KKaaoo I nInteteggrraatedted R Reeppoorrtt
ForFor the the year year ended ended DecemberDecember 31, 31, 2019 2019
www.kao.com/global/en/www.kao.com/global/en/
CorporateCorporate Business Business Planning Planning and andCoordination Coordination Corporate Corporate Strategy Strategy PublishedPublished in June in June 2020 2020 CONTENTS What Kao Aims for Chapter 1 What Kao Aims for
3 To Kao Group Stakeholders 13 Kao’s History 5 CEO Interview 15 Kao’s Yoki-Monozukuri 9 Kao Group’s Management 17 ESG Vision Vision 21 ESG-driven Management 11 Kao’s Corporate Philosophy Kao’s
Chapter 2 Kao’s Monozukuri Strategy Monozukuri Strategy 23 Yoki-Monozukuri with 31 Overview of Kao’s ESG Perspective Business in FY2019 25 Research and Development 33 Consumer Products 27 Procurement Business 29 Supply Chain Management 41 Consumer Products Sales 43 Chemical Business Kao’s Corporate Strategy Chapter 3 Kao’s Corporate Strategy
46 Human Capital Development 51 Finance 53 Advanced Digital Technology 55 Risk and Crisis Management Performance in FY2019 Performance Chapter 4 Performance in FY2019
58 FY2019 Highlights 59 Non-financial and Financial Highlights 61 Non-financial Data 63 Financial Data Corporate Governance Chapter 5 Corporate Governance
71 Messages from Outside Directors 81 Compliance and an Outside Audit & Directors and Audit & Supervisory Board Member 83 Supervisory Board Members Corporate Governance 73 Executive Officers Initiatives 87
89 Dialogue with Stakeholders 93 Corporate Information 92 External Evaluation 94 Editorial Policy
1 Kao Integrated Report 2020 Kao Integrated Report 2020 2 Chapter 1 What Kao Aims for What Kao Aims for To Kao Group Stakeholders Transforming ourselves to drive change, we will generate significant growth through our distinctive ESG activities “Kirei*1 Action.”
I would like to thank you, our shareholders, for Therefore, in FY2019 we declared our
your exceptional understanding and support commitment to shifting to ESG-driven Kao’s of the Kao Group’s business and corporate management. This is not an extension of our activities. existing value of Yoki-Monozukuri, but a way to Monozukuri Strategy *2 While passing down our Yoki-Monozukuri realize a more sustainable society focused on spirit, we have been conducting corporate the future and management efforts to do this. activities aimed at achieving the wholehearted In addition, we announced our ESG satisfaction and enrichment of the lives of Strategy, the “Kirei Lifestyle Plan,” which people globally and contributing to the further integrates ESG into our business sustainability of the world. It has been 130 strategy, in FY2019, the third year of the Kao years since we launched the first high-quality Group Mid-term Plan 2020 (K20). Kao’s Corporate Strategy bar soap produced in Japan. During this time, The “Kirei Lifestyle Plan (KLP)” was the society and economic environment have established based on the Kao Group’s seen dramatic changes, and people’s lifestyles Yoki-Monozukuri spirit to serve people’s needs have also changed accordingly. Along with and desire to live a more sustainable lifestyle. this, we have been transforming ourselves and The Kao Group defines this desired life as the achieved significant growth. “Kirei Lifestyle,” and aims to advance Yoki-Monozukuri implemented by the Kao innovations in all aspects of business to Group to date has also pursued environmental contribute even more to society. consciousness and user friendliness while Kao continued to grow in FY2019,
staying close to society and people and achieving 10th consecutive year of increases in in FY2019 Performance quickly understanding their needs. However, operating income, 7th consecutive year of the recent changes taking place in the record-high operating income and 30th business environment and society, increase in consecutive year of increases in cash dividends. the amount of information available caused by While staying close to consumers and the digital revolution and the resulting changes customers, we at the Kao Group will boldly in consumer awareness, are unprecedented in take on challenges so that we can contribute terms of their speed and scale. Along with to the lives of people globally and the this, social issues beginning with the sustainability of the world. worsening global environment are rapidly I would appreciate your continued increasing in severity, and the responsibility of understanding and support of the Kao Corporate Governance global corporations has become even heavier. Group’s business and corporate activities.
Michitaka Sawada Representative Director President and Chief Executive Officer
*1 The Japanese word “kirei” describes something that is clean, well-ordered and beautiful, all at the same time. For Kao, this concept of Kirei not only describes appearance, but also attitude—to seek to create beauty for oneself, and also for other people and for the natural world around us. *2 The Kao Group defines Yoki-Monozukuri as a strong commitment by all members to provide products and brands of excellent value for consumer satisfaction. In Japanese, Yoki literally means “good/excellent,” and Monozukuri means “development/manufacturing of products.”
3 Kao Integrated Report 2020 Kao Integrated Report 2020 4 CEO Interview
technology innovation themes to turn to practical use.
