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
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
In FY03/21, sales were JPY7.8bn (+4.1% YoY), operating profit was JPY1.6bn (+10.3% YoY), recurring profit JPY1.7bn (+11.1% YoY), and net income JPY1.2bn (+12.9% YoY). This marked new record highs at all levels and was also the 23rd straight year COTA has reported growth in sales, its eighth straight year of growth in operating profit and recurring profit, and its second straight year of growth in net income. Sales grew even in the face of the COVID-19 pandemic, driven by strong performance of the COTA i CARE product line (flagship products for salon retail sales) and other toiletries, as well as COTA Styling Base B7 Air, its new hair styling product launched in September 2020. Profit margins improved thanks to the company’s ongoing reviews of cost of sales management and reduced sales-related expenses. The planned dividend payment of JPY18.0 per share for FY03/21 is unchanged versus FY03/20. The company carried out a 1.1-for-1 stock split effective April 1, 2021, receivable by registered shareholders as of March 31, 2021.
For FY03/22, the company projects sales of JPY8.0bn (+9.3% YoY), operating profit of JPY1.7bn (+2.8% YoY), recurring profit of JPY1.7bn (+1.6% YoY), net income of JPY1.2bn (+0.8% YoY), and EPS of JPY56.11. It expects to pay annual dividends of JPY18 per share. COTA continues to pursue growth via its unique business model that combines a focus on salon retail sales of toiletries with “consulting-based sales,” its characteristic practice of boosting sales by providing free consulting services to member salons through the Junpo Salon System. In May 2021, the company rolled out COTA COUTURE, its new toiletry product line. COTA aims to establish COTA COUTURE as one of the company’s top-selling brands and boost sales of toiletries more than in the average year. At the same time, the company plans to hire and train additional staff and will continue making capital investments to aid further growth.
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
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
Announcement of permission to exercise of Series 1 stock warrants
COTA Co., Ltd. announced that it had given permission to the holder of its Series 1 warrants (with provisions to reset exercise price and grant permission to exercise) to exercise a fixed number of those warrants.
Issued via a private placement on March 25, 2021, the terms of the warrants require the holder, Morgan Stanley MUFG Securities, to obtain written permission from COTA prior to exercising any of the warrants. The shares issued in response to the exercise of the warrants will all come out of treasury stock currently held by the company.
Name of warrants: COTA Co., Ltd. Series 1 Warrants
Date written authorization to exercise received: October 13, 2021
Allowable timeframe for exercise under current authorization: October 15 through January 13, 2022 (inclusive, total 60 trading days)
Number of warrants to be exercised under current authorization: 2,000 warrants
Type and number of shares to be issued upon exercise of warrants: 110 shares of COTA Co., Ltd. common stock to be issued for each warrant exercised
Exercise price of warrants: Exercise price to be set at price equal to 91% of closing price of common shares on trading day at the Tokyo Stock Exchange immediately prior to day the request for permission to exercise the warrants was submitted (or, if no closing price is quoted, the closing price on the immediately preceding trading day), but no lower than the minimum exercise price of JPY1,263 specified in the issuing agreement.
Announcement of acquisition of a patent right for Out bath oil treatment
COTA Co., Ltd. announced the acquisition of a patent right for itsO ut bath oil treatment.
The company was granted a patent for its Out bath oil treatment (oil-type hair cosmetics; Patent No. 6955615) on October 5, 2021.
In recent years, with the increase in the number of hairstyles using perms, hair colorants, or hair bleaching agents, an increasing number of consumers have suffered from hair damage, which causes hair to lose its silky texture and become stiff and dry. The company's oil-type Out bath treatment is used as one solution to solve these problems. Using ordinary oil-based products for perms or softer hairstyles can cause problems such as "heaviness" or longer drying times when using a hair dryer due to the oil-based ingredients contained in those products.
In response to this, the company focused on polyether-modified silicone, highly polymerized silicone, isododecane, and dimethicone as oiling agents to develop products that improve the smoothness of hair while providing a softer texture that does not feel greasy, as well as shortening the time it takes to dry hair with a hair dryer.
