Executive summary

Business overview

Adjuvant Holdings Co., Ltd. (Adjuvant) 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’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

In full-year FY03/21, the company reported consolidated sales of JPY4.9bn (+4.5% YoY), operating profit of JPY293mn (versus loss of JPY185mn in FY03/20), recurring profit of JPY326mn (versus loss of JPY158mn in FY03/20), and net income attributable to owners of the parent of JPY142mn (versus loss of JPY228mn in FY03/20). With changes in consumer activity and lifestyle brought about by the COVID-19 pandemic, demand for skin care products declined and the environment remained severe for salons in the beauty industry. Adjuvant Salons, which sell the company’s products, were similarly impacted. Despite weaker demand for skin care products, sales were largely as the company had estimated in its revised full-year forecast (announced January 22, 2021) thanks in part to the launch of its new hair care brand. Meanwhile, profits outperformed the forecast because promotion and travel expenses decreased more than the company had anticipated amid the COVID-19 pandemic.

The company’s full-year FY03/22 forecast (revised October 22, 2021*) calls for consolidated sales of JPY4.7bn (-3.8% YoY), operating profit of JPY367mn (+25.3% YoY), recurring profit of JPY378mn (+16.0% YoY), and net income attributable to owners of the parent of JPY215mn (+51.0% YoY). The upward revision of sales reflects 1H results, and the initial 2H sales forecast remains unchanged. Earnings for 2C Inc., established in April 2021, are not included in the forecast. In addition, the company has revised its forecast for SG&A expenses to carryover some of the advertising and R&D expenses initially planned for 1H into 2H.

As announced on January 22, 2021, the company has withdrawn its medium-term management plan and is currently drafting a new plan. As announced on April 6, 2021, the company has resolved to transition to a holding company structure as part of the new plan (planned date: September 21, 2021) on the basis that it obtains approval at the general meeting of shareholders scheduled to be held on June 17, 2021 and the necessary approval from the relevant authorities. Adjuvant plans to first restructure its organization and rebuild its business management system to speed up decision making in order to respond to drastic changes in the market and business environment. The company says FY03/22 will be a year when it reformulates its new medium-term management plan. 

The company forecasts sales to decrease YoY in FY03/22 due to EXCEED system Co., Ltd. ceasing to be a consolidated subsidiary in FY03/21. However, it will continue to work to grow sales of skin care and hair care products through aggressive promotions in various forms. It also forecasts SG&A expenses, such as promotion expenses for new products to be launched in FY03/23, personnel expenses from the recruitment of new personnel, and R&D expenses, to increase YoY.

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

Recent updates

Plan to comply with the continued listing requirements for the new market segment

Adjuvant Holdings Co., Ltd. announced its plan to comply with the continued listing requirements for the new market segment.

On October 22, 2021, the company submitted an application seeking to select the Prime Market in connection with the Tokyo Stock Exchange's market segment restructuring scheduled for April 2022. As of the base date for transition (June 30, 2021), the company did not meet the continued listing requirements for the Prime Market, and has prepared a plan to comply with the requirements.

As the company does not meet the requirements for tradable share market capitalization and daily average trading value, it plans to implement various measures to meet these requirements by FY03/25.

Basic policy for compliance with Prime Market requirements

• Formulate the Adjuvant Group Medium-Term Three-Year Plan (FY03/23 to FY03/25) and work to enhance corporate value
  
• Work to increase tradable shares to improve liquidity of shares
  

The company will strive to meet the continued listing requirements by achieving its targets for FY03/25, including reaching a tradable share market capitalization of over JPY10bn and daily average trading value of over JPY20mn.

Received patent for hair growth agent

Adjuvant Holdings Co., Ltd. was granted a patent on October 7, 2021 for its patent application filed for its hair growth agent as disclosed on October 18, 2019.