In particular, we would very much like Fine Fiber What Kao Aims for Technology, which is able to create a layered, ultra-thin membrane with potential application in many fields, including cosmetics and medical treatments and therapies, and RNA Monitoring, which is able to help predict the skin’s future condition and the state of health, to effect revolutionary social changes. In addition, we have actively taken steps to use our human
capital including advancing women’s participation in the Kao’s workplace, to ensure compliance, and to support
employees’ health, for which we have been highly Monozukuri Strategy evaluated by various outside bodies. Meanwhile, from a financial perspective, we were able to achieve 10th consecutive year of increases in operating income, 7th consecutive year of record-high operating income, but sales and net income did not reach the level of the previous year, making 2019 a challenging year for us. Even so, the Cosmetics Business
recorded strong growth, increasing 9% on a like-for-like FY2020 is the final year of K20. We intend to Kao’s Corporate Strategy basis. The Cosmetics Business’ operating margin rose to achieve our commitments to foster a distinctive 13.7%, achieving the 2020 sales target of 300 billion yen corporate image, achieve profitable growth and provide and an operating margin of 10% one year ahead of stakeholders with a high level of returns by all possible schedule. As for cash dividends, we increased 10 yen means. To do this, conducting initiatives with even over the previous year to 130 yen per share, which greater momentum from both non-financial and financial means that we have offered increased cash dividends for perspectives is key. We will achieve profitable growth 30 consecutive years, the longest period of increased while maintaining our core focus on ESG-driven dividends in Japan. management, leading to enhance corporate value. Performance in FY2019 Performance
What did the Kao Group accomplish in FY2019 toward Q1 Announcement of our ESG Strategy, the Kirei Lifestyle Plan unique to Kao, the achievement of K20? and declared to make a major shift to ESG-driven management
We announced our ESG Strategy, the Kirei Lifestyle Plan (KLP), in April 2019 and declared the direction we are taking with specific ESG activities as well as our ambitions for the future. That September, we declared to make a major shift to ESG-driven The Kao Group Mid-term Plan 2020 (K20) has three deal of progress from non-financial perspectives. Corporate Governance main commitments. Related to the new ESG Division that we established in management as a new challenge for the Kao Group. This declaration further specifies the KLP announced in April and The first commitment is to foster a distinctive 2018, in April 2019 we announced our ESG Strategy, represents the full start of the KLP activities, and at the same time, corporate image, the second is profitable growth, and the Kirei Lifestyle Plan unique to Kao, and in September, signifies that we will implement management activities to elevate the the third is returns to stakeholders. In short, the we declared to make a major shift to ESG-driven concept of Yoki-Monozukuri that we have built up so far in our group message these commitments send is that the group management. We are now working as a united group to activities to “Yoki-Monozukuri from an ESG perspective.” By further intends to place more focus on enhancing corporate advance the KLP. I would like to see us produce major enhancing our actions taken with the environment and society in value in the future. results at an early stage. mind, we aim to become a company with a global presence. We positioned FY2019 as a decisive year to achieve Regarding our “technology innovation that will K20, and we pursued activities accordingly from both underpin the Kao Group in the future” which we non-financial and financial perspectives. We saw a great announced in November 2018, we have advanced all five
5 Kao Integrated Report 2020 Kao Integrated Report 2020 6 CEO Interview
The Kao Group declared to make a major shift to ESG- What Kao Aims for Q2 driven management in FY2019. What are your thoughts Q3 What kind of company does Kao aim to be by 2030? about the ESG Strategy, the Kirei Lifestyle Plan?
2030. Transformative product innovation is one action We aim to make Kao a company with a global presence and connect this to further enhancement of our ESG Kao’s comprising the second pillar, “Making thoughtful choices by 2030. To do this, we must establish a distinctive activities. This cycle is essential. for society.” As part of this, we aim to offer at least 10 corporate image, become a high-profit global consumer Supporting these activities is the Kao Way, the Monozukuri Strategy products by 2030 that will have a large, positive impact goods company, and provide a high level of returns to group’s corporate philosophy. Integrity becomes all the on people’s lifestyles. Zero waste is one action stakeholders. In other words, we must seek to enhance more important in a world undergoing dramatic change. comprising the third pillar, “Making the world healthier our corporate value from every angle. K20 is an Without forgetting the value of Integrity that forms and cleaner.” By 2030, we intend to have 300 million important milestone, and we are serious about taking the basis of the Kao Way, we will squarely take on containers that use our innovative film packaging in the action to achieve our targets in FY2020. challenges and intently pursue our commitment to market annually, and we are conducting activities to Key to this is connecting ESG progress with achieve our group’s mission to strive for the generate zero waste that is not recycled from all our profitable growth. Implementing our ESG Strategy will wholehearted satisfaction and enrichment of the lives of Kao’s Corporate Strategy business sites. We are also implementing initiatives for have major impacts on people, on society and on the people globally and to contribute to the sustainability of Integrity, which forms the basis of the KLP, such as planet, and as a result, we will achieve profitable growth the world. I hope to have your continued support. achieving effective corporate governance. and give our stakeholders returns with the earned profit, To turn the KLP into reality, we in management must be prepared to innovate current procedures, approaches and concepts that are not mere extensions of the past but represent new approaches and breakthrough levels of engagement. It is also important that we will strive to act with responsibility until product Technology innovation that will
