R&D expenses per year (roughly 5% of sales).

Key themes in basic research
FY03/19, FY03/20
1Confirmation of nanomaterial effects on hair
2Confirmation of surfactant effects on hair
3Establishment of evaluation method for physical properties of hair and scalp aging
FY03/18
1Influence of active ingredients nanogranulation on hair growth
2Application of safety evaluation method using 3-D skin models
3Establishment of evaluation system for itching by surfactant
FY03/17
1Influence of active ingredient nanogranulation on growth and inside of hair
2Application of safety evaluation method using 3-D skin models
3Establishment of evaluation system for itching by surfactant
Source: Shared Research based on company data

Unique sales approach: Promoting products through salons

Selling products to consumers through salons

The company has adopted the unique approach of selling its products to consumers exclusively through salons, thus forgoing other sales channels. Since professional hair stylists have already recognized the high quality of its products, COTA could likely capture a broader consumer base through online direct sales or other channels. However, it has opted to stick with selling to salons exclusively.

Shared Research believes this approach is based on the following three points. First, COTA aims to realize its founder’s spirit, “modernize the hair salon industry with salon management” by selling its products via salons and it shares this aspiration with its distributors and partner salons. Second, selling through salons gives hair stylists enough time to promote the company’s products to their customers, including having them try out the products. Closely engaging with consumers in this way encourages them to recognize the quality of the company’s products, which allows the company to sell them at high prices. Third, the salon exclusive approach is likely to cultivate repeat customers (i.e., solidify the customer base) since salon-goers tend to visit the same salon repeatedly.

Major toiletry manufacturers typically develop products tailored to mass market consumer needs, and such products seem unable to address each individual’s specific hair concerns. Because these products are sold through supermarkets and drugstores where they can be compared to rival products, they need to have the unique characteristics consumers easily understand and their prices are often the deciding factor in whether or not a consumer will buy. It is also essential for companies selling such products to conduct mass marketing (including TV commercials) aimed at raising brand recognition to maximize the effects of mass production.

Differences in sales channels for COTA and generic toiletries
Source: Shared Research based on company data

In contrast, COTA sells its products through salons. The hair stylists at these salons understand customers’ hair concerns and preferred hair textures (such as the desires for bouncy and smooth or soft and moist finishes) from daily conversation with customers, and typically recommend a suitable combination of hair products from a range of shampoos and treatments. COTA can ensure consumers continue to buy its products even at high prices by leveraging hair stylists’ in-depth explanations and allowing customers to try out products in salons. The format additionally eliminates the need to invest in major TV ad campaigns or other costly advertising. Finally, strong relationships between salons and their customers, or simply customer satisfaction, can lead to repeat orders for COTA’s products.

Range of hair finishes possible with COTA TREAT PREMIQUE
Source: Shared Research based on company data
Building mutually beneficial relationships with salons

COTA believes it is important to build win-win relationships with salons, under which increases in salon retail sales not only expand salon earnings (support stable salon management), but also contribute to its own earnings growth. The company provides lectures (led by sales staff or distributors) to salons on topics such as product characteristics, the proper usage of products, and how to select products based on customers’ hair texture and needs. It also provides support to expand salon retail sales by offering advice on sales methods (including proposing its original counseling system), such as how to navigate conversations with customers in the salon, and how and when to introduce products to customers.

Junpo Salon System

COTA also utilizes its Junpo Salon System to strengthen mutually beneficial relationships with salons by improving salon management. Using Junpo Salon System, the company provides free consulting services to salons that are eager to modernize their management and achieve transformative sustainable growth. In return for access to the system, the company requires that the salons use its products exclusively (i.e., commit not to use rival products). Through the Junpo Salon System the company obtains daily data on sales, customer traffic, and other indicators from member salons, and analyzes these metrics to provide free consulting advice on how to improve future earnings and modernize salon management.

Salon consulting: Many companies provide a range of consulting services for salons (regarding salon development, marketing, improvement of hair styling techniques). COTA’s consulting services stand out by virtue of their focus on improving salon earnings over the near term and modernizing salon management to fuel continued growth over the medium to long term. Also worthy of note is the fact that while most consulting services are provided for a fee, COTA’s consulting services are offered free of charge mainly because the advice is offered by the company to boost salon retail sales of its products.

