Adjuvant Holdings 4929
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Summary
Adjuvant plans and develops cosmetics, which it sells through salons (includes beauty salons, barbershops, aesthetic salons). It procures shampoo, facial cleanser, and other products from manufacturing facilities and sells them to some 7,000 salons nationwide.
Personal Products
Key dates
2017-05-17
Coverage initiation
Executive summary
Business overview
With the goal of restructuring its management and administrative systems, the company transitioned to a holding company structure in September 2021. Adjuvant Holdings is a holding company with three companies under its umbrella: Adjuvant Cosme Japan, a domestic salons-based sales company, Adjuvant Hong Kong, an overseas sales company, and 2C, which was established in April 2021 to sell cosmetics and quasi drugs online. Aiming to spread the achievements of its R&D in a wide variety of fields, the company moved to clarify the roles of each of its companies and hasten the development of new businesses. In addition, the company has entered the market for hair growth agents by leveraging its patents (one granted on October 7, 2021, one still pending) for a hair growth agent discovered as part of a joint research project involving the subsidiaries, the Institute of Physical and Chemical Research (RIKEN), and Organ Technologies. On October 5, 2021, 2C launched online sales of the men's hair growth brand NUOSS. Products in the brand are considered quasi drugs.
Adjuvant Cosme Japan plans, develops, and markets its own range of cosmetics that are sold in salons* (salon retail cosmetics).
*Includes beauty salons, barbershops, and aesthetic salons (which offer a variety of mostly non-surgical beauty treatments, including hair removal, weight loss treatment, and facial care).
The company procures hair care, skin care, and other products from contract manufacturing facilities, and sells to some 8,000 salons nationwide (about 3% of all salons in Japan). Roughly 90% of sales are made through distributors. In FY03/21, hair care products (shampoo, etc.) accounted for 52.2% of Adjuvant’s sales, skin care products (lotion, etc.) 30.0%, and other sales 17.7%. (All ratios are before deduction of sales rebates.) The company’s products, sold in salons, are priced higher than competitors’ products that are sold at volume retailers. For example, 300ml of Adjuvant shampoo goes for JPY2,000 or more (tax included), which is more than 5x the price of low-priced shampoos at retailers. The company’s gross profit margin in FY03/21 was high at 61.4％. In the domestic salon market, Adjuvant has a 13–14% share for skin care products (placing it in 4th place) and a 2–3% share for hair care products (10th to 15th place) (based on company estimates for 2017).
According to the company, Adjuvant is the only company in Japan selling additive-free cosmetics through salons. While the company brand cosmetics primarily use elements that are found in the human body, such as sugars and minerals, other cosmetics companies use petroleum-based ingredients to produce products in large volume at a cheaper price. Petroleum-based ingredients may negatively affect the skin and hair of some users who have allergies. However, because the company does not use petroleum-based ingredients in its cosmetics, its products do not irritate the skin or feel greasy after use. As a result, many customers switch to Adjuvant cosmetics from other companies’ products. The company says it has focused on offering safe products since 1992, when it began selling natural skin care products patented by a dermatologist. The patents for which Adjuvant had exclusive sales licenses expired in 2015, but according to the company, its products cannot be easily copied, as its methods for preparing cosmetic formulas require specialized knowledge.
At partner salons, the company has beauticians provide salon customers with thorough explanations of the characteristics of its products to grow a loyal user base. Adjuvant pays sales commissions to salons based on the procurement value of salon-only products (sold to retail customers) and helps improve salons’ earnings through retail sales. According to the company, around half of new users go on to become repeat users, so its customer base continues to expand. As additive-free cosmetics require product explanations, the customer loyalty that companies like Adjuvant has already built up serve as a barrier to entry.
The company established e-commerce company 2C Co., Ltd. in April 2021 with the objective of entering the hair growth agent market and delivering products directly to customers. Through its R&D efforts the company discovered an ingredient that is useful not only as a hair growth agent for the head, but also for eyebrows and eyelashes. The company aims to maximize the results of its R&D and while until just recently, it has sold skin care products and hair care products through salons. Now, it will be using the e-commerce channel as it enters the hair growth agent market.
Online sales by 2C were launched on October 5, 2021 (no in-store sales), with 2C selling the company's scalp shampoo, scalp lotion (quasi-drug hair growth treatments), and scalp brush (electric massage brush). These products are targeted at men and can be purchased from the 2C website, Rakuten, Amazon, and other e-commerce sites. The company's in-store products are targeted at women and do not contain any petroleum-based ingredients. In contrast, the scalp shampoo and scalp lotion are quasi-drug hair growth products containing ethanol and are targeted at men.
ADJUVANT HONG KONG COMPANY LIMITED was established as an overseas sales company in Hong Kong in July 2013.
The company’s sales grew at an average annual rate of about 6% from FY03/08 (parent only) through FY03/14 (consolidated), despite the overall cosmetics market remaining flat. However, from FY03/15 an issue emerged whereby certain partner salons and distributors were selling Adjuvant’s products (sold for professional use in salons) online through unauthorized distribution. The company essentially solved this issue by end FY03/18, but it required four years to put it to an end. By transitioning to a holding company structure in September 2021, and reorganizing its business administration, (detailed later in this report), the company aims to solve its problem with reliance on merchandise and shortage of ability to provide consulting to salons by its sales staff.
