ANNUAL REPORT 2001 For the year ended March 31, 2001

Transcription

1 ANNUAL REPORT 2001 For the year ended March 31, 2001

2 With our customers With our business partners With our shareholders With our employees With our society Through the creation of true value and exceptional quality, we strive to help our customers realize their dreams of beauty, well-being and happiness. Joining forces with partners who share our aims, we act in a spirit of sincere cooperation and mutual assistance. We aim to win the support of our shareholders by retaining earnings for future investments and paying dividends which come from sound business results, and to uphold their trust through transparent management practice. The individuals who make up our work force in all their diversity and creativity are our most valuable corporate asset. We strive to promote their professional development and to evaluate them fairly. We recognize the importance of their personal satisfaction and well-being, and seek to grow together with them. We respect and obey all laws in all regions in which we do business. Safety and preservation of the natural environment are our highest priorities. In cooperation with local communities and in harmony with international society, we call on our cultural resources in creating a global, beautiful, cultured lifestyle. Highlights Shiseido Group Brand Portfolio Management s Message Business Strategies Research and Development Together with Society Global Network Financial Section Six-Year Summary Management s Discussion and Analysis Consolidated Financial Statements Notes to the Consolidated Financial Statements Report of Independent Accountants Corporate Information

3 Fusing the cultural achievements of East and West, and applying superior skin-care technologies based on both soft (behavioral) and hard (physical) scientific principles, Shiseido consistently offers high-quality products and services that make people s lives beautiful. The result is enduring customer trust in the SHISEIDO corporate brand, which is the foundation of the Company s corporate value. We are committed to not only preserving but also increasing Shiseido s corporate value as the new millennium unfolds. To this end, we have resolved to undertake a full-scale structural reform of our domestic cosmetics business. As well, we will implement a new management structure centered on a corporate officer system and reform our Board of Directors. Shiseido envisions the 21 st century as an era of mutual prosperity, as implied in our corporate slogan Together. We are keenly set on building new frameworks that help to generate greater value for all of our stakeholders, namely, customers, business partners, shareholders, employees, and society. This will increase Shiseido s corporate value and thus serve our larger goal of becoming a global No.1 corporation, highly respected worldwide. 1 ANNUAL REPORT 2001

4 HIGHLIGHTS Financial Highlights Thousands of Millions of yen U.S. dollars For the Year: Net sales 604, , ,152 $5,410,477 Income from operations 35,362 37,996 32, ,556 Net income (loss) 10,332 15,294 (45,092) (409,927) At Year-End: Total assets 613, , ,247 $6,047,702 Shareholders equity 408, , ,696 3,288,141 Per Share Data: Yen U.S. dollars Net income (loss) (106.8) $(0.97) Cash dividends Notes: 1. Net income (loss) per share is calculated on the average number of shares outstanding in each year. 2. U.S. dollar amounts are converted from yen, for convenience only, at the rate of 110=US$1. Fiscal Year in Review The domestic cosmetics business struggled. Skin-care products and fragrances performed well overseas. Strategic investments focused on the acquisition of overseas brands. The Company completely eliminated its pension reserves shortfall and executed a full lump-sum amortization of goodwill in Zotos International, Inc. Income from operations dropped 15%, and a net loss was recorded. Future Reforms and Goals Structural reforms will focus on solidifying the Company s earnings foundations and on revising the sales system, with a particular emphasis on our goal of firmly establishing Shiseido as a prominent Skin-Care House. Shiseido aims to achieve an ROE of 7% for the fiscal year ending March 31, ANNUAL REPORT 2001