Junpo Salon System: In keeping with its name (literally, “10-day Reporting Salon System”), the Junpo Salon System originally divided individual months into three blocks of ten days (first, middle, and last), and facilitated confirmation of progress versus targets, communication of concerning problems, and the creation of improvement measure proposals based on performance data. The present version of the system sends/receives data via the internet, resulting in more timely analysis. The system grew out of the original Shuho Salon System (literally “Weekly Reporting Salon System”), which COTA launched in the early 1980s, shortly after its establishment. The system was developed to pursue its founder’s spirit of “modernizing the hair salon industry with salon management,” and the company’s investment in the system exceeded its initial capital stock. In July 1983, the company launched a computer-based version of the Shuho Salon System, which was groundbreaking at the time.

The consulting services provided through the Junpo Salon System are divided into two stages. The first stage focuses on measures to improve earnings in the near term by increasing awareness of the importance of management plans, performing data-based analysis of present conditions, formulating near-term targets, and developing proposals to resolve existing issues. COTA collects data on sales, customer traffic, and the number of customers requesting perms, coloring, or hair treatment. Based on analysis of progress relative to targets and management indicators for each salon, the company offers feedback and advice to improve performance.

Objectives of consulting through Junpo Salon System
Step 1: Aim for improved business performance
Mindset = Decision makingBusiness performance improvements start with a change in senior management mindset
Where there is a management decision, there is a way
Status quo analysisAnalyze management data to understand the status quo and find issues to solve
Goal settingSet appropriate numerical goals and share that knowledge
Implementing solutions to solve problemsPropose solutions for issues, and promote implementation
Understanding progress toward goalsUse Junpo Analysis Table to understand the progress
Productivity gainsAim for a productivity level suitable for the size of business
Step 2: Aim for modern management
Establishing management principleClarify management purposes; help all stakeholders achieve both material and spiritual wealth
Creating management planCreate medium-term management plan covering sales, costs, profits, and financing
Financial managementOffer advice on financial management
Labor managementOffer advice on labor management
Salon planOffer expertise and advice on salon openings
Other managerial adviceOffer advice on incorporation, business succession, capital policy, HR development and hiring
Source: Shared Research based on company data

In the second stage, the aim shifts to modernizing management to ensure continuous salon growth that will keep salons in business well beyond the first generation. Specifically, COTA offers advice and consultation related to the formulation of management principles, drafting of medium-term management plans, financial management, labor management, and salon development. In other words, the second stage encompasses consulting services from a medium- to long-term perspective.

The figure below shows average performance at newly joined Junpo member salons. After becoming members, salon retail sales of COTA products such as shampoos and treatments increased at the salons. Over five years, salon retail sales grew 2.2x, while salon retail sales as a percentage of total sales increased from 5.7% to 11.5%. The benefits of improving management also extend beyond merely bolstering salon retail sales. Many of the member salons have reported that higher retail sales were accompanied by increases in average spend per customer and hourly sales per hair stylist (meaning productivity had improved).

Average performance after adoption of Junpo Salon System (five years)
Source: Shared Research based on company data

The charts below show sales at Junpo member salons including salons which became a member over five years ago. The data show that total sales at member salons have risen in tandem with growth in the number of member salons, that sales per member salon have increased gradually, and that product sales account for 13% of member salon total sales. We can therefore infer that the company's consulting services have contributed to continued management improvement at salons.

Sales at Junpo member salons: total (left), per salon (right)
Source: Shared Research based on company data

Secondary benefits of the Junpo Salon System: The Junpo Salon System offers management consulting service to salons, but it also provides additional benefits such as information exchange between member salons and improved employee morale. For example, member salons operating in the same region share successful methods to cultivate new customers (including via social networking services and campaigns), or hold rallies shortly before the COTA National Salon Sales Competition, which is held in the busy year-end period. From an objective standpoint, it seems counterproductive for salons that operate in the same region to share expertise, but member salons share COTA’s ambition to modernize the hair salon industry with salon management.

Over the previous five years to FY03/21, the company’s sales have grown at a CAGR of 3.5%. Over the same period, the number of Junpo member salons grew at a CAGR of 0.9%, so we can infer that other factors (such as sales growth at member salons) expanded at a rate of 3.5% as growth drivers.