Earnings trends
Sales for FY03/22 were JPY4.4bn (-9.4% YoY), operating profit was JPY390mn (+33.3% YoY), recurring profit was JPY401mn (+23.1% YoY) and net income attributable to owners of the parent was JPY393mn (+176.1% YoY).
Sales fell short of the company's plan, despite the benefits of sales promotion activities including limited-edition skincare products and sales campaigns. Gross profit also fell short of the company's forecast due to lower-than-expected sales, but operating profit and recurring profit exceeded forecasts due to a review of SG&A expenses. When it announced the recording of a deferred tax asset and an extraordinary profit from the transfer of investment securities on March 23, 2022, the company originally planned to record JPY22mn in deferred tax assets and deferred tax income (gain). Following internal discussions and consultation with the auditor, the company decided to record JPY103mn in net income. As a result, profit was well ahead of the parent company forecast.
The company’s full-year FY03/22 forecast calls for consolidated sales of JPY5.4bn (+22.1% YoY), operating profit of JPY248mn (-36.5% YoY), recurring profit of JPY259mn (-35.4% YoY), and net income of JPY331mn (-15.8% YoY). The annual dividend forecast is JPY24 (in line with FY03/22). Sales will be driven by the relaunch of three skincare lines and one hair care line in the beauty salon business, along with initiatives to grow the skincare and hair care businesses; the e-commerce business will go live in FY03/23. The company plans for an increase in SG&A expenses, including promotional costs for new products, e-commerce advertising costs, staff costs associated with new hires, and R&D costs. In addition, the company will record a JPY263mn extraordinary profit on the sale of investment securities following the transfer of its holdings of investment securities.
Medium-term management plan (FY03/23–FY03/25)
Adjuvant Group announced a three-year medium-term management plan (FY03/23–FY03/25) at the same time as publishing its plan to comply with the continued listing requirements for the new TSE market segment on October 22, 2021. It announced a new medium-term management plan (FY03/23–FY03/25) on April 22, 2022, based on the results for FY03/22. The company now aims to achieve sales of JPY9.6bn (three-year CAGR of 29.2%), operating profit of JPY1.4bn (53.1%), recurring profit of JPY1.4bn (52.4%) and net income of JPY924mn (33.0%) by FY03/25. On September 21, 2021, the group shifted to a holding company structure in order to optimize the allocation of management resources and speed up decision-making, and clarified the roles of its operating companies. The company aims to improve its corporate value in order to comply with Prime Market standards over the next three years.
Strengths and weaknesses
Shared Research believes the company’s strengths to be its loyal fan base, being an early mover in selling products through salons, and its cash-rich position. The company’s weaknesses are a weak customer follow-up system, a low R&D-to-sales ratio, and limited ability to understand and reflect user needs in its professional cosmetic products.
Key financial data
Note: Figures may differ from company data due to differences in rounding methods. Fiscal year-end is March 20.
Recent updates
Acquisition of treasury shares and purchase of own shares through Off-Auction Own Share Repurchase Trading System (ToSTNeT-3)
On April 22, 2022, Adjuvant Holdings Co., Ltd. has passed a resolution to purchase its own shares and has determined the specific method of acquisition.
The company has decided that the advance purchase of stock will contribute to flexible incentive compensation for the company's executives and employees and will repurchase its own shares for future use as stock-based compensation in a prompt and flexible manner.
The company has submitted a request to Mr. Yutaka Nakamura, a major shareholder of the company, to sell his shareholding back to the company, to which Mr. Nakamura agreed. The company plans to consult with him on the purchase of these shares.
The company will commission a share repurchase at the closing price of JPY1,050 on April 22, 2022 through the Off-Auction Own Share Repurchase Trading System (ToSTNeT-3) of the Tokyo Stock Exchange at 8:45 a.m. on April 25, 2022 (no change to the trading system or time will be made). Purchase order is limited to this trading period.
Details of acquisition
Establishment of a subsidiary
At a board of directors meeting held on March 23, 2022, Adjuvant Holdings Co., Ltd. resolved to establish a subsidiary.
On September 21, 2021, the company transitioned to a holding company to optimize allocation of business resources, speed up decision-making, and rebuild its management and administrative systems.
The company decided to establish a subsidiary to sell hair dye and other professional products for beauty salons. It said that with the establishment of the subsidiary, it aimed to expand its sales channels and strengthen relationships with salons, to drive further development of the group.
The company thinks establishing the new subsidiary will improve corporate value in the medium- to long-term, but expects a negligible impact on earnings at this point. It plans to announce its FY03/23 earnings forecast incorporating the impact on April 22, 2022.
Overview of subsidiary
Booking of deferred tax assets for FY03/22 and extraordinary gain for FY03/23 due to transfer of investment securities
On March 23, 2022, the company resolved to transfer investment security holdings following a review to effectively utilize them.