Polyether-modified silicone is an oiling agent but has a highly hydrophilic structure, so is compatible with damaged areas of hair, while highly polymerized silicone is hydrophobic, so is more compatible with non-damaged hair. Combining these two silicones enabled the oil to act on both the damaged and non-damaged surfaces of the hair, thereby achieving a uniform and high-quality silky texture. In addition, blending in volatile isododecane and dimethicone creates a softer feel with reduced greasiness and shorter drying times.
These features enabled the company to achieve uniform silkiness and a softer texture with reduced greasiness, even with an oil-type treatment. Therefore the company had applied for a patent and in October 2021, it was granted a patent. This patent is currently used for COTA Styling Base B7 Air, which was released on September 16, 2020. The company plans to use this patent to develop more haircare products going forward.
The impact on earnings for FY03/22 was factored in the earnings forecast announced on July 30, 2021.
Acquisition of patent rights for a hair growth unit
COTA Co., Ltd. announced the acquisition of patent rights for a hair growth unit.
On July 9, 2021, the company acquired patent rights for “a system that effectively transports hair growth agents to hair papillae” (Patent No. 206543). These patent rights concern findings produced by joint research conducted with Saitama Institute of Technology, which the company announced on February 18, 2021.
Overview of patent rights
Hair growth formulas promote hair growth by allowing hair growth agents to penetrate through the scalp and reach the hair papillae, which play pivotal roles in hair formation. Accordingly, researchers within the industry are studying techniques for delivering hair growth ingredients to hair papillae with the goal of elevating the hair growth effects of hair growth agents. However, techniques for effectively delivering hair growth agents to hair papillae are associated with safety concerns, and the development of techniques that are both highly effective in terms of stimulating hair growth and highly safe has long been an extremely difficult issue for the industry.
In response to this issue, COTA conducted research and development regarding systems that selectively cause hair growth agents to remain close to the pores of the skin, thereby effectively delivering these agents to the hair papillae. Specifically, the company has developed a hair growth unit by converting fine magnetite particles (black iron oxide particles that are highly safe for the human body) into nano-sized particles that tend to accumulate near the pores of the skin and coating these particles with hair growth agents and phospholipids. This hair growth unit is capable of effectively carrying hair growth agents from the pores to the hair papillae. Additionally, the phospholipids applied as a surface coating are highly suitable for application to the human scalp and highly compatible with hair growth agents. These properties enable the hair growth unit to generate higher hair growth effects by efficiently facilitating the delivery of hair growth agents to the hair papillae. Black iron oxide oxidizes when exposed to the air, making stability an issue when attempting to utilize it commercially. Accordingly, the company developed an aerosol container that uses a special propellant gas and limits the black iron oxides exposure to the air, thereby raising its stability.
The company plans to use these patent rights in the development of future hair growth formulas.
Currently, the company does not anticipate that this acquisition of patent rights will have any impact on FY03/22 financial results.
Trends and outlook
Quarterly trends and results
Notes: Figures may differ from company materials due to differences in rounding methods.
1H FY03/22 results (out November 5, 2021)
Summary
In 1H FY03/22, sales were JPY3.7bn (+27.7% YoY), operating profit was JPY747mn (+127.1% YoY), recurring profit JPY764mn (+124.5% YoY), and net income JPY537mn (+128.7% YoY).
Progress
Versus the company’s full-year FY03/22 forecast, progress in 1H was 44.8% for sales (32.9% of full-year sales in 1H FY03/21), 40.9% for operating profit (20.3%), 41.3% for recurring profit (20.5%), and 41.9% for net income (20.1%).
External environment
The outlook for the future remained uncertain during 1H, with progress seen in the rollout of COVID-19 vaccines on the one hand and rebound in the number of domestic infection cases on the other. In the beauty industry as well, the impact of the pandemic has been unclear, and its effect on the customer count and performance of salons continued to warrant close attention.
Sales
1H FY03/22 sales were JPY3.7bn (+27.7% YoY). Sales were strong for COTA COUTURE, a newhair and scalp care product launched in May
2021.