Although the overall number of Junpo member salons remains in an uptrend, inevitably some salons decide to cancel their memberships. COTA says the effectiveness of the Junpo Salon System hinges on a change in mindset at the managerial level, and therefore the results may vary by salon. Accordingly, some salons do not reap the benefits they expected and decide to cancel their memberships. The company says another major reason for cancellations is closures or consolidation of salons driven by fierce competition in the industry. While actual numbers vary by year, the company has seen an average of 132 annual cancellations over the last five years.

COTA does not offer consulting services to non-member salons. However, it does sell products to salons that are not Junpo member salons, based on the shared awareness that selling products in salons can lead to improvements in salon management and sales. The company also says it provides advice (through sales staff and distributors) on product characteristics, the proper usage of products, selection of products based on customers’ hair texture and needs, and salon retail sales techniques to partner salons that sell its products. Many non-Junpo member salons also use and sell rival products.

Sales channels

The company develops toiletries that meet the quality standards of professional hair stylists and sells these exclusively through salons, an approach that supports high prices. While generic shampoos of major manufacturers sold at drugstores and supermarkets retail at JPY500–1,000 for a large-volume (660ml) refill pouch, COTA sells its COTA i CARE shampoo exclusively through salons, with prices ranging from JPY2,500 for a 300ml bottle to JPY5,500 for an 800ml bottle and JPY5,000 for a 750ml refill pouch. By selling exclusively through salons, the company can sufficiently highlight the strengths of its products to consumers, which allows it to charge high prices and avoid price competition among retailers.

Exclusive sales through salons: COTA develops products designed to be recommended as suitable solutions by hair stylists (who constantly listen to salon customers’ hair problems and preferences). It believes this approach toward product design delivers optimal results. In other words, as a rule the company supplies its product to consumers through salon retail sales, which entail personal interaction. Except for some products that have been in circulation for a long time, the company requests that distributors and salons handling its products commit to face-to-face sales (although repeat orders after face-to-face sales may be received online provided such sales are routed through the relevant salon). COTA takes firm measures against online sales that are not routed through a salon, which it views as unauthorized distribution, because it believes this has an adverse impact on earnings at salons that carry its products and possibly consumers in general.

Illegal distribution of salon-exclusive shampoo products: On October 31, 2019, the Sankei Shimbun and the Kyoto Shimbun reported that the Kyoto prefectural police arrested one man working in the cosmetics sales business and three male salon operators on suspicion of violations of the Act on Pharmaceuticals and Medical Devices (distribution of cosmetics with fraudulent labeling). The Act on Pharmaceuticals and Medical Devices requires cosmetics manufacturers to label product containers and packaging with serial numbers, names of ingredients, and usage precautions with the aim of ensuring the safety of cosmetics and preventing potential health hazards from spreading. These men that were arrested allegedly removed the serial numbers of COTA products and sold them online. COTA, as a rule, requests a commitment to face-to-face sales from its customers (distributors and partner salons), and does not permit unauthorized distribution through the internet. The men that were arrested appear to have removed the serial numbers of the products before selling them to ensure the products could not be traced back to their original distribution point.

Distributor and direct sales

COTA’s primary sales channels are distributor sales and direct sales. The company has been selling products through distributors since its founding, and these sales currently account for roughly 55% of total sales. The company provides lectures to distributors on topics such as product characteristics, selection, and usage, and ensures distributors share its founder’s spirit of “modernizing the hair salon industry with salon management.” The distributors promote COTA’s products and provide management consulting to their customer salons. They also deliver COTA products to, follow-up with, and collect payments from some of COTA’s existing partner salons. Distributors collect an estimated sales margin of a little over 30%. It is possible for COTA to achieve sharp growth over a short period of time by linking up with leading distributors to leverage their large networks of customer salons.

COTA ventured into direct sales to salons in the late 1980s. Its direct sales have grown to account for roughly 45% of sales. The company essentially builds direct sales structures in regions that have no influential distributors that carry its products or where such a distributor has shut down operations. It adjusts its shipment prices to ensure all salons pay the same prices for the same products, regardless of the sales channel (via distributors or direct sales). Direct sales are not affected by distributor margins, yielding higher COTA shipment prices and a high GPM. However, the company incurs higher SG&A expenses (fixed costs) for direct sales compared to distributor sales because it needs to shoulder all expenses related to sales, delivery, and collection of payments. Direct sales also enable COTA to better convey its vision to partner salons, including for sales strategy and product promotion. The drawback is that it takes time to cultivate new customer salons due to limitations in human resources.