5 SHISEIDO GROUP BRAND PORTFOLIO (COSMETICS AND TOILETRIES) Category Asia/ Japan Americas Europe Oceania Selling Formats Counseling Advice Selfselection Specialty Stores Department Stores Main Channels GMS s Drugstores Variety Stores CVS s SMs Current Brand Positioning HIGH- PRESTIGE (Clé de Peau Beauté) The Shiseido Group s top-end brand Clé de Peau Beauté (AUPRES) [China only] (Regional Line) Elixir, UV White, Proudia, Pieds Nus, Revital, Anessa, Whitess, Actea Heart, S eau de series, Taphy, Bénéfique, S, et al. (Global Line) Benefiance, The Skincare, BOP, The Makeup, Eudermine (Global), Relaxing Fragrance, et al. Overseas Domestic Main global brands embodying the SHISEIDO corporate brand image; sold in approximately 60 countries as of June 2001 SHISEIDO The Skincare Revital PRESTIGE (D ici là) (Carita) (BPI) Issey Miyake, Jean Paul Gaultier + duty-free shops Prestige skin-care brand featuring high-profile image of top-end Paris beauty salon Designer-brand fragrances from Paris Cosmetics-store brand based on concept of synergistic benefits arising from healthy skin and healthy mind SHISEIDO The Makeup (Ipsa) Department-store brand based on concept of personalized beauty creation (Decléor) + beauty salon Skin-care brand based on aromacological principles from France (acquired via equity stake in May 2000) (NARS) U.S. makeup artist brand (acquired in May 2000) Decléor NEW CATEGORY (Ayura) (Tony & Tina) (Ettusais) (5S) (Zirh) Fashion Fashion GMS s GMS s + 5S-brand stores Department-store and specialty-store brand targeted at urban women U.S. men s skin-care brand (acquired via equity stake in May 2000) Brand produced by a New York based creator Brand targeted at young women in their teens and early 20s who prefer to independently select beauty products Brand targeted at urban women, based on a SoHo, New York City, image Auslese for men, marketed by FITIT ff, marketed by FITIT MIDDLE (Free Soul Piccadilly) (Shiseido FITIT) For Women: Whitia, Aspril, Selfit, ff, Neuve, Ma Chérie, et al. For Men: Uno, Geraid, Auslese, Furorin, et al. Brand targeted at trendsetting young women in their teens and early 20s Business brand targeted at the self-selection cosmetics market Super Mild (FT Shiseido) (Keshowakusei) Convenience-store brands (Za) Strategic brand targeted at the self-selection cosmetics market in Asian countries MASS (FT Shiseido) Super Mild, Aquair, Sea Breeze, Center-In, et al. Toiletries business brand based on concept of fostering lifestyles of relaxation and enjoyment Za Note: GMS s: General merchandise stores CVS s: Convenience stores SMs: Supermarkets Counseling: Beauty Consultants provide over-the-counter counseling. Advice: Beauty Consultants and store employees provide advice according to customer needs. Self-selection: Customers freely select their own products. ANNUAL REPORT

6 The Right Time for Reform Back in the 1920s, Shiseido led the domestic cosmetics industry in establishing a thenrevolutionary distribution model based on a sales company and a network of independent chain-store outlets. While leaving this model intact, we have in recent years implemented various reforms to address specific needs. For example, in 1996 we initiated a strategy whereby brands are designed in accordance with the characteristics of specific sales channels and allocated accordingly. In 1998, we established our global multibrand strategy whereby we have promoted new brand positioning by integrating our domestic and overseas marketing activities. As we move into the 21 st century, far-reaching socioeconomic transformations are profoundly altering consumers value perceptions. In this context, the need to reconfigure our long-standing distribution model, which is the foundation of our cosmetics business value chain, is increasingly apparent. The time has now come for a full-scale reform of our business system, centering on the Company s domestic cosmetics business. As well, we must accelerate our overseas market expansion activities. We fully expect that our reform efforts in these areas will more advantageously position the entire Shiseido Group. MANAGEMENT S MESSAGE Sales-Counter Savvy: Strategic Customer Orientation The sales counter is the crux of Shiseido s reform initiative. Two concepts customer orientation and strategic orientation are key to realizing the potential inherent in the sales-counter exchange. To maximize sales of a given product, sales-counter techniques must correspond to the product s image, and correct information about the product must be effectively communicated. Put simply, Shiseido s reform initiative focuses primarily on the form and content of information flows at the sales counter, while also making reform provisions at all stages of the product cycle, from R&D and production to distribution and sales. Reform activities are concentrated chiefly in three areas: marketing reform, supply-chain reform, and organizational reform. As an integral part of these reforms, we will install computerized information terminals in the sales counters of all of our chain stores. These will form the infrastructure effectively linking all stages of the entire product cycle. Chairman (Representative Director) Akira Gemma President & CEO (Representative Director) Morio Ikeda Marketing Reform: Firmly Establishing Shiseido as a Prominent Skin-Care House, and Sales System Reform Our marketing reform activities primarily aim to translate our established strengths in skin-care products into a more supportive earnings foundation for the Company. Our ultimate goal is to become the No. 1 company both domestically and overseas in all skin-care categories, including anti-aging and skin-lightening. Specifically, we will firmly establish Shiseido as a prominent Skin-Care House by pursuing progress in such key areas as skin-care-oriented line positioning, R&D, advertising and promotion, sales-counter activities, and customer services. In addition, our sales system reform will encourage both salespersons and chain stores to make greater contributions to over-the-counter sales. Supply-Chain Reform: Inventory Level Optimization By preventing stock maldistribution and depletion, inventory levels can be optimized and inventory turnover improved. These are key factors in raising the profitability of our cosmetics business. In April 2001, we established the Logistics Division, which is charged with ensuring seamless materials procurement, production, and product supply via a centralized inventory management system based on sales data from our retail outlets. In October 2002, we will consolidate five domestic cosmetics production plants into an integrated production system to be managed by a single production subsidiary. Through more flexible production management, we will seek to raise the agility and efficiency of our production system. Organizational Reform: Functional Integration of the Parent Company and Sales Subsidiary Organizational reform of our domestic cosmetics business is aimed chiefly at raising efficiency. To date, we have focused on ensuring seamless processes, from product development to sales, thereby assuring swifter responses to market changes. Specifically, we have integrated the sales and marketing strategies functions of our cosmetics business, previously carried out by both the parent company and sales subsidiary. In the process, we established four new divisions: the Cosmetics Strategic Planning 5 ANNUAL REPORT 2001

