NUS MKT 1003 Case Study: Shiseido in China

NUS MKT 1003 Case Study
Academic Year 2009/2010 Semester 1

Shiseido in China:
A case study analysis

1. What are the functions performed by the distribution channels in cosmetic products? How are some of these functions performed in Shiseido’s operation in China?

There are a variety of distribution channels used in the marketing of cosmetic products which include examples such as product counters set up in department stores and product distribution through shelf display in supermarkets. These intermediaries make selling more efficient by minimizing the number of contacts a company has to make by handling all the individual contacts with customers and providing a range of goods to customers at one location. All of the distribution channels perform a core set of functions that are required in order for the cosmetic products to be available to the customer. These functions can be grouped by their nature under transactional, logistical or facilitating functions.

Distribution channels can perform the transactional function of buying by purchasing the product for resale in the case of wholesalers or by acting as an agent for the supply of a product as in the case of goods sold on a consignment basis. Wholesalers, unlike agents, take title of the goods before reselling and thus also perform the function of risk taking by assuming any business risk in the ownership arising from the cosmetic products becoming obsolete and out of fashion or from the products deteriorating over time. This is an important aspect of cosmetic product purchasing as cosmetic products have an average shelf life of about one year and are more prone to spoilage if they are made of natural ingredients. Agents serve the function of selling by serving as a contact to customers and by promoting the products while wholesalers serve as a contact to retailers who in turn are in contact with the customers.

Logistical functions performed by distribution channels involve the gathering, storing and dispersing of products. Distribution channels like retailers and distributors deal with the transportation of goods from the manufacturer to customers and they can purchase different products and create assortments from several sources to bring convenience to customers. Retailers also store and display the products at their retail stores which are easily accessible by customers to perform the distribution function.

Intermediaries perform facilitating functions by assisting the producer make their goods more attractive to buyers. Agents do this by providing service in the form of advice and recommendations to customers regarding the products that would most suit them. Feedback from customers is also collected by these intermediaries to be passed to the manufacturers in order to improve their products to fulfill customers’ needs.

Shiseido runs its operations in China mainly through the use of sales counters and sales corners in department stores. These are agents managed by Shiseido and only serve the transactional function of selling and promoting the products to customers while the department stores perform the logistical function of providing the retail space to Shiseido. The department stores thus do not have to purchase any of the cosmetic products for resale nor take any business risks from ownership of the products. The risks of the cosmetic products deteriorating or becoming obsolete are borne by Shiseido.

The voluntary specialty chain store system has recently been brought into China by Shiseido. This distribution channel and also the original sales counters perform the facilitating functions of providing service to the customers. The service personnel at these stores are trained to be genuine, friendly, sincere and knowledgeable skincare specialists who are able to give advice and recommendations to customers regarding Shiseido’s beauty products. Customers are also provided with information regarding the latest trends and developments in the cosmetics industry at these outlets. Thus customers have their purchasing experience improved by the service and will see Shiseido as a more attractive choice when deciding on a brand of cosmetic to purchase.

2. What are the advantages and disadvantages of selling cosmetic products through door-to-door selling, specialty stores, department store counters, and supermarket and hypermarket? How will the use of these channels vary with target market segments and brand strategies?

As stated in the case, the ban on door-to-door selling was lifted in 2005. Avon Products and Amway are taking advantage of this by using door-to-door selling as a method of marketing their products. The main advantage to using door-to-door selling in the sale of cosmetic products is that it is a cheap and cost effective method of getting products across to the customers. Companies do not incur the cost of setting up physical stores and hiring dedicated sales person when using door-to-door selling as the products are sold directly from the manufacturer to the customers via one level of sales representatives. Illustrating the success of this method of sales, Avon Products had already recruited 350,000 sales representatives by the end of 2006. We can assume that most of these sales representatives are being paid purely on a commission basis and Avon Products does not incur any other additional or fixed cost in employing these sales personnel thus making it a very cost effective method of selling products. This and the lack of intermediaries between the manufacturer and the customer mean that the cost savings can be passed onto the consumer as lower prices and that will make the products more appealing.

Door-to-door selling is also especially suited for the cosmetics industry as the product is naturally a very personal purchase and a lot of attention is required to provide the right kind of product to each different customer. This is possible in the case of door-to-door selling as the sales representatives are always handling only one customer at a time and are able to devote their attention and time to the one customer. The customers are also provided with the convenience of having the products brought to their doorstep and are able to make a purchase decision from the comfort of their homes. This improved service towards customers makes door-to-door selling a more persuasive method of selling cosmetic products.