Impact on earnings
Net income attributable to owners of the parent will increase by JPY22mn in FY03/22 due to the recognition of deferred tax assets and income taxes deferred (gain) accompanying the transfer. The impact is not incorporated in the company forecast. The company is currently reviewing its earnings forecast, including the impact of other factors, and will promptly disclose any revisions if necessary.
The company plans to book gains on the sale of investment securities due to the transfer in FY03/23, and will incorporate these into its FY03/23 forecast scheduled to be announced on April 22, 2022.
Trends and outlook
Quarterly trends and results
Notes: Figures may differ from company data due to differences in rounding methods.
Starting in Q1 FY03/19, hair dye products, which had been reported under the “Hair Dye” segment, were moved to the “Hair Care” segment.
The company holds an invitation-only event for customers (typically salon owners or managers) sometime during the first three months of every year. Operating profit tends to be lower in Q4 due to booking of expenses related to this event.
Note: Figures may differ from company data due to differences in rounding methods.
Note: Figures may differ from company data due to differences in rounding methods.
Full-year FY03/22 results (out April 22, 2022)
Summary of results
Sales for FY03/22 were JPY4.4bn (-9.4% YoY), operating profit was JPY390mn (+33.3% YoY), recurring profit was JPY401mn (+23.1% YoY) and net income was JPY393mn (+176.1% YoY).
Within the beauty industry, consumers are encountering more opportunities to purchase cosmetics through e-commerce sites (online shopping malls and brand sites) rather than in person at brick-and-mortar shopping malls and department stores. Meanwhile, in the beauty and hair dressing market, consumers are demonstrating a growing need for products sold and expertly suggested by salons (barber shops and beauty salons, aesthetic salons, nail salons, eyelash salons, beauty clinics, etc.), and sales generated through physical stores rose YoY, reaffirming the value of in-store sales. Adjuvant Salons that sell the company's products were also subject to this impact.
Versus the full-year company forecast (revised October 22, 2021*), sales were 94.2%, operating profit was 106.4%, recurring profit was 106.1% and net income attributable to owners of the parent was 182.9%. Sales fell short of the company's plan, despite the benefits of sales promotion activities including limited-edition skincare products and sales campaigns. Gross profit also fell short of the company's forecast due to lower-than-expected sales, but operating profit and recurring profit exceeded forecasts due to a review of SG&A expenses. When it announced the recording of a deferred tax asset and an extraordinary profit from the transfer of investment securities on March 23, 2022, the company originally planned to record JPY22mn in deferred tax assets and deferred tax income (gain). Following internal discussions and consultation with the auditor, the company decided to record JPY103mn in net income. As a result, profit was well ahead of the parent company forecast.
Sales down 9.4% YoY: Sales in the Skin Care segment increased 11.6% YoY, and Hair Care segment sales rose 7.6% YoY due to strong performance from KASUI brand products. Both skin care and hair care sales increased, but overall sales declined because results in FY03/21 included sales generated through EXCEED system Co., Ltd., which was deconsolidated on March 1, 2021.
Operating profit up 33.3% YoY: GPM improved 5.0pp YoY to 66.4%, while the company's SG&A ratio improved 2.2pp to 57.6%, and its OPM improved by 2.2pp to 8.8%. Despite expenses associated with Adjuvant's transformation into a holding company, profit increased thanks to an improvement in gross profit and a decrease in personnel and other administrative costs that occurred due to the deconsolidation of subsidiaries.
Net income attributable to owners of the parent up 176.1%: The company recorded a JPY40mn gain on sale of non-current assets through the sale of land.
Number of Adjuvant Salons: 9,039 salons at end-FY03/22 (+643 YoY), of which 7,937 salons were active (+382 YoY).
By segment
Skin Care
Sales in the Skin Care segment were JPY1.7bn (+11.6% YoY). Sales of special edition products in the AE Rich series were strong. Meanwhile, sales increased YoY due in part to ongoing upward impact from campaigns and other promotional activities since Q2.
Hair Care
Hair Care sales were JPY2.9bn (+7.6% YoY). Sales grew YoY in part due to continued strong performance from KASUI brand products, which were launched one year earlier in FY03/21.
Other
Other sales were JPY97mn (-89.5% YoY). Overseas sales of consolidated subsidiary Adjuvant Hong Kong Company Limited are gradually recovering despite the continued impact of the pandemic.
2C Inc. (established in April 2021) launched the NUOSS series of hair growth agents through the company's e-commerce website under a brand concept of "living strongly and beautifully" on October 5, 2021. Concurrently, the company began online sales of the series on Rakuten and Amazon. Advertising for general users will begin in FY03/23. Associated impact in FY03/22 was negligible, but the company plans to actively conduct sales activities moving forward. Please be advised that FY03/21 cumulative financial results in the Other segment included sales generated through EXCEED system Co., Ltd., which was deconsolidated on March 1, 2021.
Company forecasts for FY03/23
Summary
The company’s full-year FY03/22 forecast calls for consolidated sales of JPY5.4bn (+22.1% YoY), operating profit of JPY248mn (-36.5% YoY), recurring profit of JPY259mn (-35.4% YoY), and net income attributable to owners of the parent of JPY331mn (-15.8% YoY). The annual dividend forecast is JPY24 (in line with FY03/22).