Salons earn an estimated margin of just over 30% on product sales to consumers. Based on this, retail prices to consumers are equivalent to about 180% of the company's average shipment price. By selling products exclusively through salons, the company has built a high value-added supply chain. Junpo member salons obtain products through either distributors or the company (direct sales) based on region and the origin of the business relationship (purchase prices for member salons are identical regardless of the sales channel).

Supply chain cost structure
Source: Shared Research based on company data
Note: COTA’s average selling price indexed at 100, cost of sales at 26, SG&A expenses at 54, and operating profit at 20. Distributor and salon margins estimated by Shared Research based on interviews.

Cost structure

SG&A expenses

In FY03/21, SG&A expenses came to JPY4.1bn and the SG&A-to-sales ratio to 55.5%. According to its annual securities report, personnel expenses accounted for the lion’s share (JPY1.6bn: roughly 40% of SG&A expenses and just over 20% of sales). Sales incentives paid in accordance with annual sales value were another important cost item (roughly 10% of SG&A expenses and about 6% of sales). SG&A expenses were composed of about 25% selling expenses and 75% general and administrative expenses. In other words, SG&A expenses have a high ratio of fixed costs.

Breakdown of SG&A expenses (FY03/20)
Source: Shared Research based on the company’s annual securities report
Note: Figures in parentheses show a percentage of sales.
Manufacturing costs

In FY03/20, cost of sales came to JPY1.9bn and the cost-to-sales ratio to 24.8%. Total manufacturing costs amounted to JPY2.1bn, comprising JPY1.4bn in materials costs (for ingredients/raw materials and packaging materials), JPY213mn in outsourcing costs (for spray and other products), JPY364mn in labor costs, and JPY100mn in depreciation.

Breakdown of total manufacturing costs (FY03/20)
Source: Shared Research based on company data
Note: Figures in parentheses show a percentage of sales.

The company completed construction of its Kyoto plant in March 2012, thereby considerably expanding its production capacity. The addition of the plant drove up depreciation under manufacturing costs from JPY33mn in FY03/11 to JPY66mn in FY03/12 and again to JPY324mn in FY03/13, when the company booked depreciation over the full year. As a percentage of total sales, depreciation rose from 0.6% in FY03/11 to 1.2% in FY03/12 and 5.8% in FY03/13, and GPM declined as a result. Thereafter, the deprecation burden gradually fell, reaching 1.3% in FY03/20. The combination of a lower depreciation burden and higher plant productivity (by maximum continuous operation based on the demand outlook) has sharply driven GPM improvement.

The company’s says its facilities were running at near-full capacity in FY03/21, and that expanded production is necessary for future growth. In FY03/22, it will add production lines and tanks (each product is made in a differently shaped tank) in available space at the plant. The projected amount of capital investment is JPY180mn.In addition, the company as a rule only invests moderately in automation. This is because, as a supplier of high value-added products, it believes “products that people touch when using require meticulous visual and sensory quality checks that only people can deliver.”

In March 2021, the company issued moving strike (MS) warrants to come out of its treasury stock holdings (see Medium-term growth strategy section). Of the funds raised, it will use about JPY1.1bn to build the new research wing and residential facilities for the director of research. Completion is scheduled for May 2022. The company already bought the land, near its head office in FY03/21.

Basic management view: COTA BASIC

COTA’s business model is heavily influenced by its founder’s spirit of “modernizing the hair salon industry with salon management.” In addition, the company has formulated basic principles, founding principles, management principles, and divisional policies (collectively referred to as COTA BASIC), which are shared across the company. Shared Research understands this shared set of principles fosters a corporate culture focused on sustainable growth and a quest for “a good company” in the long term rather than chasing unstable short-term profit.

Founder’s spirit: “Modernizing the hair salon industry with salon management”

COTA's founder’s spirit expresses the company’s aim to promote the continuous business growth of salons, improve their productivity by increasing earnings, improve their work environments, and lead them toward corporate management based on modern financial accounting, thus eliminating potential conflicts between private and corporate interests. The company makes decisions based on whether practices are in line with the founder’s spirit.