7 Division, the Creative Division, the Cosmetics Value Creation Division, and the Domestic Sales Division. President Ikeda serves as the head of Shiseido s entire cosmetics operations. The Cosmetics Strategic Planning Division, central to the new organizational structure, performs a horizontally integrative function by fusing brand and sales channel strategies into a single, coherent marketing strategy. This division also formulates and monitors management plans for the entire cosmetics business, as well as allocates each brand to the most appropriate channel. Boosting sales to large-scale affiliated retailers is a key objective of our organizational reform. To this end, the sales division in charge of affiliated sales outlets, previously part of our sales subsidiary, has been incorporated into the parent company. This move strengthens our negotiating position vis-à-vis large-scale affiliated retailers, thereby empowering Shiseido to favorably revise business contracts and implement incentive mechanisms conducive to increased profitability. Steady Growth in Overseas Markets Shiseido s overseas business is showing steady profitability growth, reflecting market share gains in various regions and productivity improvements generally. We will continue to implement our global multibrand strategy with SHISEIDO brands and the Clé de Peau Beauté brand. In addition, we will pursue mergers and acquisitions as well as other initiatives geared to maximizing Shiseido s overseas market opportunities. In these ways, we will ensure continued high growth and improved profitability. During the period under review, Shiseido established four new overseas business alliances via acquisitions or equity purchases. In addition, in September 2000 we established a joint venture with Intimate Brands Inc., a leading U.S. specialty retailer of intimate apparel as well as beauty- and personal-care products that also specializes in brand power and store network development. In conjunction with this move, we began the development of a new brand. Also during the period under review, we made considerable progress in globalizing our distribution operations. Following the establishment of the European Distribution Center in January 2000, we began operations at the new Asia-Pacific Distribution Center in January In 2002, we will set up a new distribution center that will serve all regions of the Americas. These initiatives reflect our intention to simplify product ordering and orderreceipt procedures, shorten delivery times, and reduce shipping costs. In line with our efforts to reinforce the Group s management structure, we are working to achieve greater Group cohesion. As part of this initiative, we are promoting a consistent corporate image among all Group companies. To this end, we have resurrected a 1915 design of Shiseido s corporate logo, the hanatsubaki (camellia). Turning Together into a Reality We believe that the mutually beneficial creation of value together with all of our stakeholders increases Shiseido s corporate value, and thus ultimately maximizes shareholder value, in the long term. This belief is the philosophical foundation of the Company s various management activities. To best ensure Shiseido s future ability to maximize value creation, we have deemed it necessary both to introduce a corporate officer system and to reform our Board of Directors. By clearly separating the functions of the Board from those of executive management, we intend to strengthen the Company s decision-making and control capabilities, fortify our strategic execution power, and clarify lines of responsibility and authority. Moreover, we will institute one-year appointments for directors and corporate officers, as well as establish an advisory board and a committee to determine their remuneration. Our policy on shareholder return emphasizes passing on profits to shareholders via cash dividends, share buybacks, and various other means, in addition to generating mediumand long-term share price gains. We intend to improve total shareholder return by carrying out share buybacks flexibly over a sustained period and by strategically allocating our cash flows to high-growth-oriented investments. We look forward to the continuing support and understanding of all of our stakeholders as we take in hand the reins of reform and steer steadily toward a more profitable future. June 28, 2001 Akira Gemma Chairman (Representative Director) Morio Ikeda President & CEO (Representative Director) ANNUAL REPORT

8 BUSINESS STRATEGIES COSMETICS Shiseido s products and beauty-enhancement services are based on state-of-the-art dermatological research. We are aiming to translate our established strengths in skin-care products and related counseling services into a more supportive earnings foundation. In Japan, we are pursuing marketing reforms focusing on the sales counter, the point of direct contact with customers. Overseas, we are creating ever-higher value for the Shiseido Group both by entering new markets and by implementing our global multibrand strategy. Specific initiatives include the purchase of other companies brands and the promotion of new brands through equity tie-ups. Cosmetics Sales, by Category (Year ended March 31, 2001) New Category 4.9% Fragrance 6.5% Prestige 66.8% Business Contract Revision To promote improved domestic over-the-counter sales, we will introduce an incentive system that reflects our retailer s actual sales rather than their purchases from our sales subsidiary. As well, we will offer chain stores free sales strategy advice, including which product lines are most suited to the specific concepts of individual chain stores. For large-scale affiliated retailers, we will revise business contracts based on comprehensive sales-support rules. Middle 21.8% 7