Basis for company forecasts
Sales
Sales will be driven by the relaunch of three skincare lines and one hair care line in the beauty salon business, along with initiatives to grow the skincare and hair care businesses; the e-commerce business will go live in FY03/23.
CoGS, SG&A expenses
The company plans for an increase in SG&A expenses, including promotional costs for new products, e-commerce advertising costs, staff costs associated with new hires, and R&D costs.
Extraordinary profit
In addition, the company will record a JPY263mn extraordinary profit on the sale of investment securities following the transfer of its holdings of investment securities.
New medium-term management plan
See the following section on the company's new medium-term management plan.
Medium-term outlook
New medium-term management plan (FY03/23-FY03/25)
When Adjuvant Group announced its plan to comply with the continued listing requirements for the new TSE market segment on October 22, 2021, it also announced a three-year medium-term management plan (FY03/23-FY03/25). However, it updated this plan based on the results for FY03/22 and announced a new medium-term management plan (FY03/23-FY03/25) on April 22, 2022.
The company aims to achieve sales of JPY9.6bn (three-year CAGR of 29.2%), operating profit of JPY1.4bn (53.1%), recurring profit of JPY1.4bn (52.4%) and net income attributable to owners of the parent of JPY924mn (33.0%) by FY03/25.
On September 21, 2021, the group shifted to a holding company structure in order to optimize the allocation of management resources and speed up decision-making, and clarified the roles of its operating companies. The company aims to improve its corporate value in order to comply with Prime Market standards over the next three years.
Basic strategy
Establishment of sustainable growth business
The company aims to capture a market share of over 1% (JPY40bn sales) of the e-commerce cosmetics market (worth approx. JPY320bn) in three years by using the e-commerce channel to sell hair growth products derived from basic research to consumers which the company has not been able to access previously up till now. Against the backdrop of a rapidly changing business environment, the company will work to make rapid market share gains through effective use of web marketing based on the OODA cycle (Observe, Orient, Decide, Act), and will aim for sustainable growth.
Renewed challenge for professional products
In 2014, the company launched a professional-use gray colorant which was suitable for use on sensitive skin, but the product did not fully meet the needs of beauticians and other practitioners. In response, the company established a new business specializing in sales of professional beauty products, first re-launching a range of colorants that met market needs and appointing dedicated color specialists to develop new salon sales channels through beauty dealers.
Release of Adjuvant's unique skin and hair care products for the Japanese domestic hairdressing industry
The company's strategy is to provide safe and reliable skin and hair care products made exclusively with Adjuvant proprietary ingredients that are kind to both the environment and to people via a network of salons; continue to focus on research and development to create products that embody the muti-faceted approach, and revise and discontinue various product lineups over the next three years. The company is also launching a B2B2C e-commerce site to improve customer convenience.
Overseas markets
As of the the start of FY03/23, the company's principal priority is to expand its market share in Japan. For the time being, it will concentrate its management resources on the domestic market. In overseas markets, the company will work to rebuild sales channels while continuing to monitor the progress on the principal priority.
Financial strategy
The company aims to improve the cash conversion cycle (CCC) by streamlining inventory and shortening lead times, while updating and discontinuing various product lines, and strategically allocate the cash generated to web marketing, research and development, personnel expenses, and dividends.
Sustainability
Through the beauty market, the company will continue to address the challenge of providing solutions for a prosperous future for people, society and the earth.
The following details were announced on October 22, 2021.
Adjuvant Group Medium-Term Three-Year Plan (FY03/23–FY03/25)
The company aims to improve its corporate value by achieving the growth targeted in its new three-year medium-term management plan. Specifically, it aims to ensure stable earnings through the established domestic salons-based sales business and sustained growth through the new e-commerce business. As announced at the 1H FY03/22 results briefing held on October 25, 2021, management targets FY03/25 sales of JPY9.4bn (JPY5.4bn in the salons-based business and JPY4.0bn in the e-commerce business). This would represent growth of 192.4% compared to sales in FY03/21. The company expects the e-commerce business, powered by its entry into the hair growth agent market, to be the growth driver, with the business recording FY03/25 sales of JPY4.0bn, operating profit of JPY900mn (OPM of 22.5%), and net income of JPY600mn.
Entering the hair growth agent market
The company has moved into a new area of business, the hair growth agent market, as part of its effort to maximize the results of its R&D efforts that led to the discovery of useful ingredients for hair growth products for the head as well as eyebrows and eyelashes. With the aim of delivering these products directly to customers, it established 2C in April 2021 and continued its preparations in that regard. E-commerce sales of the NUOSS men's hair growth brand were launched on October 5, 2021 (see the "Recent updates" section). However, while notifying shareholders, the company has refrained from actively promoting the product to the general public until November, when the online advertising pages will be ready. With the completion of the online advertising pages in November, the company will launch sales to the general public.
