The International Top 30: is Japan ready to stage a rebound?

WALL STREET ANALYSTS are all too familiar with the herd mentality. When investors start insisting it's time to buy, buy, buy, it's usually time to sell, sell, sell. As a result, many an investor has outperformed his or her peers by taking a contrarian view of industry sectors, companies and stocks. But can a contrarian view work just as well when the subject matter is an entire country? That just may be the case when it comes to Japan, which, despite decade-long economic problems, is still the No. 2 economy in the world and a key market for household and personal care manufacturers.

Back in the 1970s and 1980s the world marveled at the Japanese business model. But while all those assembly lines ran smoothly, the financial system was in complete chaos. With a banking system in disarray, a collapsing real estate market and a culture that discouraged competition, Japan sank into a economic malaise that by many measures has lasted more than 14 years.

But could the worst of times be over for Asia's dominant economy? In this edition of The International Top 30, Happi's report on the leading household and personal care companies with headquarters outside the U.S., nearly every Japanese company bemoaned that the recently concluded fiscal year was difficult. In addition, many Japanese firms expect the current year to cause problems, with a real recovery in consumer spending not soon expected. Such candid assessments are a welcome change from Japanese companies, and our contrarian readers might take these statements as a signal that real recovery is on the way.

Nearly every Japanese company on our list provides details on cost-saving measures and revamped corporate structures that could put them back on solid ground. Are these programs real reform or just more window-dressing to attract overseas investors? Only time will tell, but from our vantage point, it appears Japanese companies are finally taking the steps necessary to rebuild their businesses to compete in the global marketplace.

Happi has published The International Top 30 for more than a decade, and in every one of those reports, Unilever has been the No. 1 company. The 2003 version is no different. Once again, Unilever is No. 1, with L'Oreal a distant second. Other companies that have cracked the top 10 are Kao, Shiseido, Henkel, Reckitt Benckiser, Wella, Beiersdorf, LVMH and Lion.

We hope you enjoy this edition of The International Top 30. As always, we welcome your comments on our ranking, as well as anything else that appears in Happi.

1. Unilever

London, United Kingdom

(44) 020.7822.5252

www.unilever.com

Sales: $19.6 billion

Sales: $19.6 billion for household and personal care products. Corporate sales: $46.1 billion. Net income: $2.0 billion.

Key Personnel: Niall FitzGerald, chairman; Antony Bargmans, chairman; Keki Dadiseth, home & personal care director; Charles Strauss, president, home & personal care North America and global prestige business and chairman, North America committee; Clive Butler, corporate development director.

Major Products: Personal care--Axe/Lynx, Rexona/Sure and Degree deodorants; House of Valentine, House of Cerruti and Calvin Klein fragrances; Dove, Caress, Lux and Lever 2000 soaps; Pond's and Vaseline skin care products; Organics, Salon Selectives, SunSilk, Suave and ThermaSilk hair care products; Mentadent, Close-Up, Signal and Pepsodent oral care products. Household products--Ala, All, Omo and Wisk laundry detergents; Comfort and Snuggle fabric softeners; Domestos, Cif; DiverseyLever professional cleaning products.

New Products: Personal care--Dove Essential Nutrients skin care, Dove hair care, Axe (North America), Dove Silk Shower & Bath (Europe), Suave Seasonals, Home care--Wisk Sport, All Oxy Active.

Comments: Size does matter at Unilever, but company executives still maintain bigger isn't always better. A couple of years ago, Unilever made headlines around the world when it announced a scaling back to 400 or so core brands--a key element of its Path to Growth strategy. The move followed Unilever's strategy to focus on three key industries (food, home care and personal care) and just 14 categories. Now, the company is determined to focus even more intently on just 20 global brands and what it calls 40 "local jewels." As a result, Unilever now has 14 global brands with sales that exceed or nearly reach the $1 billion mark. Just 10 years ago, the company only had one such brand.

Within the home and personal care division, sales totaled $19.6 billion. Sales of leading brands jumped 6.7%, compared to a 5.2% gain for other household and personal care products.

Although Unilever is focused on all of its leading brands, the past 12 months could truly be labeled the Year of the Dove. Unilever took its well-known personal cleansing brand into brand new categories by launching Dove hair care in 31 countries in Europe, Latin America and Southeast Asia.