By product category, sales of toiletries totaled JPY3.0bn (+37.2% YoY), hair styling products JPY513mn (+0.2% YoY), hair coloring products JPY152mn (+10.9% YoY), hair growing agents JPY92mn (-9.8% YoY), perm products JPY51mn (-1.9% YoY), and other products JPY69mn (+102.9% 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.
Operating profit
Operating profit came to JPY747mn (+127.1% YoY). The 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 rose 0.3pp YoY to 72.0%. While the higher personnel expenses led to a YoY increase in SG&A expenses, the SG&A ratio improved 8.6pp YoY to 51.6% on sales growth and lower cost of sales. As a result, operating profit margin improved 9.0pp YoY to 20.4%.
Company forecast for FY03/22 (revised on July 30, 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.
Changes in accounting standards for revenue recognition
Starting FY03/22, COTA 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 FY03/22 (revised up on July 30, 2021)
The company revised up its FY03/22 forecast on July 30, 2021. The revised forecast calls for sales of JPY8.2bn (+12.0% YoY), operating profit of JPY1.8bn (+12.6% YoY), recurring profit of JPY1.8bn (+11.5% YoY), net income of JPY1.3bn (+9.7% YoY), and EPS of JPY60.89. It expects to pay annual dividends of JPY18 per share. The company is shooting for record high sales and its 24th consecutive year of sales growth. It is also aiming for its ninth consecutive year of higher operating profit, while continuing to hire and train human resources and make the capital investments needed to generate further growth.
The previous forecast called for sales of JPY8.0bn (+9.3% YoY), operating profit of JPY1.7bn (+2.8% YoY), recurring profit of JPY1.7bn (+1.6% YoY), net income of JPY1.2bn (+0.8% YoY), and EPS of JPY56.11.
The company revised up its forecast for the following reasons.
Strong sales of flagship of COTA i CARE product line (flagship products for salon retail sales)
Higher-than-expected take-up of COTA COUTURE, its new toiletry product line, launched in May 2021, at distributors and salons (Q1 Sales of COTA COUTURE exceeded the company's expectations by JPY240mn: see Q1 FY03/22 results)
Company forecast assumptions
Although the impact of COVID-19 on FY03/22 performance is unclear, customer volume and performance at member salons are on a recovery trend. The company continues to pursue growth via its unique business model that combines a focus on salon-based retail sales of toiletries with “consulting-based sales” centering on the Junpo Salon System. The company will work to further improve performance of its member salons and channel its energies into the development and modernization of the beauty industry.
Demand for salon retail sales was robust even amid the pandemic, and many consumers value the company’s services. COTA also acknowledges the growing preference of consumers for its high-value-added product offering. The company rolled out COTA COUTURE, its new toiletry product line, in May 2021 (discussed below). COTA aims to establish COTA COUTURE as one of the company’s top-selling brands and boost sales of toiletries more than in the average year. At the same time, the company plans to hire and train additional staff and will continue making capital investments to aid further growth.
Target performance indicators
COTA sets general targets for performance indicators to achieve steady growth and sustainability: recurring profit margin (RPM) of 15% or higher; ROE of 10% or higher. The company projects RPM of 21.0% and ROE of 13.3% for FY03/22. Adjusting for the application of new accounting standards for revenue recognition, RPM equates to 21.2% in FY03/20 and 22.6% in FY03/21.
Stock split
As in the previous 10 years, the company carried out a stock split on April 1, 2021, with the aim of improving market liquidity and expanding the investor base. It forecasts a dividend of JPY18 per share. The 1:1.1 stock split represents 10% actual increase of dividend. Excluding the impact of the issuance of moving strike (MS) warrants (discussed in the Medium-term growth strategy section), the payout ratio is forecast at 32.1%.
(Reference) Sales by product category (initial company forecast)
The company forecasts sales of toiletries of JPY6.2bn (+JPY603mn, 10.8% YoY), hair styling products of JPY1.5bn (+JPY76mn, 5.5%), hair coloring products of JPY320mn (+JPY8mn, 2.7%), hair growing agents of JPY328mn (+JPY45mn, 16.1%), perm products of JPY101mn (-JPY13mn, 11.5%), and other products of JPY88mn (+JPY15mn, 20.5%). It will continue to aim at sales growth centered on flagship toiletries.