According to COTA, when the company started operating (around 1980), the hair salon industry was plagued by low productivity in part due to an emphasis on apprenticeships under technically trained hair professionals, giving rise to a relatively uninspiring environment for young hair stylists. In addition, many salons were held back by outdated management methods and a lack of professionalism among owners with regards to appropriate use of the salon space. COTA’s founder Eiji Oda, who at the time served as the president of another hair care product manufacturer, was deeply concerned about the state of the hair salon industry, and decided to launch COTA in an effort to modernize and develop it.

COTA is strongly committed to creating management structures that allow salons to achieve continuous growth. To this end, the company aims to bring about a change in awareness among salon managers (transforming them from technically trained hair professionals to genuine managers), increase productivity, improve the work environment, and introduce modern financial accounting.

Founding principle: “Fostering a love for beauty, culture, and peace”

Culture is born out of the love of many for things of beauty and for beauty itself. An unwavering love of culture eliminates strife so that a love for peace may spread throughout the world. This founding principle expressing COTA’s original aspiration is shared across the company.

Management principle: “Pursuing business for the sake of people and society while holding fast to our founding principle”

In this context, “for the sake of society” refers to the idea of employing more people and paying more taxes, while “for the sake of people” refers to achieving the expectations placed on the company by shareholders, customers (distributors and salons), and partners (suppliers, financial institutions, and others). COTA also aims to raise the economic prosperity and happiness of its employees through this management principle.

Divisional policies

Sales Division: Increase salon earnings by implementing COTA’s unique business model that combines consulting-based sales through the Junpo Salon System with a salon retail sales strategy centered on toiletries.

Production Division: Increase trust in COTA and its products by manufacturing safe products and providing a stable supply of high-quality products to the market.

R&D Division: Develop safe products that provide high added value to end users by enhancing female beauty, and perform quality control to ensure attainment of the highest standards. Pursue fundamental research in a range of fields by collaborating with industry and academia.

Administrative Division: Focus on staff training and develop management structures to become a concrete model for “modernizing the hair salon industry with salon management,” and provide back office support for other divisions to ensure the company as a whole further strives to become “a good company.”

Basic principle: Constantly aiming to be “a good company”

COTA’s perspective on what makes “a good company” has nothing to do with generating high sales or operating out of expensive buildings. Instead, the company believes “a good company” is built on the positive mindsets of its employees. Such mindsets generate a strong sense of ethics and morals among employees to remain and promote “a good company,” and also form a foundation for ultimately remaining “a good company,” which makes all of its employees, partners, and stakeholders happy to be connected to it.

When current president Hiroteru Oda was appointed in 2004, he was convinced that a proper value system shared by executives and employees would drive the development of the company. What was important to him was not so much making decisions based on the prospect of future gains or losses, but rather taking action in accordance with a sense of what is ethical. COTA urges all its employees to constantly think and act in a way that can further elevate the company’s status as “a good company.”

COTA BASIC
Source: Shared Research based on company data

Market and value chain

Demand-side trends

COTA's business model positions salons as sales locations through which it can supply its toiletries and other products to consumers. Put differently, all salons operating across Japan are potential sales outlets for the company. According to statistics compiled by the Ministry of Health, Labour and Welfare, the number of salons operating in Japan stood at 254,000 in 2019, and continues to trend upward. This data is based on applications for salon openings to healthcare centers, which is required by law in Japan, and shows that a large number of such applications are submitted each year (however, the proper notification is not always submitted when a salon closes). The same statistics show growth in the number of hair stylists in Japan, putting the total at 542,000. Japanese hair stylists need to attend a professional training school, pass exams, and obtain a national license before they can work in a salon. A large number of people acquire this license every year.

The annual expansion in the number of salons and hair stylists is a tailwind for COTA, which looks to increase its market share. Salons and hair stylists with an established track record typically value fixed business relationships and are reluctant to switch the products they use to a different manufacturer. New entrants, however, are far more likely to actively explore new products and services in an effort to set themselves apart from established rivals. While the older generation of salon managers was often opposed to the idea of selling toiletries and other products and failed to understand the importance of salon retail sales, such resistance appears to be rare among younger salon managers.

Number of salons and hair stylists