The Japanese company's research and development department has supplied the key technology behind two of the top 10 categories in U.S. supermarkets-ultraconcentrated laundry detergents and superabsorbent disposable diapers-which each top $4.2 billion in annual retail sales. Kao also invented the product that has spawned the past year's hottest new consumer product category, electrostatic dust mops. But Kao doesn't sell any laundry detergent or diapers here, and its presence in what could become a massive $500 million electrostatic duster category this year is limited to licensing technology to and making dust cloths for S.C. Johnson & Son's Pledge Grab-It line.
But Kao's role as global patsy may be about to change. With a Western-style restructuring under its belt and relatively robust earnings and stock market performance compared to its U.S. rivals, Kao is poised for a large-scale purchase.
"Certainly, acquisition is an important part of [Kao's] growth strategy, and the trend in the [U.S. stock market] in the past few months certainly would make [a deal] more viable," said William Gentner, a Unilever alum who is president of Kao's U.S. unit, Andrew Jergens Co., acquired in 1989. "Kao is actively looking at acquisitions."
MUCH MORE AGGRESSIVE
"Upper management has become much more aggressive and much more committed to the idea of being a global powerhouse," one former Kao executive said. "They realize that key competitors are getting stronger and they need to move quicker. They could probably protect their markets in Japan forever. But when it comes to being global, it's really been a change in the mind-set from `Can we be global?' to `We have to be global.' "
Kao owns a salon haircare products marketer in Germany called Goldwell and has an alliance with Beiersdorf that includes joint ventures in Europe and Japan. But the company has expanded outside Asia only with personal-care lines, not household brands. That's despite marketing items in its home country based on technological breakthroughs, such as pet cleaning products and a waterless car wash spray cleaner.
Tokyo-based Kao Corp. President Takuya Goto has identified expansion in North America as a top priority, according to Mr. Gentner, and is looking at organic growth, alliances, licensing and acquisitions "large and small that will provide platforms to expand in areas where we can leverage Kao's core strengths in technology."
Jergens has been a good learning experience for Kao, said Burt Flickinger, a consultant with Reach Marketing, but "Now Kao has to buy a meaningful consumer products company with some marketing clout."
Likely candidates, Mr. Flickinger believes, are Dial Corp. and Colgate-Palmolive Co. The latter would give Kao a strong foothold in Latin America as well as the U.S.
Speculation about Kao's expansion has circulated for more than a decade, since Kao acquired Jergens a year after launching its Attack ultraconcentrated laundry detergent in Japan. At the time, Procter & Gamble Co., which had long seen Unilever and Kimberly-Clark Corp. as its primary threats, suddenly was looking at Kao as its most feared foe, according to former P&G executives. But P&G beat Kao to the punch, launching ultraconcentrated versions of its own laundry detergent brands in the early 1990s. And the expected assaults by Kao on the U.S. laundry, cleaning and diaper businesses never materialized.
As a result, Kao gained a reputation for being far more cautious than even its traditionally cautious global competitors P&G and Unilever, Mr. Flickinger said. And even with Jergens, growth has been much more deliberate than most observers expected.
"I think [marketers] go in there expecting to see a big infusion of marketing investment from the corporate parent and it doesn't materialize," Mr. Flickinger said. "The marketing budget in the States has been driven by existing sales" rather than bigger outlays aimed at faster growth.
"In terms of organic growth," Mr. Gentner said, "we believe our chances for success are greatest if we gradually expand from our skincare core competence." But he pointed to the development of Jergens from essentially a hand and body lotion brand to a full-fledged skincare business-bolstered by the addition of Biore from Japan to the U.S. in 1997 and acquisition of Curel from Bausch & Lomb last year-as evidence of strong growth.
As the one global brand Kao has brought to the U.S., Biore skincare products face growing incursions from rival P&G's Oil of Olay and Unilever's Pond's. The brand jumped to leadership in the $600 million facial cleanser category in a single year, with sales of more than $130 million in 1998. But Biore has been under attack by Oil of Olay and Pond's, both of which outspent Biore last year. For 1999, Pond's received $38.4 million in measured media, according to Competitive Media Reporting. P&G's Oil of Olay skincare line got $120 million, while Biore was supported with $28 million in measured media.
Ultimately, Jergens couldn't hold on to the agency that launched Biore. Deutsch, New York, jumped ship late last year to work on Reflect.com, the customized e-commerce beauty care venture owned by P&G. Kao, which named Kirshenbaum Bond & Partners, New York, its new agency, called the move "a mutual decision."
Biore, while successful, may not have been the best move Kao could have made at the time. With limited financial resources, Kao in 1996 faced choosing among options that included launching Biore in the U.S., expanding in haircare and skincare in Europe or trying to expand to other world markets its Quickle Wiper, an electrostatic duster launched in 1995 in Japan.
Biore won out and spawned a $150 million segment in skincare in the U.S. But P&G latched onto Quickle, which became the model for its Swiffer brand, and generated sales of more than $150 million in its first six months in the U.S. alone. Kao was able to get in on the action by striking a deal with S.C. Johnson to market its Quickle Wiper as Pledge Grab-It in the U.S. and Europe, reaching the U.S. market within weeks of Swiffer in August. Kao would have found it impossible to launch the product on its own without an existing brand in the U.S., Mr. Gentner said.
S.C. Johnson won't cite sales figures, but said Pledge, handled by FCB Worldwide, Chicago, is "neck and neck" with Swiffer on a global basis. Its U.S. sales, however, are less than half Swiffer's, not quite $60 million through January, according to Information Resources Inc. P&G said global sales of Swiffer are on pace to top $400 million by the end of June.
Kao's product line includes laundry and dish detergents, household cleaners, personal-care products, diapers, feminine hygiene products and nutritional supplements. But its global sales of $8 billion are well below that of P&G's $38 billion or Unilever's $44 billion. Having shed its unprofitable floppy disk business last year, Kao is projecting earnings growth of 35% for the fiscal year ended in March, to $560 million.
Unlike those global rivals, which each earn more than half their sales outside their home markets, less than 20% of Kao's sales come from outside Japan. And while U.S. consumer products companies have lagged the U.S. stock market, Kao has been outperforming a recovering Japanese market. Its shares have also been outperforming most of its global competitors, up 6% since August. Meanwhile, P&G's shares have fallen 41%, Unilever's 34% and Dial's 52%.
But that doesn't mean making a move in the U.S. will be easy, said James Dormer, analyst with Morgan Stanley Dean Witter & Co.
"Just because the stock market has repriced some of the shares [of U.S. companies], it doesn't mean their management teams are necessarily willing to jump ship at these levels. And I don't think hostile takeovers work in this industry."
Management wouldn't necessarily have to jump ship, though, Mr. Flickinger said, adding that Kao may be as interested in acquiring the management teams as the companies. Like Unilever, Mr. Gentner said, Kao has tended to run decentralized operations globally.
Another option is developing alliances, although that becomes more difficult as other global players, such as Germany's Henkel, align themselves with companies such as Clorox Co. and Dial through substantial ownership stakes or joint ventures.
Regardless of the details, Mr. Dormer believes it's more a matter of when rather than if Kao will make another move in the U.S.
"Scale is a major issue, and Kao wants to be a major player," he said. "They've been disadvantaged by not having more exposure here."
Contributing: Dagmar Mussey.