9 Prestige Market Marketing Reforms Focusing on the Sales Counter Skin Visiom facilitates analysis of the skin s condition, including melanin content, corneous condition, and luster. In 2000, we began a thoroughgoing pursuit of growth recovery and profitability improvement in our domestic cosmetics business. Central to this effort are marketing reforms aimed at strengthening our skin-care business. Specifically, we will pursue progress in areas ranging from skin-care-oriented line positioning and R&D to manufacturing processes and sales-counter activities. By implementing integrated action plans for each of these areas, we expect to substantially boost Shiseido s ability to create and transmit value. In reassessing our skin-care-oriented line positioning, we will reduce the number of product lines by consolidating overlapping items. Then, we will concentrate on nurturing 20 core product lines into distinctly powerful lines, each of which we expect to achieve annual sales of at least 10 billion. A central focus of our reform initiative is the sales counter, where Shiseido comes directly into contact with customers. Here, we will introduce Skin Visiom, a comprehensive skin-condition testing program, at approximately 10,000 department stores and chain stores. Incorporating cutting-edge technologies and aesthetic principles, Skin Visiom is designed to help customers fully understand and appreciate the benefits of proper skin care. At the same time, we will hold seminars and improve salescounter communication to ensure that valuable skin-care information is transmitted directly and comprehensibly to customers. In addition, we will review the training system for our Beauty Consultants, full-time Shiseido employees responsible for communicating the Company s skin-care philosophy and product value to customers. Here, we will revise sales techniques in line with new products that incorporate advanced skin-related research. Also, we will more effectively place our Beauty Consultants and their part-time correlates, Beauty Partners, according to the needs of our various retail channels. Overseas, we will continue to expand our presence in our three major markets of North America, Europe, and Asia. In these regions, we will focus activities on SHISEIDO The Makeup, a new brand launched in January 2001, and on two existing strategic brands, SHISEIDO The Skincare and Clé de Peau Beauté. SHISEIDO The Skincare is formulated to counteract the initial stages of skin aging. SHISEIDO The Makeup incorporates the latest photochemical technologies. Self-Selection Market Display counter for the new ff line In January 2001, we changed the business name of our operations catering to the rapidly growing middle market, targeting self-selection needs, from Cosmenity to FITIT. Domestically, we are focusing on 10 main product lines, each of which we expect to achieve annual sales of at least 10 billion. Combined sales of these 10 lines accounted for approximately 70% of FITIT s total sales in the year under review. In drugstores and supermarkets, we are installing special display counters with the intention of boosting over-the-counter sales. Offering only a limited number of product lines and designed for maximum functionality, these display counters will more effectively highlight individual line characteristics and thereby fortify each line s distinct image. During the period under review, the introduction of special display counters as part of our full-scale repositioning of the ff line as a comprehensive makeup line confirmed our expectations for this new approach: the result was a significantly increased contribution by ff to sales in this category. In the overseas self-selection market, we are promoting our global multibrand strategy and cultivating new retail channels, with a particular emphasis on China, Taiwan, and other Asian countries. Already, our mainstay Za brand is firmly established in several regions, thanks to effective deployment of our sales expertise and retail channels. South Korea is another market for which we anticipate considerable market growth. Accordingly, in August 2000 we entered that nation s self-selection market by establishing a joint venture with Daesang Corporation, a local importer and retailer of cosmetics. Our future strategy in overseas markets is to continue introducing FITIT-brand products that have been successfully launched in Japan. ANNUAL REPORT

10 New-Category Brands To meet customers increasingly diversified and individualized needs, we promote non-shiseido brands through four independent companies, each responsible for one of our four in-house-developed brands: Ipsa, D ici là, Ettusais, and Ayura. Since first launching Ipsa in Taiwan in 1997, we have steadily penetrated overseas markets with these four brands, with a particular emphasis on such Asian markets as Hong Kong, Singapore, and South Korea. In May 2000, we took equity stakes in two companies and acquired one brand. First, in recognition of the rapid growth in men s skin-care markets in North America and in major European countries, we took more than a 50% equity stake in Zirh International, Corp., a leading U.S. men s cosmetics company. Second, we took a 75% equity stake in a French cosmetics company, Laboratoires Decléor S.A., which makes skincare products based on aromacological principles. We plan to concentrate sales of the Decléor brand chiefly in Asia. To help ensure the success of this regional focus, we will add new products incorporating our own skin-care technologies. Finally, we acquired NARS, a U.S. makeup artist brand. This acquisition will reinforce our existing business in the United States, as well as boost our market position in other countries. Also, we plan to cultivate new markets for this brand, starting with the Japanese market. The NARS makeup artist brand is produced by François Nars, an internationally renowned makeup artist. Fragrances Shiseido considers the fragrance business to be an important growth area within the cosmetics markets of Europe and North America. Accordingly, we have positioned this business as a key element of our global multibrand strategy. We have already established a presence in world markets for the two designer brands of Beauté Prestige International S.A. (BPI), Issey Miyake and Jean Paul Gaultier, as well as for SHISEIDO-brand fragrances, which combine a prestigious image with aromacological technologies. Following on our earlier releases of SHISEIDO Relaxing Fragrance and SHISEIDO Energizing Fragrance, in October 2000 we launched SHISEIDO ZEN, a calming fragrance incorporating aromacological technologies. We plan to eventually market SHISEIDO ZEN in approximately 60 countries. SHISEIDO ZEN, our newest global fragrance, is a modern expression of Japan s Zen culture. 9 ANNUAL REPORT 2001