New products
The company launched the new COTA COUTURE line of shampoo and treatment on May 13, 2021, positioning this as its top toiletries brand. It forecasts first-year sales of JPY1.6bn in the initial year (FY03/22). After that, the company will aim for new record highs every year by cultivating new users and retaining repeat customers.
Without factoring in the effects of applying new revenue recognition accounting standards, the company’s sales forecast for FY03/22 is JPY8.5bn, a YoY increase of JPY736mn (+9.5%). Shared Research assumes that, although the company forecasts JPY1.6bn in sales of the new COTA COUTURE product line, it is also prepared for lower sales of its existing flagship COTA i CARE product line, due to sales cannibalization.
Developed in connection with COTA’s corporate slogan of collaborating with beauty salons to make women’s hair beautiful, COTA COUTURE products seek to meet the needs of women with high beauty standards. The company is positioning the line as its top toiletries brand, and is forecasting sales to grow more than in a typical year. As the beauty standards of Japanese women increase year by year, the company, convinced that a woman’s beauty starts with her hair, says it felt confident in releasing COTA COUTURE as a line of top-notch products that can empower hair stylists to fully bring out their beauty sense. The company claims the products can deliver beautiful hair and heartfelt satisfaction to users.
The company developed the COTA COUTURE line based on the shampoo formulation it patented in October 2020. It is characterized by a dense, full-bodied foam and protection against the fading of hair coloring. The dense foam prevents friction between hairs, and repairs and moisturizes hair during washing, allowing users to pass their fingers easily through their hair during washing and rinsing. The company says its patented technology also limits the admixture of cleansing ingredients, which minimizes the leaching of pigment used in hair coloring, enabling a high degree of satisfaction as users can keep their hair clean across repeated uses.
There are three versions in the lineup, each of which offers a different finish: Silky (smooth), Flannel (moist), and Velvet (higher moisture). The product design is based on the concepts of counseling and beauty, envisioning a setting in which professional hair stylists provide an assessment of a customer’s hair condition and then select the product most suited to each individual case. Touted as the company’s top toiletries brand at launch, the price structure* of COTA COUTURE is set more than 50% higher than the existing COTA i CARE line of flagship products. The company believes the combined effects of the COTA COUTURE and COTA i CARE lines of toiletries will help cultivate new salon-based customers.
Capital investments, depreciation
The company’s capital investments are summarized below (the FY03/21 figure was revised to reflect the subsequent application of new revenue recognition standards).
The company projects capital investments of JPY511mn in FY03/22. The cost of relocating and expanding its Tokyo branch (to a location closer to Shibuya Station from the current location in the vicinity of Yoyogi Park) in June 2021 will be roughly JPY100mn. Equipped with a training studio and seminar room, it will serve as a sales base. It is a rental location. The company also anticipates spending JPY180mn on the expansion of its plant facilities. With current sales volumes, existing facilities are running at near full capacity, and expanded production is necessary for future growth. The company will add new production lines and tanks using available space in the plant. The company will also build a new research wing, and residential facilities for the director of research. Completion is scheduled for May 2022. The company plans to raise roughly JPY1.1bn to fund construction of the research wing through the issuance of moving strike (MS) warrants to come out of its treasury stock holdings (see Medium-term growth strategy section below). The company already bought the land, near its head office, in FY03/21.
Depreciation was JPY207mn in FY03/19, JPY204mn in FY03/20, JPY174mn in FY03/21, and is forecast to be JPY257mn in FY03/22.
Initial forecast and results
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.
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.
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.
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.
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.
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.
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 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).
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.
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.
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.
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.
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).
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.
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.
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).
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.
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.
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.”
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.
Household spending at salons has also trended upward. According to Household Surveys conducted by the Ministry of Internal Affairs and Communications, spending per household at salons/barbershops expanded from JPY25,700 in 2013 to JPY28,900 in 2018. The increase was driven mostly by growth in fees for “other services” such as hair coloring and treatments, while haircut and perm fees expanded modestly.