disposal (waste treatment). To do this, we must underpin the Kao Group in FY2019 Performance comprehensively advance ESG-related Essential In November 2018, Kao held a session on Research and propose innovations that connect to the technology innovation that will underpin the The Kao Group’s ESG Strategy has been developed practical realization of the KLP. As a first step in this, we Kao Group in the future, at which the company and designed to serve people’s needs, behaviors and are advancing innovations in the three areas of Reduce, showcased five major new technologies that desire to live sustainable, authentic lifestyles. We define Recycle and Social. We will also be offering new brands have been created through the intensification these lifestyles as the Kirei Lifestyle, and we established that embody the KLP. and fusion of Essential Research. Our technology innovations began to take concrete the Kirei Lifestyle Plan (KLP) as our distinctive ESG It is important to start from doing what we can do shape in 2019. In April 2019, we launched Strategy comprising the vision, commitments and now, but as a group we will combine forces to Attack ZERO laundry detergent featuring Bio proactively and boldly implement our strategy so that we actions that contribute to it. IOS, our new detergent base that offers the Corporate Governance The KLP consists of three pillars. The first is do not stop with doing only what can be done now. highest cleaning power in our history. Then in “Making my everyday more beautiful,” the second is November, we began a collaborative project “Making thoughtful choices for society,” and the third is with Preferred Networks, Inc. aiming to realize “Making the world healthier and cleaner.” Universal practical application of our sebum RNA product design is one action comprising the first pillar, monitoring technology. And in December, we Announcing Fine Fiber Technology Announcing Attack ZERO with launched our Fine Fiber Technology business. products from SENSAI and est, the practical application of Bio IOS. “Making my everyday more beautiful.” We have set the first practical application on the target to have 100% of our new and improved products technology. conform to the Kao Universal Design Guidelines by
7 Kao Integrated Report 2020 Kao Integrated Report 2020 8 Kao Group’s Management Vision What Kao Aims to Be and Achieve for Society by 2030 What Kao Aims for
Progress and Road Map for the Kao Group Mid-term Plan K20 Kao was able to meet all management and FY2030 numerical targets adopted in K15 (FY2013 to FY2017 to FY2020 FY2015), Kao’s first publicly announced mid-term *1 plan. Kao will further accelerate efforts to achieve What Kao Aims to Be Kao’s our vision by 2030. K20 represents an important Mid-term Plan *1 milestone toward achieving our vision by 2030, K20 Monozukuri Strategy and we are making steady progress toward K20’s Mid-term plan focused on the following three points Make Kao a achievement. Kao has already started taking action to reach our vision of becoming a company Commitment to fostering a distinctive corporate image Company with a with a global presence by 2030. ● Become a company that is always by the consumer’s side
Commitment to profitable growth Global Presence
● Continue to set new record highs for profits Kao’s Corporate Strategy ● Aim for like-for-like net sales CAGR of +5%*2 ● Operating margin of 15% A distinctive corporate image ● Three 100 billion yen brands (Merries baby diapers, Attack laundry detergents, Bioré skin care products) A high-profit global consumer goods company Commitment to returns to stakeholders
● Shareholders: Continuous cash dividend increases A high level of returns to stakeholders FY2013 to FY2015 (40% payout ratio target) ● Employees: Continuous improvement in compensation, benefits and health support ● Customers: Maximization of win-win relationships Performance in FY2019 Performance Mid-term Plan ● Society: Advanced measures to address social issues Targets for 2030
K15 Progress over FY2019 Numerical Targets 2.5 trillion yen Kao’s first publicly announced FY2019 Results Net sales (1.0 trillion yen outside Japan) ▲ mid-term plan, sought to enhance aim to exceed Record highs for Achieved record highs for operating these targets Kao’s ability to formulate and profits income for the 7th consecutive year Operating Margin 17% execute detailed strategies Sales growth -0.4% year-on-year (like-for-like*2 +0.7%) ROE *3 20% Increase in operating margin +0.3 points year on year Review of Numerical Targets and Performance Dividend +10 yen year on year Corporate Governance increases Numerical Results Achieve- ESG Strategy Targets ment ratio Cultivation of 100 Continued to successfully cultivate billion yen brands our three 100 billion yen brands Making my everyday more beautiful 1.40 1.47 Net sales 105% trillion yen trillion yen Improvements in These brands achieved the target sales employee in FY2017 and continued to surpass Making thoughtful choices for society Operating 150.0 164.4 110% compensation 100 billion yen income billion yen billion yen Expanded initiatives to promote health Making the world healthier & cleaner Sales ratio Health supports Over 30% 35% Achieved (Selected as a Health and Productivity Management outside Japan Stock Selection for the 5th consecutive year)
*1 For the period between 2020 and 2030, Kao may develop a separate action plan to tie these two plans together. Formulated detailed strategies and steadily achieved results An important milestone toward achieving our vision by 2030 *2 Like-for-like growth excludes the effects of currency translation. *3 Ratio of net income to equity attributable to owners of the parent.