Most recently, in June, Unilever introduced Dove Essentials in the U.S. The 8-SKU facial care line of cleansers, lotions and creams promises to restore moisture and leave behind a therapeutic blend of nutrients and vitamins to help skin maintain a healthy glow. All the items in the line contain a proprietary complex of lipids, amino acids, minerals and vitamins A, E and B5. Other products contain such tony ingredients as green tea, grapeseed extract and spring water.

According to Unilever executives, this combination is expected to capture 10% of the U.S. facial care market within five years--or about $200 million in sales. The core audience is expected to be women ages 25 to 30-plus.

"Dove is one of Unilever's biggest brand equities and part of our focus on fewer, bigger brand equities and part of our focus on fewer, bigger brands as we continue on our 'Path to Growth'," said Peter Waxman, Dove brand director, Unilever North America, in a statement. "Our ambition is to enter segments where we can provide real consumer benefits and where we can gain the No. 1 or No. 2 market position."

Also in the U.S., Unilever introduced its Axe body spray for young men. That launch boosted Axe's sales by 17%. In just its first month on the U.S. market, Axe chopped out a 2.2% dollar share of the total deodorant category.

For the first quarter ended March 31, corporate sales fell 4% to 11.1 billion euros. Net profit jumped 57% to 680 million euros.

The company noted that sales growth of its leading brands was 5.5% for the last 12 months, and 3.0% in the first quarter, with continued excellent growth of 6.8% in home & personal care but a slow start in foods which was flat against last year.

In their first quarter addresses, chairmen Niall FitzGerald and Antony Burgmans said sales were off to a slower than expected start, due to known phasing effects, including a later Easter, as well as a number of short-term developments in the business environment in the latter part of the quarter. In combination, they negatively affected foods and Unilever's businesses in Europe and North America.

"However, a strengthening performance in developing and emerging markets and an excellent performance in personal care have contributed to another quarter of strong growth in home and personal care," said the chairmen.

They noted too that savings from restructuring and portfolio mix improvements continued to be in line with the Path to Growth program.

"These savings provided the fuel for investment behind Unilever's brands and support our plan for the year, which is built upon a step up in the level of innovation and market place activities for foods, and a sustained rate for home & personal care," said Mr. FitzGerald and Mr. Burgmans.

"While we face a more challenging operating environment, our business, strengthened by the Path to Growth program, is naturally resilient and we remain comfortable that our plans will deliver the targets we have given for leading brand and earnings growth," they said.

2. L'Oreal

Clichy, France

(33) 1.47.56.70.00

www.loreal.com

Sales: $13.1 billion

Sales: $13.1 billion for cosmetics. Corporate sales: $13.5 billion. Net profit: $1.3 billion.

Key Personnel: Lindsay-Owen Jones, chairman and chief executive officer; Beatrice Dautresme, executive vice president, strategic business development; Giorgio Galli, executive vice president, corporate communications and external affairs; Jean-Francois Grollier, executive vice president, research and development; Marcel Lafforgue, executive vice president, production and technology; Jean-Jacques Lebel, president, professional products; Christian Mulliez, executive vice president, administration and finance; Patrick Rabain, president, consumer products; Gilles Weil, president, luxury products.

Major Products: Hair care, skin care, sun care, color cosmetics, toiletries and fragrances marketed under such brand names as Biotherm, Cacheral, Carson, Helena Rubinstein, Lancome, Lanvin, La Roche-Posay, L'Oreal, L'Oreal Paris, L'Oreal Professionnel, L'Oreal Perfection, L'Oreal Kids, Kerastase, Redken, Inne, Laboratoires Garnier, Giorgio Armani, Harley Davidson, Matrix, Maybelline, Jade, Gemey Paris, Jean-Louis David, Dop, Cadonet, Jacques Dessange, Ralph Lauren, Redken, Soft Sheen and Vichy.

New Products: Professional--Majirouge Mix + colorants, XTenso texture, Elasto Curl, Matrix Sleek Look and Trix, Redken Addictive hair care. Consumer products--SoftSheen.Carson Optimum Care, L'Oreal Paris Elseve Liss Intense, Feria Boost, Invincible lipstick, Ideal Balance, Nutrilift body care, Cherie Tale color cosmetics. Luxury--Lancome Hair Sensations and Juicy Tubes lipstick, Giorgio Armani Mania for Men and Sensi for Women fragrances, Biotherm Skin Loving Colors, Helena Rubinstein Prodigy anti-aging cream.