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 joint research project led to the discovery that topical preparations containing palmitoyl dipeptide-5 diaminobutyroyl hydroxythreonine and palmitoyl dipeptide-5 diaminohydroxybutyrate (hereinafter referred to as "Peptide A") have a hair growth-activating effect that promotes hair growth at a comparable level to minoxidil. The project also demonstrated that Peptide A induces the development of genes associated with hair growth in hair dermal papilla cells, which regulate hair growth.

The company currently markets a hair care brand specializing in scalp care consisting of shampoo, treatment, and conditioner, and based on this patent, the company plans to further promote research and development in the health care field.

Launched men's hair growth brand, NUOSS

Adjuvant Holdings Co., Ltd. announced the launch of its men's hair growth brand, NUOSS.

As announced on February 12, 2021, the company has established 2C Inc. and been preparing to newly enter the hair growth product market and deliver products directly to consumers by maximizing the results of its research that led to the discovery of useful ingredients for hair growth products for the head as well as eyebrows and eyelashes. On October 5, 2021, the company launched the men's hair growth brand NUOSS.

This has not been factored into the company's full-year FY03/22 earnings forecast and the company is currently examining the impact on earnings. It will promptly provide a disclosure in the event a forecast revision becomes necessary.

Under the brand concept of "living strongly and beautifully," the company spent six years thoroughly researching men's hair and its life cycle to develop NUOSS, a brand purely focused on building a foundation for hair growth. 

In October 2015, the company began joint research with the Laboratory for Organ Regeneration at the RIKEN Center for Biosystems Dynamics Research. In 2018, the company discovered that phytosphingosine (moisturizing ingredient: not an active ingredient) was effective in supporting hair growth after screening it from a vast array of cosmetic ingredients through research using a hair cycle measurement model. According to the company, NUOSS is a hair-growth product that embodies beauty and advanced science using phytosphingosine.

Hair loss is caused by the shortening of the growth phase in the hair growth cycle as people age, as well as the onset of the regression phase which induces hair thinning, and the shortening of the resting phase when new hair starts growing. The joint research team of the company and RIKEN measured the changes that phytosphingosine brings to the hair cycle and hair growth in the growth phase using RIKEN's hair cycle measurement model.

NUOSS contains three hair growth boosting ingredients. The hair-growth-boosting ingredient, cepharanthine, works on the hair papilla to support the hair's growth phase. Together with the hair-growth-boosting ingredient Swertia japonica extract and the blood circulation-boosting ingredient Panthenyl Ethyl Ether, the product is designed to boost hair growth by promoting blood circulation to the scalp, delivering nutrients through the bloodstream, and stimulating hair matrix cells.

The NUOSS lineup consists of three products: the Scalp Boost Lotion, priced at JPY5,980 (including tax), the Scalp Boost Shampoo, priced at JPY3,980 (including tax), and the Scalp Boost Brush, priced at JPY39,800 (including tax). The company will also start a NUOSS original hair growth support program for regular customers, in which a team of trained hair diagnosticians will provide counseling and hair growth methods online. 

Trends and outlook

Quarterly trends and results

1H FY03/22 results (out October 22, 2021)

Summary of results

In 1H FY03/22, the company reported consolidated sales of JPY2.2bn (+2.4% YoY), operating profit of JPY267mn (versus loss of JPY1mn in 1H FY03/21), recurring profit of JPY274mn (versus profit of JPY8mn in 1H FY03/21), and net income attributable to owners of the parent of JPY172mn (versus loss of JPY94mn in 1H FY03/21). In the beauty industry, salons continued to operate under shortened business hours, and sales activities continued to be conducted while observing social distancing amid the ongoing COVID-19 pandemic. However, salons saw an increase in customer traffic YoY, leading to an increase in sales. Adjuvant Salons, which sell the company’s products, were similarly impacted. 