9 Kao Integrated Report 2020 Kao Integrated Report 2020 10
Kao’s Corporate Philosophy
’ The origins of the Kao Way can be traced back to the company’s founder, Fundamentals That Support Kao s Value Creation What Kao Aims for Tomiro Nagase. In 1887, Tomiro Nagase founded Nagase Shoten, a Western sundry goods store. He launched Kao Sekken (Kao Soap) three years later in 1890. His goal was to create a high-quality facial soap and offer it at an affordable price to contribute to cleaner and more comfortable lives for people at the time, The Kao Way when the only choices available were poor-quality domestic soap and high-priced imported soap. This is the origin of our mission “to strive for the wholehearted satisfaction and enrichment of the lives of people.” Kao’s Tomiro Nagase Mission The Founder of Kao Monozukuri Strategy
Our mission is to strive for the wholehearted satisfaction and enrichment of the Values Unique to Kao lives of people globally and to contribute to the sustainability of the world, The three Values express what we believe in. We do not Innovation and Yoki-Monozukuri built upon Integrity, and through Yoki-Monozukuri, meaning our strong commitment to provide products conduct business or take actions that do not conform this has become our distinctive foundation. and brands of excellent value created from the consumer and customer’s perspective. with these Values. Above all, we believe in achieving Kao’s Corporate Strategy
Yoki-Monozukuri
Yoki-Monozukuri refers to developing innovative members as the source of our corporate strength. products and brands by determining the needs of We reinvest the profits earned through consumers and fusing them with seeds of our Yoki-Monozukuri toward the continuous creation of original technologies. We create dynamic synergy products and brands of excellent value. This cycle by uniting the creativity and energy of every of Yoki-Monozukuri earns us the respect and trust employee and division. The driving force of of all of our stakeholders, thereby achieving Performance in FY2019 Performance Yoki-Monozukuri is the passion of individual profitable growth.
Innovation
We improve and innovate our products, brands and while maintaining a healthy sense of dissatisfaction business processes in order to stay one step ahead with the status quo. We regard difficulties as of changes in consumer lifestyles and the business opportunities for self-improvement and continue to environment. We proactively seek new opportunities grow individually and as a corporation by and challenges to always continue moving forward overcoming them. Corporate Governance
Integrity
We treat others with respect and fairness, and stakeholders through sound and honest business pursue our work with sincerity and diligence in an activities. As a responsible corporate citizen, we effort to optimize the performance of individuals seek to ensure the safety of our products and and the corporation as a whole. We behave lawfully operations, and proactively engage in solving social and ethically, and earn the respect and trust of all issues including environmental issues.
11 Kao Integrated Report 2020 Kao Integrated Report 2020 12 Kao’s History
130 Years Since the Launch of Kao Sekken
Kao’s history began with the launch of Kao Sekken (Kao Soap) in 1890. Since What Kao Aims for then, we have continued to expand our business, driven by a mission to enrich Global financial crisis FY2019 Sales ratio European debt crisis outside Japan people’s lives. This mission has been handed down for 130 years to the present stock price *2 1990 day, unshaken by the passage of time. 9,025 yen 15.9%
Asian currency crisis Dot-com bubble bursts 2019 Japan’s bubble *3 economy bursts FY2019 % operating 37.0 income
Market Kao’s 211.7 capitalization billion yen
1990 Monozukuri Strategy 711.3 billion yen
FY2019 2019 net sales 1,502.2 4,350.1 billion yen billion yen *2 Closing price on December 30, 2019 *3 Based on customer locations 1990 1995 2000 2005 2010 2015 2019 (Fiscal year) Kao’s Corporate Strategy
History Up to Today
Concentrated Goldwell AG joins Establishment of John Frieda Professional The Kao Environmental 1987 1989 1996 2002 2009 laundry detergent the Kao Group Kao Vietnam Hair Care, Inc. joins Statement and new ESG Strategy “Kirei Lifestyle Plan” Reduced the Kao Group CI announced 2019 announced box size by 80% Reduced weight by 62%
1890 Performance in FY2019 Performance Kao founder Tomiro Nagase, determined to offer an Kao launches Attack, a Goldwell, manufacturer of Kao Vietnam is established. Kao downsized laundry detergent that professional hair care products, Vietnam engages in manufacturing This move aims to further expand Kao announces the Kao affordable offers powerful cleaning power joins the Kao Group. Kao and sales of consumer products the U.S. and European hair care Environmental Statement and Japanese-made soap with just a small amount of develops the business for hair including hair care and skin care business using the eponymous declare its commitment to “eco with the quality to product. This reduced the amount salons globally using the business products and chemical products. brand of U.K. hair stylist John together” activities conducted with compete with of paper used in packaging and foundation built by Goldwell. Frieda. consumers and other stakeholders imported products, the energy used during throughout the entire product launches Kao Sekken. transportation. 1999 Withdrawal from Molton Brown Limited lifecycle. At the same time, Kao In April, Kao announces that it is introducing ESG the information 2005 joins the Kao Group defines the new corporate identity (Environmental, Social and Governance) perspectives into High Point Chemical Establishment of Kao technology business (CI) of “Enriching lives, in harmony our business strategy, aiming to expand business domain 1987 Corporation joins 1993 Corporation Shanghai with nature.” and contribute to a sustainable society. the Kao Group
Oribe Hair Care, LLC 2018 joins the Kao Group Corporate Governance
Sales expand to a scale of more E than 80 billion yen since entering U.K. luxury brand Molton Brown, ENVIRONMENTAL the floppy disk business in 1985, which offers plant-based skin It begins production for de-inking In 1994, hair care products are but a collapse in product prices care, hair care and body care agents for recycling paper and launched to start the Consumer causes profitability to decline. In products, joins the Kao Group. toner binders in 1991, enhancing Products Business in China. April 1998, Kao announces a full This move is designed to further the Chemical Business in North withdrawal from the business. develop the Cosmetics Business America. in Europe and North America. Oribe, a super-premium brand for ® The Kao Way 1999 EVA introduction*1 Kanebo Cosmetics Inc. U.S. hair salons, joins the Kao Group. S G This is designed to create synergies Corporate philosophy Establishment of Kao Chemical 2006 joins the Kao Group SOCIAL GOVERNANCE 1988 U.S.-based Andrew Jergens 1995 Kao becomes the first Japanese with Kao and further global growth from our founding Company joins the Kao Group Corporation Shanghai company to introduce the EVA® The strengths of both Kao and for the hair care business. The Consumer Products Business Kao Chemical Corporation management performance metric. Kanebo Cosmetics are utilized to enhances global business Shanghai is established with an eye This is intended to further reinforce Cosmetics Business’s development, primarily in North to expanding business in the enhance corporate value in the development within and outside America. fast-growing Chinese market. era of global competition. Japan. *1 EVA® is a registered trademark of Stern Stewart & Co. 13 Kao Integrated Report 2020 Kao Integrated Report 2020 14 Kao’s Yoki-Monozukuri
Our society is in the midst of transformations so large that if companies do not transform themselves, they will At Kao, we have made ESG the foundation of management, and are pursuing Yoki-Monozukuri that embeds the
get left behind. Many complex issues are also difficult to solve by continuing to do what has been done before, ESG perspective in product development. We will fully utilize our assets, create innovations and contribute to What Kao Aims for and companies must fundamentally change their current procedures, approaches and concepts. the sustainability of the world.