There are however, disadvantages to using door-to-door selling to market cosmetic products. The most significant of which is that this method of distribution is usually seen as being unprofessional because it is very easy for anyone to become a sales representative and there is very little or no formal training provided for these sales personnel. The service provided by these sales representatives is thus very inconsistent and when bad service is provided, the relationship between the company and the customer will be damaged. Also, the image of having non-professional salespersons promoting the products from the company in the informal setting of the customer’s home can make the cosmetic brand seem cheap and of low quality.

Specialty stores are another method used in the distribution and selling of cosmetic products. Shiseido has used this concept in Japan and also in China where they opened their first directly managed specialty store in Shanghai where Shiseido provided very specialized service to customers. Lancome has also started a concept specialty store in Shanghai which focuses on classy, luxurious store design and specialized service. As seen in these examples, a major advantage of using specialty stores in the distribution of cosmetic products is the ability to fully control the design and concept of the store. Companies can go to extremes to make their specialty stores luxurious or outstanding in terms of design and service. Shiseido has demonstrated this in their Huan Cai Kong Jian specialty store in Shanghai where the design was based on intensive research into the Chinese market. The store has highly knowledgeable and trained sales personnel to guide and advise customers on the range of products available at the store, providing personalized and professional service. Various advanced technologies are also available at the store which includes skin analyzers that improve the experience of shopping at the specialty store.

At Huan Cai Kong Jian, only quality products are carried and this gives a very positive image to the brand and the products being promoted at the store. Having a specialty store gives the products an air of exclusivity and makes consumers more willing to pay a higher price for the products being sold at a specialty store.
The main disadvantage to having a specialty store is simply the cost of setting up the store. To have a really specialized store with special design and decorations is very costly. The time and money taken to train the staff at the store will also drive up the total cost of such a selling concept. Another problem of specialty stores is that the design and atmosphere inside the store could be too exclusive and alienating for customers not familiar with the brand. This may cause customers to be afraid of entering the store and that is definitely bad as potential customers could be driven away.

Department store counters are slightly similar to specialty stores in that they have specially trained sales staff to provide service to customers. Thus, department store counters will provide a similar level of personalized and professional service to customers. However, there are other different advantages and disadvantages to using department store counters.

An advantage of department store counters that is in contrast with specialty stores is that department store counters are generally more approachable to customers because of the open nature of the counter and the setting of being in a department store. Customers will be more comfortable in approaching the counter and thus the traffic at a department store counter will likely be higher. Setting up of department store counters will also be cheaper than setting up a specialty store as the size is usually smaller and the retail space requires less renovation and design before it can be used.

The disadvantage to using department store counters is the fact that companies will have less freedom to experiment with different sales concepts and services as there are restrictions put upon the counter by the department store. Also, it is likely that the store counter will be put in a location where there are other competitors selling the same cosmetics. This is disadvantageous for the cosmetic company as customers will be able to easily compare the products and their prices with the competitors, leading to increased competition and possibly lower profits.

Another common type of distribution channel used in the marketing of cosmetics is the display of the products at supermarkets and hypermarkets. As stated in the case, Olay is mainly distributed through supermarkets and hypermarkets and has been doing very well. This is due to the fact that distribution through supermarkets can be even more cost effective than department store counters as there need not be the rental of exclusive retail space and there is no need to hire sales representatives for the cosmetic products to be sold at supermarkets. There is also less management required in the selling process, this lowers the cost of selling drastically and can translate into lower prices for the consumers.

However, there is a disadvantage to using supermarkets in the distribution of cosmetic products as it is wholly dependent on the customer to make the purchase decision. There is no salesperson to persuade or advise the customer on which products to choose. This makes it easy for the customer to choose a competitor’s product if there is not much difference between the two.

With varying target market segments and brand strategies, different distribution channels can be used to suit the marketing strategy of the company.

For a brand that aims to be more commonplace and is targeting a large consumer group, intensive distribution channels such as supermarkets and hypermarkets can be used to provide its products in as many outlets as possible. This intensive distribution method can be used if the brand aims to market its cosmetic products as a commodity or even a convenience product and market coverage is important.

In the case of Shiseido, it is branding itself as a pioneer in the fusion of western and eastern knowledge in cosmetics. As such, the brand aims to maintain itself as an exclusive and up-market producer and distributor of quality cosmetic products. Thus, exclusive distribution channels are more suited for such a company where the products sold are mostly higher priced specialty products and there is more control over the market segment that the company is targeting.

When a brand is selling its product as a shopping good, selective distribution channels such as departmental store counters can be used. Selective distribution allows the market coverage benefits of intensive distribution to be gained while providing the company some control as to where the product should be sold and to which customer groups. Shiseido has also used selective distribution channels like sales corners in department stores to market its medium-priced cosmetic brands such as Za and Whitia.