Comments: Corporate sales rose 4% and net profit increased 18.5%. Sales of cosmetics increased 4.2%. By branch, consumer product sales rose 4.4% and accounted for 54.5% of cosmetics sales. Luxury product sales rose 2.6% to 26.1%. of sales. Professionial product sales increased 4.8% and accounted for 13.6% of sales. Sales of active cosmetics rose 6.5% and represented 5% of sales.

By business segment, hair care accounted for the biggest portion of sales (24.5%), followed by makeup (22.1%), colorants (18.6%), skin care (19.9%), perfumes (11.6%) and other (3.3%).

Finally, by region, Western Europe accounted for 49.9% of cosmetic sales, followed by North America (30.3%) and rest of world (19.8%).

"Despite significant currency fluctuations and a difficult economic climate in some markets, L'Oreal was able to maintain strong organic growth momentum in 2002 thanks to its policy of international innovations," observed Lindsay Owen-Jones, L'Oreal's chairman and chief executive officer. "Good currency hedging and strict cost control enabled us to continue to improve our margins. Overall, we achieved further strong growth in our net profit."

Within the professional products division, the company strengthened its position in the U.S. with the acquisition of Artec. The division also posted good growth in key markets, with sales rising 33% in South Korea, 30% in Thailand, 56% in China and 26% in Eastern Europe. According to Jean-Jacques Lebel, president of the professional products division, emphasis continues to be placed on expanding the division's presence in Asia and Eastern Europe--two regions where L'Oreal is under-represented. Although professional sales are strong in the U.S., L'Oreal's share is expected to come under fire when Procter & Gamble's acquisition of Wella is finalized. In fact, Happi columnist and industry consultant Colin Hession maintains that the purchase of Wella moves P&G within striking distance of L'Oreal for the top spot in the global cosmetics and toiletries market. Hair care has become a prime growth engine for the Cincinnati-based firm. As Mr. Hession notes, prior to its acquisition of Clairol, hair care represented about 35% of P&G's total cosmetics and toiletries sales. Following that acquisition, hair care accounted for 45% of P&G's C&T sales and now, with Wella in the fold, hair care will probably account for 50% of C&T sales.

The consumer products division had several successes in 2002. Sales of L'Oreal Paris rose 10%, while Maybelline extended its lead as the No. 1 cosmetics brand in the world with a 6% sales gain. In new growth-driver countries, Garnier proved popular with sales jumping in Brazil (111%), Thailand (80%), Russia (76%), Australia (63%) and Mexico (31%). In fact, the popularity of Garnier helped division sales rise 20% in Eastern Europe, Asia, Latin America, Africa and the Pacific region.

Sales within the luxury goods division rose 33% in Asia. Sales were even strong in the well-established Western European market, thanks to strong performances in the UK and Spain. In 2003, the division is committed to strengthening the position of Lancome as one of the world's leading luxury brands. Other key objectives include boosting the perfume brands Ralph Lauren, Armani and Cacharel and globalizing Kiehl's and Shu Uemura.

L'Oreal maintains that its active cosmetics (including Vichy and La Roche-Posay) are the world's No. 1 over-the-counter dermatological skin care products. Although the group's activities are widely-known in Europe, L'Oreal is committed to expanding the Vichy and La Roche-Posay brands into Asia, Latin America and Eastern Europe, especially Russia. In addition, the division is taking steps to build a presence in the U.S. and Japan.

For the first half of 2003, the company said revenues fell 3.2% to $8.1 billion. Still the firm expects 2003 to be a good one.

"Thanks to these extremely encouraging figures, obtained in the most difficult conditions, L'Oreal should be able to achieve its traditional objective of like-for-like sales growth of between 7-9% per annum," said Mr. Owen-Jones.

Just last month, L'Oreal ceased operations of Helena Rubinstein cosmetics in the U.S. The brand was reintroduced in the U.S. in 1999, but never developed a strong following in the States. Company executives decided that it would require too much effort, time and resources to get the brand going in the…