According to the company and based on the 2020 cosmetics marketing outlook from Yano Research Institute, the beauty and hair dressing market accounts for about 6% of the total Japanese cosmetics market (valued at about JPY2.4tn), while the e-commerce market accounts for about 13% of the same. By entering the e-commerce market with its hair-growth products, the company's business domain will expand from 6% of the cosmetics market (approximately JPY140bn, of which the company's estimated share is about 3%, putting it 14th in the industry according to the company) to 19%. The company's FY03/25 sales targets (JPY5.4bn for the salons-based business and JPY4.0bn in the e-commerce business) translate into a 4% share of the beauty and hair dressing market and over 1% of the e-commerce market.
Also according to the company and the 2020 cosmetics marketing outlook from Yano Research Institute, the hair growth agent market in Japan is valued at approximately JPY75.0bn and is expanding by roughly 3% each year. The company estimates that 10mn to 13mn people in Japan worry about thinning hair, of which 2mn to 3mn use hair regrowth and hair growth products. The following section outlines the company's NUOSS brand and some of its key competitors.
There are many hair-growth agents on the market, including the RiUP lineup of products, and the company's entry into the hair-growth agent market was the result of its taking advantage of opportunity to conduct joint research with RIKEN. On October 7, 2021, the company received a patent for a hair growth agent* containing two peptides discovered in a joint research project with the Laboratory for Organ Regeneration team of the RIKEN Center for Biosystems Dynamics Research, which used scientific analysis of mechanisms involved in changes to hair quality to find and assess candidates for active ingredients in new hair care products. The results from the basic research on hair growth were as follows.
According to the company, the Japanese Dermatological Association ranks ingredients as A, B, and C in order to clarify the differences among them. An A rating means results are guaranteed, and minoxidil is the only example in hair growth agents. Among oral drugs for hair growth, Propecia (finasteride) tablets have an A rating. In hair growth agents, the only ingredient with a B rating is Adenogen. No other hair-growing ingredients are recognized as producing effects, with all given a D rating.
The company has obtained evidence of hair growth activity for is ingredient equivalent to that of minoxidil, which has been clinically proven to be effective in humans, through its joint research with RIKEN. More specifically, the company was able to discover cosmetic raw materials producing these effects. One is a raw material used in KASUI cosmetic products, which were launched in FY03/21, while the other is the raw material used in the NUOSS brand of quasi drugs, which were launched through the e-commerce channel on October 5, 2021.
However, these raw materials are cosmetic raw materials and are not active ingredients in quasi-drugs.
Once the application for the active ingredient is submitted to the Ministry of Health, Labor and Welfare, it will take about three to five years for approval. As noted earlier, the raw material for KASUI has already been patented. The company has applied for the patent for the NUOSS raw material, and it believes that if all goes well, the patent should be granted in FY03/23.
The acquisition of a patent is not directly related to sales. However, the company aims to use the evidence from joint research with RIKEN of hair growth being activated to drive growth through sales of its quasi drug hair growth agent that is not only easy to use, but also as effective as RiUp, which uses minoxidil as its hair-growth ingredient.
Acquiring new users
The company targets 150,000 subscribers for the men's hair growth brand NUOSS by FY03/25. Targeting people in their 30s and 40s who are concerned about thinning hair, the company will use e-commerce malls and its website to attract regular users who are looking for real results*. The company's target is based on a conservative assumption that new subscribers using one unit every two months, will cancel after six months, but that the overall number will increase on the acquisition of new users. In response to changes in the channels by which consumers make their purchases, the company will sell its men's hair growth brand through e-commerce malls and its own website.
Expanding recurring sales
Due to the hair growth cycle, it takes at least three months to realize hair growth from product use. As such, the company believes that if customers see no growth, the cancellation rate for its products could be rather high. NUOSS is an evidence-based hair-growth product, and the company believes that this will contribute, at least to some extent, to increase usage rate. The company also aims to reduce the cancellation rate through a variety of measures and support activities for users purchasing subscriptions.
Strengthening corporate governance
On June 17, 2021, the company transitioned from a company with corporate auditors to a company with an audit and supervisory committee. On September 21, 2021, it transitioned to a holding company structure. The company says it is working to strengthen its governance, reorganize itself* (with the company as a pure holding company and Adjuvant Cosme Japan, Adjuvant Hong Kong, and 2C** under its umbrella) and get the group back on track for growth. Adjuvant Cosme Japan will continue to sell products through salons in Japan, while Adjuvant Hong Kong will handle overseas sales, and 2C will handle e-commerce. The transition to a holding company is also aimed at spreading the results of the company’s R&D in a number of fields. Moreover, clarifying the role played by each group company is aimed at accelerating new business. By raising the percentage of outside directors, the company is bolstering the supervisory functions of its board of directors.
The company says that Adjuvant Hong Kong struggled amid the COVID-19 pandemic, but that over the past year it has seen an increase in inquiries. With e-commerce subsidiary 2C, the company intends to market products with different concepts from those marketed to its existing customers, and says it aims to cultivate new customers with a wider vantage point transcending its traditional product concepts. By leveraging the accomplishments of the research conducted with RIKEN, the company aims to achieve steady growth in sales in its traditional salon channel while engaging in new undertakings with 2C.