Make major contributions to Enhance corporate value people, society and the planet Yoki-Monozukuri ESG-based with ESG Products and
Perspective Services Contributions to the sustainability Kao’s
Delivering a high Monozukuri Strategy Cosmetics Business level of returns to Diverse Consumer Needs Consump- tion stakeholders of the world My ● Consumers Making Global Enrichment of the lives of people Kirei Full Use warming R&D of Assets Lifestyle Skin Care and Hair Care Business ● Customers/
business partners Kao’s Corporate Strategy Maximization of Financial assets win-win relationships Resources Sales scarcity ● Employees Excellent ・Continuous improvement in human capital compensation and benefits Large Human Health Care Business ・Providing educational Increase our positive Social opportunities High ethical Marketing impacts changes standards ・Health support global presence Plastic on people, waste Major social ● issues Intellectual Shareholders society changes forcing property and ・Continuous cash dividend
and the in FY2019 Performance company brand equity increases Logistics planet transformation Fabric and Home Care Business ・Share repurchases and retirements Severe Excellence in hygiene research and Profitable growth conditions technology Procure- Environment Business ment Reducing environmental field Outstanding impact expansion manufacturing and logistics Chemical Business Defor- estation Production Society
Marketing and Global Corporate Governance sales expertise ・Advanced measures to business address social issues expansion ・Kao’s role as a quasi-public Aging institution (Paying taxes, society Corporate Governance employment, etc.) Enhancing our business Corporate philosophy The Kao Way Mission Enrichment of the lives of people and brands
Expansion of business Investment to advance sustainability opportunities originating from social issues
15 Kao Integrated Report 2020 Kao Integrated Report 2020 16 ESG Vision Mid- to Long-term Targets for the 19 Kao Actions
Mid- to Kao’s ESG Strategy has been developed and Kao will strive to create a long-lasting impact to Kao Actions Indicator 2019 Results long-term targets SDGs Value Year
designed to serve people’s needs, behaviors and society through the Kirei Lifestyle Plan. To deliver our What Kao Aims for desire to live sustainable lifestyles that contribute to vision of a Kirei Lifestyle for all, we have set out three Making my everyday more beautiful The number of people empowered to enjoy more beautiful lives—greater *1 1 billion 2030 3, 5, 6, 10, a sustainable world. We call this the Kirei Lifestyle, ambitious 2030 commitments supported by 19 Commitment cleanliness, easier aging, better health and confidence in self-expression Plan to disclose in 2021 people 12, 14, 17
and we call the vision, commitments and actions leadership actions. % of new or improved products which contribute to a comfortable, Improved quality of life Plan to disclose in 2021*1 100% 2030 3, 5, 12, 17 that contribute to that lifestyle the Kirei Lifestyle Plan. beautiful, healthy life and touch the heart of people Habits for cleanliness, Coverage of enlightening activities that stimulate habits for cleanliness, beauty & *1 Plan to disclose in 2021 100% 2030 3, 6, 17 beauty & health health using Kao products and services (Scope: targeted brands/categories) % of new or improved products that meet Kao Universal Design Universal product design Guidelines 44% 100% 2030 10, 12, 17
Safer healthier products % of targeted ingredients of concern on which views are disclosed Plan to disclose in 2021*1 100% 2030 3, 12, 14, 17 Kao’s Making thoughtful choices for society Kao’s ESG Monozukuri Strategy % of Kao brands that make it easy for people to make small but meaningful 4, 8, 9, 10, 11, Commitment Plan to disclose in 2021*1 100% 2030 Commitments and choices that, together, shape a more resilient and compassionate society 12, 13, 15, 17 Coverage of distribution of information, information tools, and Actions Sustainable lifestyle enlightening or communication activities for sustainable lifestyle. Plan to disclose in 2021*1 100% 2030 4, 11, 12, 17 My promotion (Scope: targeted brands/categories)
Kirei % of Kao brands that make a contribution to solving social issues and Purpose driven brands Plan to disclose in 2021*1 100% 2030 12, 17 Lifestyle that make people feel and sympathize with the brand’s social usefulness. Cumulative number of transformative sustainable product 10 or 2 innovations 2030 Transformative product innovations launched. more 9, 12, 13, 17 innovation % of new or improved products which meet Kao sustainability guidelines Plan to disclose in 2021*1 100% 2030 Kao’s Corporate Strategy Responsibly sourced % of certified paper products and pulp for consumer products 91% 100% 2025 8, 10, 12, 15, 17 raw materials Confirm traceability to small oil palm farms Completed for large plantations Finish 2030