11 TOILETRIES In October 2000, Shiseido turned over its entire toiletries business to an independent company, FT Shiseido Co., Ltd. During the period under review, the market environment worsened owing to intensified price competition caused by persistent deflation and depressed consumption in Japan. In response, we critically reviewed this business cost structure. FT Shiseido is now rebuilding profitability by introducing high-value-added lifestyle-related products. Difficult operating conditions prompted us to withdraw from the market for disposable diapers during the fiscal period ended March 31, Since then, we have pursued structural reform of the toiletries business supply system, including the functional integration of the business Stock Center and Order Receipt Center. In addition, FT Shiseido has strongly promoted cost-best activities throughout all production, procurement, and distribution operations, thereby reinforcing the business profit foundations. We will continue to pursue our megabrand strategy at FT Shiseido, which entails carefully cultivating several mainstay brands while fortifying brand power and maximizing the effectiveness of marketing-related investments. In the year under review, we improved the functionality and updated the packaging of such megabrands as Super Mild and Aquair in an effort to expand the core of customers loyal to these brands. In May 2000, we acquired Sea Breeze, a hair-care and body-care brand. Since then, we have reinforced the Sea Breeze brand by adding new items, notably, sun-protection products. Furthermore, we continued efforts to attract new customers and retain our already-strong following via a marketing strategy that strongly connects new products with specific lifestyle images. For example, based on our belief that resort-style living environments will grow in popularity in the 21 st century, we introduced Villefranche, a brand that brings to mind a carefree Mediterranean resort town. We also launched Miel, a selfselection brand suited to the cosmetics lifestyles of a more mature generation of women. In these ways, we continue to create higher levels of brand value. Overseas, we started operations in Taiwan and South Korea as initial steps in the global development of our toiletries business. In June 2000, Shiseido formed a joint venture with Paltac Corporation, a Japanese wholeseller. This new joint venture in Taiwan bagan actual operations in August. In South Korea, we are making full use of Johnson & Johnson s sales routes to develop the market. In the future, FT Shiseido will strengthen its position throughout Asia by making successive product releases, focusing on megabrands that have proved to be successful in the Japanese market. We recently improved the Super Mild hair-care series by adding a new taurine compound, which beautifies the hair from the roots. Since its launch in the United States in 1902, the Sea Breeze hair-care and body-care brand has earned a loyal following throughout the world. Villefranche, a lifestyle-oriented brand based on the concepts of tranquillity and excitement, takes its name from a Mediterranean resort town. ANNUAL REPORT