The prior medium-term management plan
The company announced its five-year medium-term management plan starting FY03/19 at the time of the FY03/18 earnings results announcement. However, in light of earnings progression through Q3 FY03/21, the company withdrew its medium-term management plan targets, which it considered to be unrealistic. Although it withdrew numerical targets of JPY10.0bn in sales and operating profit of JPY2.0bn, we believe there has been no major change to its basic strategies (quantitative growth of domestic Adjuvant partner Salons, quantitative growth of salon management system, qualitative and quantitative growth of the overseas business, qualitative and quantitative growth of its product development foundation, qualitative and quantitative growth of the IT utilization in logistics, etc., and improvement of employee skills and income. The company plans to change focus points and weightings to set new targets.
Coinciding with the withdrawal of its medium-term management plan, the company announced the resignation of President and Representative Director Kenji Matsui, who had led efforts to achieve plan targets, and that Chairman Yutaka Nakamura would also serve as president. The company said it will work to strengthen its governance, reorganize itself (with the company as a pure holding company and Adjuvant Cosme Japan, Adjuvant Hong Kong, and 2C under its umbrella) and get the group back on track for growth.
The company said that while its own sales teams had no problem presenting its own products, it was lacking in knowledge and expertise to support salon management. Between FY03/20 and FY03/21, it lost approximately 30 employees, fresh graduate hires among them.
The company conducts employee training based on the training programs previously put to use by staff scouted from industry peers. The company has had little to show for the funds it has put into its sales force training so far, and learning from those missteps, it is embarking on a new training project. In particular it will be training personnel to provide comprehensive support to salons.
Reference: Prior medium-term management plan (FY03/19–FY03/23; withdrawn in January 2021)
In FY03/23, the final year of this plan, the company targeted JPY10.0bn in sales, JPY2.0bn in operating profit, and OPM of more than 20%. According to the company, its goal was to increase the number of distributors from 57 at end FY03/18 to 80 at end FY03/23, double the number of salespeople between end FY03/18 and end FY03/23, and expand the number of partner salons on contract from 6,879 in FY03/18 (896 salons served directly, 5,983 salons served via distributors) to 10,000 by end FY03/23.
Concept upon formation of medium-term management plan
Based on the results of the previous medium-term management plan (see below), the company focused on balance and timing and designated the following five years as a period of building a strong business foundation. Specifically, the company focused on building each business infrastructure in the first three years, and achieving double-digit sales growth and accelerated improvement in OPM in the final two years of the plan (from FY03/22).
Basic strategy
Quantitative growth in domestic Adjuvant partner salons
The company planned to increase the number of partner salons on contract from 6,879 in FY03/18 (896 salons served directly, 5,983 salons served via distributors) to 10,000 at end FY03/23. The company's goal was to introduce a team system to promote the efficient use of salespeople as well as provide detailed salon support. It designated the Tokyo, Nagoya, and Osaka regions as key areas as about 50% of all of the approximately 240,000 beauty salons in Japan are located in these areas. The company defined its marketing persona (typical salon customer) as salons which have around seven beauticians, with the owner also working as a beautician (such salons accounted slightly more than 25% of the partner salons at end FY03/18). It planned to cultivate salons that fit this profile using its own salespeople and distributors. In the past, the regional sales offices made efforts to expand their salon coverage independently, making profitability studies on their own. However, the company said the main office (HQ) will closely monitor and analyze market needs and predict consumer behavior (organized response).
The company aimed to double the number of salespeople between end FY03/18 and end FY03/23 through systematic hiring of new graduates. The company also aimed to increase the number of distributors from 57 at end FY03/18 to 80 at end FY03/23. The company did not proactively tap into new distributors in the past (number of distributors: 54 in FY03/14, 57 in FY03/18), so it planned to tap into distributors proactively.
Quantitative growth of salon management system
The company targeted the reestablishment of the MAP System, making it usable on the cloud. The company aimed to reconfigure dedicated departments and strengthen synergies with EXCEED system (subsidiary). In FY03/19, the company urged EXCEED system customers (about 2,800 salons) to switch to the cloud-based version. From FY03/20, the company aimed to sell the cloud-based MAP System to partner salons (6,879 at end FY03/18) which do not overlap with EXCEED system customers.
Quantitative and qualitative growth of the overseas business
The company aimed to increase opportunities to approach Southeast Asia, mainly Hong Kong, and expand the reach of Adjuvant cosmetics. The company had placed an emphasis on B2C in the past, but aimed to shift to B2B, using local distributors as an intermediary.
Quantitative and qualitative growth of product development foundation
The company aimed to improve its basic research (external collaboration, etc.) and establish a new product R&D facility. It also aimed to expand its lineup of in-house prescription products and adjust its product lineup. The company has a research facility in Shinagawa, Tokyo (research focusing on hair care products) and launched its Class S series, a hair care product lineup which uses the company’s first in-house prescription, to market in May 2018. The use of an in-house prescription increases added value, increase sales price, and can lower the cost ratio. The company planned to build a research building during FY03/19 on the site of the Kobe logistics center after it relocated. In this building, the company planned to research in-house prescriptions for skin care products and create prescriptions for product development based on basic research conducted with RIKEN.