Versus company forecast: Versus 1H forecast, 1H sales reached 109.7%. As for profits, the company forecasted an operating loss of JPY31mn, a recurring loss of JPY26mn, and a net loss attributable to owners of the parent of JPY34mn, but reported profits in each profit category. Sales exceeded the previous forecast as a result of strong sales of the AE Rich series of skin care products as well as the KASUI hair care products introduced in FY03/21. All profit lines came above the previous forecast thanks to improved gross profit from higher sales, lower personnel expenses due to deviations from the personnel plan, lower travel and transportation expenses owing to voluntary restraint in sales activities amid the pandemic, as well as lower-than-expected SG&A expenses as a result of carrying over some advertising and R&D expenses to 2H FY03/22. Versus full-year company forecast (revised October 22, 2021*), sales were 47.8% (22.2% in 1H FY03/21 versus full-year results), operating profit 72.7% (loss in 1H FY03/21), recurring profit 72.4% (2.4%), and net income attributable to owners of the parent 80.1% (loss in 1H FY03/21).

Sales up 2.4% YoY: Sales were driven by AE Rich in the Skin Care segment and the KASUI brand products in the Hair Care segment. Excluding the impact of removing EXCEED system from consolidated accounts as of March 1, 2021, sales would have increased 9.3% YoY.

Operating profit of JPY267mn: GPM increased 6.7pp YoY to 66.1%, while the SG&A-to-sales ratio decreased 5.2pp YoY to 54.3%. The result was an OPM of 11.9% (versus operating loss in Q1 FY03/21). Profitability improved as the company utilized online store visits, which were more efficient than in-person visits, and controlled costs. 

Developments: To restructure its management and administrative systems, the company decided to transition to a holding company structure on September 21, 2021. In preparation for the transition, the company established the wholly owned subsidiary Adjuvant Cosme Japan Co., Ltd. as a preparatory company, as well as 2C Co., Ltd. for the purpose of selling cosmetics and quasi drugs online in April 2021.

Number of Adjuvant Salons: 8,658 salons at end-Q2 FY03/22 (+262 YoY), of which 5,794 salons were active (+363 YoY).

By segment

Skin Care

Sales in the Skin Care segment were JPY897mn (+17.4% YoY). Sales growth was attributed to robust sales of AE Misty III Special Edition under the AE Rich series backed by sales promotions, which more than made up for the slight decline in sales of existing products compared to 1H FY03/21.

Hair Care

Hair Care sales were JPY1.5bn (+26.5% YoY). Sales grew in part due to continued strong performance of the KASUI brand products launched in FY03/21.

Other

Other sales were JPY45mn (-89.1% YoY). Overseas sales of consolidated subsidiary Adjuvant Hong Kong Company Limited are gradually recovering despite the continued impact of the pandemic. Further, 1H FY03/21 results included sales of JPY152mn from EXCEED system, which was excluded from the scope of consolidation on March 1, 2021.

Full-year company forecast for FY03/22

Summary

The company’s full-year FY03/22 forecast (revised October 22, 2021*) calls for consolidated sales of JPY4.7bn (-3.8% YoY), operating profit of JPY367mn (+25.3% YoY), recurring profit of JPY378mn (+16.0% YoY), and net income attributable to owners of the parent of JPY215mn (+51.0% YoY). 

The following information was prepared prior to the announcement of the revised forecast. Shared Research plans to update the information following an interview with the company.

The company’s full-year FY03/22 forecast calls for consolidated sales of JPY4.5bn (-7.5% YoY), operating profit of JPY128mn (-56.3% YoY), recurring profit of JPY138mn (-57.6% YoY), and net income attributable to owners of the parent of JPY50mn (-64.9% YoY). Stagnation in economic activities caused by the COVID-19 pandemic has left the outlook uncertain, and the company expects the environment to remain severe for salons.

The company plans to change structures from a Company with Corporate Auditors to a Company with an Audit and Supervisory Committee on June 17, 2021, and transition to a holding company structure on September 21, 2021. The company says it will work to strengthen its governance, reconfigure 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 (detailed later in this report). FY03/22 is the first year of that transformation, during which the company will formulate a new medium-term business plan.