12 OTHERS This category encompasses several important businesses that support our cosmetics operations, including beauty salon products, health and beauty foods, pharmaceuticals, fine chemicals and other items. In line with our transition to consolidated management, we have already separated off some of these businesses while increasing the independence of others. As a result, we anticipate enhanced management agility in each business and improved overall profitability for the Shiseido Group. Color Fixa is Shiseido s avant-garde beauty and amusement salon. Reflecting our ultimate beauty salon concept, Shiseido s domestic beauty salon business includes not only our core hair-care products but also a full lineup of skin-care, body-care, and makeup offerings. In addition to selling a wide range of products to commercial establishments, this business also provides beauty-related services and salon management expertise. As such, our salon business takes full advantage of both the hard (product-related) and soft (people-oriented) capabilities of the Shiseido Group. In the year under review, sales of our hair-care products increased on the rising popularity of Shiseido s superior hair-growth treatments. Also, we reinforced our hair-styling and hair-coloring lines with new, fashion-oriented products. Additionally, we offered innovative hair-design ideas for straight hair and cultivated new markets with related product-development initiatives. A pillar of our beauty salon business is Zotos International, Inc., a U.S. subsidiary. As part of our aggressive structural reform at Zotos during the period, we elevated a local professional to the position of company president. Other initiatives included a one-time lump-sum amortization of goodwill in this subsidiary. Zotos sales revenues rose during the period, thanks in part to considerably higher revenues from its exclusive retail channels comprising major salons in the United States. In recognition of the high growth potential of the resort spa business, in May 2000 Shiseido took a 40% equity stake in Mandara Spa, a luxury spa and salon management company headquartered in Delaware, USA. In the autumn of 2001, Shiseido and its new joint-venture partner will commence operations of a new luxury spa resort located on Bali Island. The year under review corresponded to the first year of independent operation of Shiseido s health and beauty foods business, which we separated off in April During the year, our focus on enhancing management efficiency resulted in this business return to profitability. Anticipating growth in the market for diet foods, we introduced Eat Plan, a dietary supplement line. We will aim for sales expansion of this business by developing products that enhance health and beauty. Our pharmaceuticals business benefits from substantial R&D synergies with our cosmetics business. In the year under review, sales of over-the-counter pharmaceuticals were up and this segment returned to profitability thanks to our concentration on mainstay products and reinforcement of sales to drugstores. Sales of Ferzea, a treatment for corns, were notably solid. In addition, we enhanced the active functions of Whisis, a freckle-reduction treatment, thereby boosting this product s sales. In the medical-use pharmaceuticals segment, we launched Casal Cream, an antiviral agent that is beneficial in the treatment of shingles and herpes simplex. Shiseido s fine chemicals business, which also benefits from the Company s considerable R&D capabilities, comprises materials and chromatography. In the materials segment, we expanded applications both for Infinite Color, a photochromic titanium dioxide pigment, and for biohyaluronic acid, thus accelerating this segment s move toward high profitability. In the chromatography segment, we sell microscopic component analysis instruments specifically for the medical and environmental protection fields. Our shares of both domestic and overseas markets for this equipment steadily expanded during the period under review. Eat Plan is a dietary supplement line of rice porridge with vegetables, available in three flavorful versions. Ferzea, a treatment for corns, is based on a urea compound. 11 ANNUAL REPORT 2001

13 RESEARCH AND DEVELOPMENT Creative Integration Shiseido s guiding R&D vision for the 21 st century is the creation of ever-rising levels of customer value. With this in view, we are integrating our substantial R&D strengths: technological expertise in a broad range of research fields, a global R&D system, and the advanced knowledge and capabilities of our research teams. Developing Products for Beauty and Health A new R&D project for the Company begins when a potentially viable research theme is matched with an actual market need. Our product development activities comprise both basic research and product commercialization research. Our basic research activities establish innovative formulation technologies and ingredients. In product commercialization research, meanwhile, we determine customer needs through market surveys, perform exhaustive safety and efficacy tests, including environmental impact assessments, and undertake detailed product design. The result is a diversity of high-quality products providing new levels of value. For example, we introduced Elixir Skin-Up Pact, a revolutionary makeup foundation that functions also as a skin-care treatment thanks to its incorporation of a recently developed powder that prevents and effectively treats skin chapping. We also succeeded in developing entirely new types of products during the fiscal period under review. In November 2000, we introduced Pieds Nus Aqua Speedy Nail, a super-rapiddrying nail enamel. By placing the fingernails in water directly after application, this enamel dries in just 45 seconds. Other R&D successes in the year under review include SHISEIDO ZEN, a calming fragrance incorporating aromacological technologies, and Ag+, a deodorant powder spray that contains silver-exchanged zeolite, a new compound featuring the disinfectant qualities of silver to effectively prevent underarm odor. These and other examples demonstrate how Shiseido s R&D strengths translate into products that allow people to enjoy more beautiful and comfortable lives. Shiseido s Research Center in Shin-Yokohama conducts R&D on cosmetics and fine chemicals. Global R&D Shiseido s R&D system is organized into three geographical sectors: Japan, the United States, and Europe. Reflecting both our diversified approach and our desire to access research from sources around the globe, we are strengthening our alliances with various research institutes, both in Japan and overseas. In Japan, we integrate wide-ranging R&D technologies via three research bases: two in the Yokohama area and one the Institute of Beauty Sciences/Beauty Creation Center in Tokyo. In November 2000, we relocated one of the Yokohama centers to a new, more modern facility. In conjunction with the Massachusetts General Hospital (MGH) and Harvard Medical School, in 1989 we provided funding for the establishment of the MGH/Harvard Cutaneous Biology Research Center (CBRC). The CBRC conducts basic dermatological research, some of the fruits of which have already been applied by Shiseido in SHISEIDO The Skincare. The research supporting the development of this product was awarded the first prize in the oral presentation category at the 2000 Berlin Show of the International Federation of Societies of Cosmetics Chemists (IFSCC). Also at the 2000 Berlin Show, our super-rapid-drying nail enamel received the first prize in the poster presentation category. This marked the first time that one company had received two top awards in a single year, which clearly testifies to the international predominance of our R&D capabilities. In the future, we will strengthen our R&D system in line with our strategy of creating technologies and sharing them throughout the world. As part of this strategy, we will remain sensitive to local factors, particularly lifestyle, cultural, and climatic characteristics of nations around the world. ANNUAL REPORT