Making Making Making Making the world healthier & cleaner my everyday thoughtful the world % of Kao products that leave a full lifecycle environmental impact *1 3, 6, 7, 12, 13, Commitment Plan to disclose in 2021 100% 2030 more choices for healthier that science says our natural world can safely absorb 14, 15, 17 CDP Climate Change A, Water A, Highest 3, 6, 7, 12, 13, Kao recognition or achievement level by external ratings firms evaluation Every year beautiful society & cleaner Forest (Timber) A-, Forest (Palm Oil) A- level 14, 15, 17 % reduction in absolute full lifecycle CO2 emissions*4 4% 22% 2030 Decarbonization 7, 12, 13, 17 % reduction in absolute scope 1 + 2 CO2 emissions*4 9% 22% 2030 Quantity of innovative film based packaging penetration for Kao and *2 300 others per annum Plan to disclose in 2021 million 2030 Zero waste 12, 14, 15, 17 Quantity of waste not for recycling from all factories and offices Plan to disclose in 2021*2 Zero 2030
4 % reduction in full lifecycle water use per unit of sales* 6% 10% 2030 in FY2019 Performance BY 20 30 BY 20 30 BY 20 30 Water conservation Kao’s % reduction in full lifecycle water use per unit of sales in regions with *1 6, 12, 15, 17 We will aim to empower all 100% of Kao brands will 100% of our products will water scarcity*4 Plan to disclose in 2021 40% 2030 Commitments people, at least 1 billion by make it easy for people to leave a full life cycle Air & water pollution prevention % of factories which disclose VOC and COD emissions VOC 0%, COD 100% 100% 2025 3, 6, 12, 14, 17 by 2030 2030, to enjoy more make small but meaningful environmental footprint that beautiful lives—greater choices that, together, will science says our natural cleanliness, easier aging, shape a more resilient and world can safely absorb Walking the right path better health and confidence compassionate society Highest evaluation level Highest Every Kao recognition or achievement level by external ratings firms ® evaluation ( World’s Most Ethical Companies selection) level year in self expression Effective corporate Number of serious compliance violations* per annum 8, 16 governance Every * Compliance violations that have a significant impact on management and Zero Zero significantly damage corporate value year Full transparency % of consumer product brands for which people can easily Plan to disclose in 2021*1 100% 2030 8, 12, 16, 17 Kao Actions access complete ingredients information % response rate to human rights due diligence Internal: 100%, suppliers: 20%, HABITS FOR SUSTAINABLE PURPOSE Respecting human rights 100% 2030 5, 8, 10, 17 IMPROVED ZERO (risk assessment across internal, suppliers and contractors respectively) contractors: 0% CLEANLINESS, LIFESTYLE DRIVEN DECARBONIZATION QUALITY OF WASTE BEAUTY PROMOTION BRANDS LIFE Affirmative answer rate to a question on “Inclusion and Diversity” & HEALTH Inclusive & diverse Did not conduct Find 75% 2030 Corporate Governance on Find, our employee survey with voice of employees 5, 8, 10 workplaces Same % as female % of female managers 29.4% employees. 2030 Lost time accident frequency rate (per million hours worked) 0.78 0.1 2030 Employee wellbeing & safety Average number of lost long-term work days (days/people) * Starting from Japan 129 105 2030 3, 8 UNIVERSAL SAFER TRANSFORMA- RESPONSIBLY AIR & WATER WATER Ratio of employees who have lost long-term work days per one PRODUCT HEALTHIER TIVE PRODUCT SOURCED RAW POLLUTION CONSERVATION thousand employees * Starting from Japan 0.198 0.12 2030 DESIGN PRODUCTS INNOVATION MATERIALS PREVENTION Affirmative answer rate to a question on “Development Opportunities & Did not conduct Find 75% 2030 Climate” on Find, our employee survey with voice of employees Human capital development 3, 4, 5, 8, 10 Affirmative answer rate to a question on “Engagement/Employer of Did not conduct Find Choice” on Find, our employee survey with voice of employees 75% 2030
Walking the right path % of chemical products and raw materials with disclosed information of *3 benefit and safety to ensure safe usage for our customers Plan to disclose in 2022 100% 2030 Responsible chemicals % of areas where impact on health, environment and safety from 3, 6, 12, 14, 17 EFFECTIVE FULL RESPECTING INCLUSIVE EMPLOYEE HUMAN RESPONSIBLE management chemicals are managed responsibly and sustainably considering Plan to disclose in 2022*3 100% 2030 CORPORATE TRANSPARENCY HUMAN & DIVERSE WELLBEING CAPITAL CHEMICALS their stages from raw materials procurement to disposal GOVERNANCE RIGHTS WORKPLACES & SAFETY DEVELOPMENT MANAGEMENT
Kao Integrated Report 2020 *1 Conducted the review of detailed requirements in 2019 *2 Built a data collection system in 2019 Kao Integrated Report 2020 17 *3 Conducted review of detailed requirements in 2019 and plan to build a data collection system in 2020 *4 2017 is the base year. 18 We are working towards the realization of Zero Waste, one of the key themes of our ESG Strategy, so as to create a healthier world What Kao Aims for By incorporating the ESG perspective from the product development stage onwards, Society’s Expectations we create products that embody careful Responding to the Issue of Plastic Waste thought regarding how the product will be Over the years, the use of plastic has spread widely throughout society, and has come to underpin our lifestyle. Kao’s However, in recent years the need to respond to the Issue of plastic waste has been recognized as a pressing used after it has been sold