Basis for company forecasts

Sales

The company forecasts sales to decrease 7.5% YoY in FY03/22 due to EXCEED system Co., Ltd. ceasing to be a consolidated subsidiary in FY03/21 (the preceding fiscal year). However, it will continue to work to grow sales of skin care and hair care products through aggressive promotions in various forms. The company also says that when excluding the portion from EXCEED system, FY03/21 sales were approximately JPY4.1bn. When compared that figure, the company’s sales forecast for FY03/22 represents YoY growth of approximately JPY10%.

Skin Care: The company forecasts sales of JPY1.9bn (+20.8% YoY). The company attributes the drop in skin care in FY03/21 to the decline in cosmetics demand due to mask wearing amid the COVID-19 pandemic. Demand for basic cosmetics continued as usual, but big-ticket products declined. Hence, the company plans to concentrate on AE Rich, DJ, and other high-quality aging care products in FY03/22.

Hair Care: The company forecasts sales of JPY2.9bn (+5.0% YoY). It anticipates full-year contributions in FY03/22 from KASUI, the scalp care product it launched in October 2020. It will concentrate on the “Re” product line.

CoGS, SG&A expenses

The company estimates that its CoGS-to-sales ratio will shrink 4.5pp YoY to 34.1% thanks to continuation of the additional scrutiny in inventory control since the previous year as well as reduction in development staff costs with the severance of EXCEED system.

It forecasts SG&A expenses, such as promotion expenses for new products to be launched in FY03/23, personnel expenses from the recruitment of new personnel, and R&D expenses (detailed below), to increase YoY. The company plans to proactively implement various promotions in its Skin Care business, which struggled in FY03/21 due to the COVID-19 crisis. Although it depends on the state of the pandemic, the company plans to hold its big February event in 2022, having postponed it last year. It says it anticipates an approximately JPY1.5mn–JPY1.6mn YoY increase in event expenditures. It also forecasts that the SG&A-to-sales ratio will rise 7.6pp YoY to 63.0%. To augment its sales force, it plans to hire 11 fresh graduates and 5 recent graduates in FY03/22, compared to 9 fresh graduates in FY03/21.

As a result, the company estimates that its OPM will dip 3.1pp YoY to 2.9%.

R&D

The company has conducted a screening to find promising hair growth materials and analyze their mechanism of action, and based on ingredients discovered, it is currently engaged in the following projects to develop and market them as merchandise. It says it expects R&D expenses in FY03/22 to increase approximately JPY70mn YoY.

Development Project A: Currently awaiting quasi-drug approval. Sales launch planned for autumn 2021 through 2C Co., Ltd.

Development Project B: Plans to apply for quasi-drug approval during FY03/22 and launch in FY03/23.

Development Project C: Under development. Aims to apply for approval within five years and launch within eight years.

Establishment of 2C Co., Ltd.

The company discovered through R&D useful active ingredients for hair and scalp, eyebrows and eyelashes. It therefore established a subsidiary, 2C Co., Ltd., in April 2021, with the objective of entering the hair growth agent market and delivering directly to customers. Until now, the company has sold skin care products and hair care products through salons, but it plans to use e-commerce when entering the hair growth agent market.

Mail order sales by 2C are scheduled to begin on October 1, 2021 (no store sales). 2C will sell the company's scalp shampoo and scalp lotion (quasi-drug hair growth treatments), as well as 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 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, targeted at men.

The company has factored out e-commerce sales (sales at 2C Co., Ltd.) given the highly uncertain nature of sales and costs at this time. It plans a minimum start with SG&A expenses scaled back.