14 TOGETHER WITH SOCIETY Since its foundation, Shiseido has been a standard-bearer of responsible corporate citizenship in Japanese industry. Through our corporate activities promoting beautiful and healthy lifestyles, we have consistently demonstrated a sincere commitment to the arts, culture, and the environment. Shiseido s corporate slogan at the beginning of the new century, Together, expresses our commitment to contributing even more proactively and more inclusively to society than in the past. We aim to achieve harmonious coexistence both with the environment and with society by practicing and promoting environmentally responsible behavior and gender equality, as well as by maintaining corporate ethical standards of the highest rank. Our ultimate goal is to contribute meaningfully to society and, as a result, make our employees proud to work for Shiseido. Environmentally We practice and promote environmentally responsible behavior within the Company and in society through our corporate policy on the environment and a code of environmental standards covering all business activities. In 1998, we announced four environmental objectives. Specific initiatives related to these objectives, as well as progress status updates, appear in environmental reports periodically released by the Company. We have already achieved three of these environmental objectives. First, we have completely eliminated the use of polyvinyl chlorides (PVCs). Second, we have reached our targets for reducing industrial waste: We now recycle 60% of all industrial waste generated by our production facilities, and we have achieved a 50% reduction in unusable waste compared with 1990 levels. Third, we have obtained ISO certification, an international standard for environmental management, for all of our factories. Still unachieved is our objective to reduce carbon dioxide emissions from our production facilities. By introducing cogeneration systems, we aim by 2010 to achieve a 15% reduction in such emissions per production volume unit compared with 1990 levels. Currently, we are developing higher environmental standards and more challenging reduction targets, reflecting our intention to strengthen the Company s environmental protection activities. Shiseido s environmental activities reflect our determination to embody and enliven the philosophical spirit of environmental legislation. For example, from April 2001 retail outlets in Japan selling Shiseido products began to accept the Company s used glass-bottle cosmetics containers for recycling. Although our contribution is necessarily limited, this initiative reflects our commitment to realizing a fully self-sustaining society. As part of this commitment, we collect and recycle the bottles ourselves, in addition to using the services of official recycling companies, as stipulated in the Law for Recycling Containers and Packaging. Full Component Labeling Environmental Commitment 1989 Announces elimination of chlorofluorocarbons (CFCs) 1990 Eliminates CFCs from all aerosol products 1991 Establishes Environmental Policy Committee 1992 Announces Shiseido Eco Policy 1993 Establishes Eco Guide for Product Development Guidelines 1994 Start of environmental audit system, monitored by Shiseido s corporate auditors 1996 Releases Environmental Report (Data Section) 1997 Kuki Factory receives ISO certification Establishes Shiseido Global Eco-Standards for product development 1998 Releases Shiseido 1997 Environmental Report Announces four environmental objectives: 1) Elimination of polyvinyl chlorides (PVCs) from all product containers and packaging 2) Reduction of industrial wastes generated by production facilities 3) Reduction of carbon dioxide emissions from production facilities 4) Receipt of ISO certification for all domestic and overseas factories Releases Shiseido 1998 Environmental Report 1999 Holds the Environmental Symposium Releases Shiseido 1999 Environmental Report 2000 Receives Director-General of the Environment Agency s Prize at annual Global Environment Awards Releases Shiseido 2000 Environmental Report Environmental Reports Since March 1999, we have been gradually introducing full component labeling on all of our cosmetics containers, well in advance of Japanese governmental regulations requiring such labeling from April We consider the full disclosure of product information to customers to be our corporate responsibility. Therefore, we have established a dedicated Web site that describes the Company s activities prior to the introduction of full component labeling, as well as labeling rules and descriptions of various components used in our products. Promoting Beautiful Lives for Everyone Shiseido s activities for the physically challenged and the elderly reflect our keen commitment to promoting beautiful lives for everyone. The Company has released a beauty-care informational audiotape for the visually handicapped, which is available at Braille libraries throughout Japan. Also, we supply Braille texts on beauty-care methods and color combinations, as well as product seals in Braille that enable the identification of cosmetics container contents. In addition, Shiseido offers beauty-care seminars in rest homes for the elderly and the physically challenged, with very positive rehabilitative benefits reported among the participants. Braille versions of two Shiseido publications: Makeup and Skincare 13 ANNUAL REPORT 2001