issue by the international community. Worldwide, up until the present time, huge quantities of plastic products Monozukuri Strategy have been manufactured, and most of them has ended up being discarded as waste. The pollution caused by plastic waste has a negative impact for both people and the environment. In order to build a sustainable society, we need to utilize resources more efficiently, and shift over to a society with circularity in which the amount of waste generated is kept to a minimum. Looking Ahead to the Future
Speeding Up the Reduction in the Initiatives on Containers and Packaging Amount of Plastic Used through the Adoption of New Film-type Kao’s Corporate Strategy Containers Making Containers We have developed Air-in Film Bottles, a new type More Compact New Refill and Replacement of container that functions like a bottle, in which air We have been working to reduce the amount Product Offerings is blown into a plastic film so that it blows up like a of plastic material that we use by developing more highly concentrated products that can be By developing new refill and replacement rubber swimming ring. In this way, we have made it sold in smaller containers, and by changing products, and promoting their widespread possible for the container to be produced using container design to create thinner bottles that adoption, we have been striving to dramatically only around the same amount of plastic as a refill are still sufficiently strong. reduce the amount of material used in container. We also continue to pay painstaking pack. No refilling is required, and the product can Comparison with conventional attention to container design, to ensure that container types: be used to the last drop, without any waste. The
anyone can refill containers easily. in FY2019 Performance introduction of this new container design has begun with its adoption for use with the new We have realized a 40% reduction*1 MyKirei by KAO brand. in the amount of plastic material used MyKirei by KAO has come into being as a response to the wishes of consumers who want to pursue environmentally-conscious, Conventional type Compact type socially-beneficial lifestyles. The *1 Assuming the same number of wash load. launching of this new brand in the
U.S.A. will help to speed up the Corporate Governance Kao’s Offerings reduction in the amount of plastic used, and realize a Kirei Lifestyle for ESG-driven Product Design That Takes Product Use and consumers. In this way, we are Disposal into Account contributing toward the creation of a In order to realize the shift to a society with circularity, it is vitally important that we reduce the amount of plastic sustainable society, while also being used, while also making it as easy as possible to separate between different types of plastic container and fostering sustainable growth for us product, and to use them. To help ensure a healthy future for the planet, we are committed to reducing the over the long term. By cultivating amount of plastic used in our product containers and packaging. So far, we have been offering new lifestyle strong brands that consumers will solutions that include being able to reuse the original container with refills, or use refill products in combination want to support, and which embody with a holder device, etc. We are now implementing initiatives based on a new approach that seeks to do away our ESG perspective, our global with the rigid plastic bottle altogether, with the introduction of new film-type container that are fully recyclable. presence will be strengthened.
19 Kao Integrated Report 2020 Kao Integrated Report 2020 20 Chapter Kao’s Monozukuri Strategy ESG-driven Management 2
By taking on the challenge of creating and innovating through ESG-driven Yoki-Monozukuri manufacturing, we aim to develop businesses that can contribute towards the realization of enriching, sustainable lifestyles, while also enhancing corporate value.
David J. Muenz
Executive Officer Senior Vice President, ESG, Global
Role and Activities of the ESG Committee The ESG Committee discusses and decides on the related to ESG activities, identifies ESG issues, risks and overall direction of activities related to our ESG Strategy. opportunities, and examines the current state of ESG The committee is chaired by the President and Chief activities. The ESG External Advisory Board consists of Executive Officer, and its members include Senior outside experts, and gives advice and recommendations Managing Executive and Managing Executive Officers. to the ESG Committee to bring external perspectives to The committee formulates policies and strategies that are the management of the company.