3. Why is Shiseido using voluntary specialty chain stores, besides their counters at department stores? What are the advantages and disadvantages for each of these retail channels? Which area should the company emphasize?

Shiseido is using voluntary specialty chain stores to market their higher range of products that would benefit from being more exclusive when sold in specialty stores instead of department store counters. Shiseido also hopes to encourage private enterprise and contribute to the local economy by helping independent owners of the stores run the franchise and impart knowledge of cosmetic store management to them. In addition, Shiseido is also aiming to promote knowledge regarding aesthetics and beauty by being a source of information on skincare, fashion and hairstyle trends through their specialty stores.

The advantage to using voluntary specialty chain stores is that Shiseido has the freedom to design the store in a way that they deem fit for the market segment they are targeting. The model store in Shanghai, Huan Cai Kong Jian, even has specialized equipment like the skin analyzer that is used to diagnose a customer’s skin conditions. Having a specialty store also means that Shiseido can train and employ skincare specialists and knowledgeable beauty consultants to provide specialized service to customers who need help with choosing their purchase. Shiseido is also thus able to customize the experience for their customers at the specialty store, in Huan Cai Kong Jian for example, there is space for customers to try products freely and lessons on home beauty treatments are conducted daily. This improves the customer’s experience at Shiseido and serves to make it an easier choice for consumers to decide on Shiseido as their chosen brand.

Another advantage is that Shiseido is much more in control of specialty stores as they are in direct control of the sales representatives employed at the store. The company thus has a better control over the quality of service at their store. Shiseido also cuts down on intermediaries by setting up voluntary specialty stores and marketing products directly through this distribution channel. This allows Shiseido to save on distribution costs while still enjoying the benefits of having a centralized distribution channel for their range of products. A voluntary specialty store also functions as an exclusive space for Shiseido to market and display their products. This makes Shiseido’s products more exclusive and separates them from competition from other brands.

The disadvantage to using specialty chain stores is mainly the issue of cost. The cost of setting up the specialty store with the required décor and equipment is definitely higher than the costs incurred to set up a retail counter at a department store. The costs involved in the training of the skincare specialists and consultants are also much higher than the cost of training salespersons at department stores.

Another disadvantage to using the distribution channel of specialty chain stores is that each of these specialty stores are restricted to one location in each region and is thus unable to reach as many of the target customers as the total number of customers multiple counters at different department stores can reach. The physical limitations of the exclusive specialty stores also means that such stores will experience less customer traffic than the more easily accessible and numerous department store counters.

So far we can see that department store counters do address some of the weaknesses that voluntary specialty chain stores exhibit naturally. Department store counters have the advantage of being more cost efficient when it comes to exposing products to more customer traffic. Because these counters are more approachable and accessible, the counters manage to still provide personalized service even during times of high customer traffic.

However, department store counters also have disadvantages to them. First of which is that the image of the product becomes less exclusive and while this may make the product more accessible to customers, some of the value from the exclusivity may be lost. Using the department store counter retailing method also puts the company’s product in close proximity to competing products from other brands. This brings competition closer and will make it easier for consumers to make comparisons between the differing products. This can possibly be bad as customers can be lost to the competition due to this.

Finally, in deciding which area Shiseido should be emphasizing in and putting more effort, the brand image and goal that Shiseido is trying to achieve has to be taken into consideration. Shiseido has always been maintaining a strong brand image of producing high quality cosmetic products and also has been functioning as a source of consultation and knowledge about beauty, skincare and fashion trends for women.

Outside of Japan, Shiseido has largely been successful in marketing themselves as a premium cosmetics brand (Taipei Times) and that has lent itself as the reason why foreign sales had grown to 27% of Shiseido’s total sales in 2005. To continue maintaining a prestigious presence overseas, Shiseido’s emphasis should continue to be put on specialty and concept stores.

Back in Japan however, because Shiseido has large establishments in department stores selling low-end products like detergent and other household products, the brand image has already been associated with the mundane and boring everyday items. This has caused domestic sales to slip in contrast to Shiseido’s performance overseas. In order to remedy this, would need to put more effort into their specialty stores which sell Shiseido’s premium products in order to bring its domestic image up to the prestigious level Shiseido enjoys out of Japan.

References

Kerin, A. R., Hartley W. S., Berkowitz N. E., Rudelius W. (2006). Marketing. New York: McGraw-Hill

Taipei Times. (2002). Shiseido not seen as so exotic in its home in Japan. Retrieved March 31, 2009, from http://www.taipeitimes.com/News/bizfocus/archives/2002/04/27/133644.