15 GLOBAL NETWORK (As of March 31, 2001) Segment Activity Parent Consolidated Subsidiaries Shiseido Co., Ltd. Domestic: 43 Americas: 13 Overseas: 46 Europe: 19 Asia/Oceania: 14 Total: 89 Manufacturing *Manufacturing and Sales Kamakura and Kakegawa factories Osaka Shiseido Co., Ltd. (Osaka and Maizuru) Shiseido Kako Co., Ltd. Shiseido Beautech Co., Ltd. ETWAS Co., Ltd. Haramachi Paper Co., Ltd. Shiseido America Inc. (Oakland and East Windsor) Davlyn Industries, Inc. Shiseido International France S.A.S. (Gian and Val de Loire) *Laboratoires Decléor S.A. Taiwan Shiseido Co., Ltd. (Chung-Li and Shin-Tsu) *Shiseido Liyuan Cosmetics Co., Ltd. *Shanghai Zotos Citic Cosmetics Co., Ltd. *Shiseido (N.Z.) Ltd. 13 (17) [plus 2 parent company factories] Cosmetics Sales and Other Shiseido Sales Co., Ltd. Shiseido Cosmenity Co., Ltd. Shiseido FITIT Co., Ltd. Shiseido Asia Pacific Co., Ltd. IPSA Co., Ltd. d ici là Co., Ltd. Ettusais Co., Ltd. Ayura Laboratories Inc. InterAct Co., Ltd. Beauté Prestige International Co., Ltd. Shiseido International Inc. AXE Co., Ltd. Orbit, Inc. Beauty Technology Co., Ltd. Taishi Trading Co., Ltd. Fullcast Co., Ltd. Shiseido International Corporation Shiseido Cosmetics (America) Ltd. Shiseido of Hawaii, Inc. Shiseido (Canada) Inc. Shiseido do Brasil Ltda. Decléor U.S.A. NARS Cosmetics, Inc. Zirh International, Corp. Shiseido Investment US, Inc. Shiseido Europe S.A. Shiseido Cosmetici (Italia) S.p.A. Shiseido Deutschland GmbH Shiseido France S.A. Shiseido United Kingdom Co., Ltd. Shiseido España S.A. Beauté Prestige International S.A. Beauté Prestige International S.p.A. Beauté Prestige International S.A. (Spain) Beauté Prestige International GmbH (Germany) Beauté Prestige International GmbH (Austria) Les Salons du Palais Royal Shiseido S.A. Carita S.A. Carita International S.A. FIPAL S.A. Shiseido Dah Chong Hong Cosmetics Ltd. Shiseido Dah Chong Hong (Guangzhou) Cosmetics Ltd. Beijing Huazhiyou Cosmetics Sales Center FLELIS International Inc. Shiseido Korea Co., Ltd. Shiseido Singapore Co., (Pte.) Ltd. Shiseido Thailand Co., Ltd. SAHA Asia-Pacific Co., Ltd. Shiseido (Australia) Pty., Ltd. 49 Toiletries Manufacturing *Manufacturing and Sales *FT Shiseido Co., Ltd. Mieux Products Co., Ltd. 2 (2) Sales and Other Amenity Goods Co., Ltd. PRIER Co., Ltd. Taiwan FTS Co., Ltd. 3 Manufacturing *Manufacturing and Sales *Zotos International, Inc. 1 (1) Others Sales and Other Shiseido Beauty Salon Co., Ltd. Shiseido Beauty Company, Co., Ltd. GENIC Corporation Hair Color Plaza Co., Ltd. Shiseido Parlour Co., Ltd. Shiseido Beauty Foods Co., Ltd. The Ginza Co., Ltd. Shiseido Shoppers Club Co., Ltd. Shiseido Pharmaceutical Co., Ltd. Shiseido Irica Technology Inc. Shiseido Real Estate Development Co., Ltd. Shiseido Logistics Company Ltd. Shiseido Information Network Co., Ltd. Shiseido City Co., Ltd. Shiseido Astek Co., Ltd. Kyuryudo Art-Publishing Co., Ltd. Shiseido Lease Co., Ltd. Shiseido Investment Co., Ltd. Piidea Canada, Ltd. Alma Coiffure S.A. Alma Esthetique E.U.R.L. 21 Total Manufacturing *Manufacturing and Sales Sales and Other 2 factories 7 (8) 36 3 (4) 10 2 (3) 17 4 (5) (20) [plus 2 parent company factories] 73 Total R&D Facilities Research Center (Shin-Yokohama) Research Center (Kanazawa-Hakkei) Institute of Beauty Sciences/Beauty Creation Center Shiseido International Corporation in the East Windsor factory Zotos International, Inc. Shiseido America Techno- Center in Zotos International, Inc. Shiseido Europe Techno- Center in Shiseido Europe S.A. Shiseido International France S.A.S. in Val de Loire factory Domestic: 3 Overseas: 5 in 2 countries Note: Figures in parentheses indicate number of factories. ANNUAL REPORT