Quantitative and qualitative growth of IT utilization in logistics, etc.
The company planned to rebuild its systems and expand its distribution warehouses. It also aimed for more efficient production management. In FY03/19, the company aimed to relocate and expand its logistics center and rebuild its IT logistics systems. In the past, the company had handled product orders from customers by analog means such as FAX or telephone, so it aimed to build a one-stop structure for product distribution, production management in OEMs, and receiving orders online from customers. The goal was to improve efficiency while strengthening product traceability.
Improvement of employee skills and income
The company planned to review its employee training, evaluation, and wage systems (planned to reinforce systems during FY03/19). It strove to improve the skills of all employees by establishing educational programs for different levels and ranks. These were not be one-off programs, but rather continuous education (including training in the area of salon management, in addition to products). The company aimed to increase employee income as a result of higher productivity from improved skill sets.
Business
Company overview
With the goal of restructuring its management and administrative systems, the company transitioned to a holding company structure in September 2021. Adjuvant Holdings is a pure holding company with three companies under its umbrella: Adjuvant Cosme Japan, a domestic salons-based sales company, Adjuvant Hong Kong, an overseas sales company, and 2C, which was established in April 2021 to sell cosmetics and quasi drugs online.
Adjuvant Cosme Japan plans and develops its own range of cosmetics (salon retail cosmetics), which it sells through salons (beauty salons, barbershops, aesthetic salons). 2C, established in April 2021, sells cosmetics and quasi drugs online, while Adjuvant Hong Kong handles overseas sales. Aiming to spread the achievements of its R&D in a wide variety of fields, the company moved to clarify the roles of each of its companies and hasten the development of new businesses. In addition, the company has entered the market for hair growth agents by leveraging its patents (one granted on October 7, 2021, one still pending) for a hair growth agent discovered as part of a joint research project involving the subsidiaries, the Institute of Physical and Chemical Research (RIKEN), and Organ Technologies Inc. On October 5, 2021, 2C launched online sales of the men's hair growth brand NUOSS. Products in this lineup are quasi drugs.
Adjuvant Cosme Japan procures hair care, skin care, and other products from contract manufacturing facilities, and, as of end-FY03/21, was selling through some 8,396 salons nationwide (about 3% of all salons in Japan). About 90% of its sales are made through distributors*. It sells these products through distributors or through direct sales to the salons, where beauticians provide counselling to customers to sell the products at salons. The company provides a variety of seminars and workshops to enhance knowledge and expertise on product explanation and sales guidance. It also operates its own salon for direct marketing to consumers. On the other hand, 2C handles online sales of cosmetics and quasi drugs. Manufacturing of the products are outsourced to a contract manufacturing facility.
Research and development
The company has a research facility in Shinagawa, Tokyo (research focusing on hair care products) and launched its first hair care product, which uses an in-house prescription, in May 2018. The company finished building a research facility in February 2019 on the site of its new Kobe logistics center (following its relocation). The company began using the new facility to develop new formulas for skin care products and develop formulas for aging care product development based on basic research* conducted with RIKEN.
Sales composition
The company’s products can be largely divided into skin care products¹, hair care products², and salon management software system, etc.³ In FY03/21, the hair care products (shampoo, etc.) accounted for 52.2% of Adjuvant’s sales, skin care products (lotion, etc.) 30.0%, and other sales 17.7%.
Domestically, the company has 13–14% of the market of skin care products for salons (placing it in 4th place) and 2-3% for hair care products for salons (10th to 15th place) (company’s 2017 estimates). As for unit prices, for example, 300ml of Adjuvant shampoo goes for JPY2,000 or more (tax included), which is more expensive compared to the prices of low-priced shampoos at retailers.
Note: Hair Dye was moved under Hair Care starting in FY03/19; YoY comparisons for the Hair Care segment reflect this change
Company characteristics
According to the company, Adjuvant is the only company in Japan selling additive-free cosmetics through salons. Its cosmetics primarily use elements that are found in the human body, such as sugars and minerals, while other cosmetics companies use petroleum-based ingredients to produce products in large volume at a cheaper price. Petroleum-based ingredients may negatively affect the skin and hair of some users who have allergies. Since Adjuvant does not use petroleum-based ingredients, the preservative para-hydroxybenzonate (paraben), nor artificial fragrances, its products do not irritate the skin or feel greasy. As a result, many consumers switch to Adjuvant cosmetics from other companies’ products. The company has focused on offering safe products since 1992, when it began selling natural skin care products patented by a dermatologist. The patents for which Adjuvant had exclusive sales licenses expired in 2015, but the company says its products cannot be easily copied, as its methods for preparing cosmetic formulas require specialized knowledge.
At partner salons, the company has beauticians provide salon customers with thorough explanations of its products to grow a loyal user base. Adjuvant pays sales commissions to salons based on the procurement value of salon-only products (sold to retail customers) and helps improve salons’ earnings through retail sales. According to the company, around half of new users go on to become repeat users, so its customer base continues to expand. As additive-free cosmetics require product explanations, the customer loyalty that companies like Adjuvant has already built up serve as a barrier to entry.