Impact of COVD-19

Customers

Regarding domestic customers, the company says that the pandemic has affected major distributors and small-scale distributors in different ways. The majors, with their ample sales forces, have basically kept merchandise moving as normal, while sales activities has stagnated at small-scale distributors. Therefore, the company will respond by allocating different sales teams depending on area and volume. At its main overseas customers, salons in South Korea and in particular Hong Kong, circumstances have been tough, but the company says it has received inquiries from neighboring countries.

Sales activities

In Japan, although there are restrictions on sales activities crossing prefectural lines, new normal sales using online tools, are taking hold. Overseas, the company has taken the new step of producing and displaying videos at salons. Since it can now use online tools to reach distant customers that had generally been beyond the scope of its traditional sales methods, the company thinks it will have a good year in FY03/22 even with minimal sales staff.

Production and logistics

On the production front, the company has been dealing with the pandemic by producing all cosmetics domestically in Japan, managing production schedules three months in advance, and splitting up production teams at its plants. There have been no particular problems regarding raw materials procurement either. In terms of logistics, the company has two warehouses in the Kanto and Kansai regions, but it is able to handle all orders even with just one warehouse.

Reformulation of medium-term plan

As announced on January 22, 2021, the company has withdrawn its medium-term management plan and is currently drafting a new plan. As announced on April 6, 2021, the company has resolved to transition to a holding company structure as part of the new plan (planned date: September 21, 2021) on the basis that it obtains approval at the general meeting of shareholders scheduled to be held on June 17, 2021 and the necessary approval from the relevant authorities. Adjuvant plans to first restructure its organization and rebuild its business management system to speed up decision making in order to respond to drastic changes in the market and business environment. The company says FY03/22 will be a year when it reformulates its new medium-term management plan.

Strengthening governance

The company plans to change structures from a Company with Corporate Auditors to a Company with an Audit and Supervisory Committee on June 17, 2021, and transition to a holding company structure on September 21, 2021. The company says 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. 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 aimed at expanding the horizons of the company’s R&D achievements. Clarifying the role played by each group company is aimed at accelerating new business. By raising the percentage of outside directors, the company aims to enhance 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 six months it has seen an increase in inquiries. With e-commerce subsidiary 2C, the company intends to market products of different concept from those for 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 to its traditional salon channel while engaging in new undertakings with 2C.

Medium-term outlook

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 says 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. 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. Following the transition to a holding company, the company plans to formulate a new medium-term management plan to commence in FY03/23.

Shared Research understands that the new medium-term plan will consist of three pillars: Development of hair dye, which is essential to its lineup of professional salon merchandise; e-commerce sales of hair regrowth agents (by establishing 2C Co., Ltd.); and employee training (an ongoing goal).

The company had poor hair dye sales in April 2020 when it celebrated its 30^th anniversary. Its hair dyes flopped when it developed them in 2016 because it had no hair dye experts on board. According to the company, of the approximately 200 companies supplying salons, there are around 20 that include hair dye in their lineups (Adjuvant Cosme Japan is one of them, but it only has sales of a few tens of millions of yen). It says it is new concentrating on hair dye R&D by leveraging the expertise and previous R&D experience of two employees scouted from industry peers.

The company discovered through R&D useful active ingredients for hair and scalp, eyebrows and eyelashes. With these ingredients, it plans to enter the hair growth agent market and engage in e-commerce by establishing a subsidiary, 2C, with an aim to deliver directly to customers. One of the company’s key concepts is its non-use of alcohol or oil-based ingredients, but with 2C, it will be using ethanol-based ingredients for sake of effectiveness. According to Yano Research Institute’s “Hair Care Market Overview 2020,” hair growth agents are a JPY75bn market (as of 2019) with a CAGR of around 3%. According to the Ministry of Economics Trade and Industry, the cosmetics and pharmaceuticals industry has an e-commerce market worth JPY660bn, for an e-commerce ratio of 6% (2020 e-commerce market survey). The company sees a substantial room for growth in hair growth agent e-commerce.