Resolving temporary setbacks to resume sales growth
The company’s sales grew at an average annual rate of about 6% from FY03/08 (parent only) to FY03/14 (consolidated), despite the cosmetics market remaining flat. Its strategy of increasing the number of loyal users by having salon beauticians explain its products to consumers appears to have paid off. However, since FY03/15 some salons and distributors began unauthorized distribution of Adjuvant products via the internet rather than selling them exclusively at salons. This caused salons which used proper channels to lose interest in selling Adjuvant products, and after peaking in FY03/14, sales of high-margin skin care and hair care products trended downward, causing operating profit to decline as well. From FY03/15, the company strengthened its efforts to prevent product diversion and regain the trust of its partner salons. From the beginning of FY03/18, the company replaced the previous registration system (salons purchase a minimum of JPY100,000 worth of products and conclude an ACS agreement with member salons that stipulates specific ways to explain products to customers under the guidance of the Adjuvant Group) with a system of concluding sales contracts with salons and distributors to prevent unauthorized distribution of its products. The new sales contract includes a condition stating termination of the contract in the case of unauthorized distribution.
In FY03/17, the company’s sales turned up again after making EXCEED system a subsidiary (no longer consolidated as of March 2021). The company forecasts YoY sales and operating profit growth in FY03/18 based on the full-year contribution of EXCEED system and new product effect in the Skin Care business. According to the company, the unauthorized distribution problem has been essentially resolved by end FY03/18.
Core strategy
Targeting salon products, a niche market
Adjuvant has expanded by targeting salons that spend ample time with each customer. This is because the company wants beauticians to provide salon customers thorough explanations of its products, increasing the number of loyal users with a deep understanding of Adjuvant products.
According to the company, the salon products market in which it operates is a niche market accounting for just over 10% (about JPY160–180bn) of the total domestic cosmetics market (about JPY1.8tn according to 2019 data from Ministry of Economy, Trade and Industry, Current Survey of Production, Chemical Industry Statistics).
Salons’ sales consist of revenue from beauty treatments and retail sales. Typically, their sales mostly come from beauty treatments, but this is expected to stagnate or even decrease in the medium to long term due to a declining birthrate and an aging and shrinking Japanese population. For this reason, Adjuvant helps salons improve earnings through expanded retail sales, which should also lead to expansion of Adjuvant’s sales.
In order to increase salons’ retail sales, beauticians must proactively propose products to their customers. Salons need to enhance beauticians’ benefits to increase their motivation to provide better counseling and product explanations, leading to greater consumer satisfaction. Greater satisfaction leads to retail sales growth and to more frequent visits by customers who become loyal Adjuvant users. With more loyal users buying products from salons, salons can improve their earnings, leading to more benefits for beauticians and improved earnings for Adjuvant.
Business model
Outsources manufacturing
Adjuvant plans and develops cosmetics, which it sells through salons (includes beauty salons, barbershops, aesthetic salons). It procures shampoo, facial cleanser, and other products from manufacturing facilities and, as of end-FY03/21, was selling them through some 8,396 salons nationwide (about 3% of all salons in Japan). Most of its sales (approximately 90%) are through distributors. The company outsources all manufacturing because its products only require small-scale production––making it difficult to enjoy scale merits––and because manufacturing equipment size varies for different products (hair care products are produced in 5t and 10t quantities, while skin care is in 500kg quantities).
Product overview
Adjuvant’s products fall into three areas: skin care, hair care, and body care. Its main hair care product is shampoo, for which it has a contract with two manufacturers. Since it offers a variety of types of skin care and body care products, the company has contracts with nine manufacturers. According to the company, Adjuvant is the only company in Japan selling additive-free cosmetics through salons. Its cosmetics primarily use elements that are found in the human body, such as sugars and minerals. Since Adjuvant does not use petroleum-based ingredients, the preservative para-hydroxybenzonate (paraben), nor artificial fragrances, its products do not irritate the skin or feel greasy.
The company’s products are priced higher than other companies’ products, which are sold at volume retailers. For example, 300ml of Adjuvant shampoo goes for JPY2,000 or more (tax included) and 100g of facial cleanser goes for JPY4,000 or more. The company’s gross profit margin in FY03/21 was high at 61.4%.
Skin Care
Mainstay Skin Care brand: All Enrich series
About 60% of sales in the Skin Care segment come from the All Enrich series, a line of anti-aging skin care products. Prior to September 2019, the All Enrich series was known the AE series, but the brand name was changed to All Enrich as part of a brand makeover. The All Enrich series includes a clear gel-type makeup remover, face soap, skin lotion, facial serum, and gel-type facial serum. Products in the company’s All Enrich series contain coenzyme Q10, found in cells throughout the human body, and collagen extracted from tiger pufferfish from Kumamoto Prefecture.
Other: Prinshell series, DJ series, Basic series
In addition to the AE series, the company sells the makeup Prinshell series (facial serum-infused makeup series), the new aging care skin care product DJ series (medicinal facial cleanser, whitening face lotion, facial serum, moisturizing cream, and medicinal cream foundation), and its Basic series, which it has sold since its inception (facial cleanser, face lotion, facial serum, whole-body lotion).