The company says that while its own sales teams had no problem presenting its own products, it was lacking in knowledge and expertise in salon management consulting. Between FY03/20 and FY03/21, it lost approximately 30 employees, fresh graduate hires among them. The company explains that in FY03/21, amid the COVID-19 crisis, new hires underwent training until around August 2020, after which they were sent out into the frontline, but due to their lack of hands-on experience, sales results were disappointing.

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. It will be nurturing professional management consultants. It will take one or two staff members from each sales branch and bring them to the head office for six months or so of training, and through intensive training courses of limited enrollment and short-term duration, build a team of professionals able to crunch data and put together effective customer proposals. The company plans to have a select number of head office training graduates conduct lectures for staff at other sales branches, after which still further staff from those branches will then go through the head office training in a continuous loop cycle.

Reference: Medium-term management plan (FY03/19–FY03/23; withdrawn in January 2021)

In FY03/23, the final year of this plan, the company targets JPY10.0bn in sales, JPY2.0bn in operating profit, and OPM of more than 20%. According to the company, it aims 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 has focused on balance and timing and has designated the following five years as a period of building a strong business foundation. Specifically, the company will focus on building each business infrastructure in the first three years, and achieve the double-digit sales growth and accelerated improvement in OPM in the final two years of the plan (from FY03/22).

In this new medium-term management plan, the company reestablished its medium-term vision based on the results of the medium-term management plan which ended in FY03/18 (established in June 2013, revised in April 2015; see below). In the next five years, the company aims to establish an advantageous position in its industry and see each group company achieve continued progress. Through assorted initiatives, the company is focusing on the following strategies as a step toward achieving its long-term vision of “generating innovation in the beauty industry and fixing the hiring gap between salons and general companies.”

Basic strategy

Quantitative growth in domestic Adjuvant partner salons

The company plans 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 will introduce a team system to promote the efficient use of salespeople as well as provide detailed salon support. It will designate 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 has 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 plans 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, now the main office (HQ) will closely monitor and analyze market needs and predict consumer behavior (organized response).

The company plans to double the number of salespeople between end FY03/18 and end FY03/23 through systematic hiring of new graduates. The company plans 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). However, it now plans to tap into distributors proactively.

Quantitative growth of salon management system

The company will reestablish the MAP System, making it usable on the cloud. The company will reconfigure dedicated departments and strengthen synergies with EXCEED system (subsidiary). In FY03/19, the company will urge EXCEED system customers (about 2,800 salons) to switch to the cloud-based version. From FY03/20, the company will 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 will increase opportunities to approach Southeast Asia, mainly Hong Kong, and expand the reach of Adjuvant cosmetics. The company has placed emphasis on B2C in the past, but it plans to shift to B2B, using local distributors as an intermediary.

Quantitative and qualitative growth of product development foundation

The company will aim to improve its basic research (external collaboration, etc.) and establish a new product R&D facility. It also aims 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 plans to build a research building during FY03/19 on the site of the Kobe logistics center after it relocates. In this building, the company plans 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 will rebuild its systems and expand its distribution warehouses. It will also aim for more efficient production management. In FY03/19, the company aims to relocate and expand its logistics center and rebuild its IT logistics systems. In the past, the company has handled product orders from customers by analog means such as FAX or telephone. However, the company aims to build a one-stop structure for product distribution, production management in OEMs, and ordering from customers through web management. This will improve efficiency while strengthening product traceability.

Improvement of employee skills and income

The company will review its employee training, evaluation, and wage systems (plans to reinforce systems during FY03/19). It will strive to improve the skills of all employees by establishing educational programs for different levels and ranks. These will not be one-off programs, but rather continuous education (including training in the area of salon management, in addition to products). The company will increase employee income as a result of higher productivity from improved skill sets.

Business

Company overview

Adjuvant plans and develops its own range of cosmetics (salon retail cosmetics), which it sells through salons (beauty salons, barbershops, aesthetic salons).

Adjuvant 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. 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.

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).