Main items deliberated on and approved Themes proposed to the ESG Committee by by the ESG Committee in FY2019 the ESG External Advisory Board in FY2019
● Establishment of ESG Strategies and mid-to ● Implementation and promotion of the long-term goals Kirei Lifestyle Plan within the company ● Setting up of the ESG External Advisory Board ● Methods adopted by Kao to support the ● Selection and approval of priority actions realization of ethical consumption by consumers ● Internal communication plans ● Creation of new systems to promote ESG
Kao’s Support for the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) In FY2018, Kao expressed its support for the through Reduce Innovation and Recycle Innovation, in recommendations of the TCFD. In FY2019, Kao line with the Kirei Lifestyle Plan, the Kao’s ESG Strategy. implemented quantitative assessment of the potential Kao has utilized TCFD scenario analysis to evaluate the 23 Yoki-Monozukuri with ESG Perspective impact of climate change on its business, using several company’s resilience to climate change, and the different climate change scenarios. The results obtained evaluation results will be reflected in Kao’s future business 25 Research and Development in this assessment showed that there was a significant strategy. 27 Procurement potential impact in relation to crude oil price data and carbon pricing, etc. Kao has already begun taking action 29 Supply Chain Management to minimize resource usage and realize decarbonization 31 Overview of Kao’s Business in FY2019 33 Consumer Products Business WEB Climate Change Scenario Analysis www.kao.com/content/dam/sites/kao/www-kao-com/global/en/sustainability/pdf/klp-pr-2020-e-all.pdf 41 Consumer Products Sales For more details about the climate change scenario analysis implemented in FY2019, see the “Decarbonization” section in Kao’s Kirei Lifestyle Plan Progress Report 2020. 43 Chemical Business
21 Kao Integrated Report 2020 Kao Integrated Report 2020 22 Yoki-Monozukuri with ESG Perspective
The strong ESG-driven value creation foundations that we possess provide support for every Kao business, and our effective integration of a perspective based on our ESG Strategy is contributing toward the building of a sustainable
society. What Kao Aims for
R&D Marketing Procurement Production Kao’s Monozukuri Strategy
● ● Innovation capability through Essential Research. Thorough, consumer-driven marketing. ● Procurement that addresses environmental and ● Factory capabilities that embody safe, stable ● ● Strengths High-value-added product development capability. A product development capability focused on Strengths social issues. Strengths manufacturing. ● Unique technologies that realize outstanding delivering products that are genuinely useful for ● Procurement risk management capabilities and ● High-quality, low-cost, environmentally-conscious performance. Strengths both consumers and society as a whole. stable product supply. production technology. ● Brands that cultivate close links with consumers, ● Network of strong relationships with suppliers. ● Product supply driven by demand forecasting. ・ Developing products that reduce the burden on the and which enjoy a high degree of loyalty. Kao’s Corporate Strategy ● environment. A comprehensive product line-up oriented toward ・Sustainable procurement taking care of ・Promotion of Responsible Care activities and enriching people’s lifestyles. ESG ・ Developing products that can be used safely and with environment. effective chemical substance management. activities peace of mind. ESG ・Implementing procurement that respects human ESG ・ Utilization of renewable energy. activities ・ Transformative product development. ・ Cultivating purpose-driven brands. activities rights and addresses labor issues. ・ A enhanced production system that realizes ・ Developing products that embody universal product ESG ・ Environmentally-conscious brands and products ・Dialogue with and support for small-scale energy-saving and reduces greenhouse gas design. activities creation that seeks to reduce plastic usage and agricultural producers. emissions. cut CO2 emissions.
Logistics Sales Consumption Performance in FY2019 Performance Corporate Governance ● A seamless transportation and delivery network ● Ability to offer attractive solutions to retailers and
Strengths linking manufacturing to the customer. other firms. ● Cooperation between production and sales to Strengths ● Sales infrastructure that extends into around 100 realize highly efficient logistics. countries and regions. ● A strong customer base. Moving forward together ・ A reduced environmental impact due to promotion of with consumers modal shift implementation, joint transportation, etc. ・Reducing the amount of waste associated with ESG ・ Sustainable Logistics Movement (a program launched returned goods, promotional items and special ● Reducing waste and promoting recycling. activities by the Japanese government to make logistics more ESG project items. ● Reducing water usage. efficient) that fosters improvement of delivery drivers’ activities ・ A range of measures for working together with ● Reducing CO2 emissions. working environment. retailers to enhance logistical efficiency. ・ Controlling the amount of waste generated through the control of appropriate inventory levels.
23 Kao Integrated Report 2020 Kao Integrated Report 2020 24 Research and Development What Kao Aims for Working to Further Enhance Essential Research By thoroughly pursuing Essential Research, we will generate innovations to solve social issues and make Kao has adopted the following three basic policies for its distinctive fundamental technologies and our new R&D activities. product development capabilities facilitates the great contributions to society as a whole. 1. Create the seeds for new businesses generation of unique new product ideas that will create 2. Bring about innovation that creates new consumers’ new value. Yoshihiro Hasebe needs in existing business domains Research and Development Division Representative Director, Senior Managing Executive Officer 3. Share scientific technologies with society Senior Vice President, Research and Development, Global Research Strategy Kao’s Senior Vice President, Strategic Innovative Technology, Global Planning Group Responsible for Compliance To realize these policies, we have reinforced matrix
management for R&D activities, which brings together Monozukuri Strategy Human Health Car Cosmetics Skin Care and Hair Care Fabric and Home Care Chemical knowledge and goes beyond conventional technological Material science (interface, analysis) domains. By putting in place an organizational structure in which individual research facilities report directly to the Life science (biology) Pursuit of Innovations for Solutions to Social Issues Research and Development Division, we have been able Production technology (processing development) I believe the social issues that Kao should tackle are the medical treatments would be reduced. to realize faster decision-making and accelerated global excessive use of substances and energy associated with Our goals for these major issues are to have growth. Matrix management makes it possible to e Human science (emotion) products over and above consumption, the rise in consumers choose products with long life over the long integrate knowledge and technologies from many Environmental science
(packaging, safety) Kao’s Corporate Strategy medical expenses in Japan and the decrease in healthy term without competing. As one effort toward this, our different fields, and the continuous linkage between our life-span by Japanese senior people. From the 20th RNA monitoring technology for skin, which aims to century, manufacturing has been based on a free market monitor people’s health at the genetic level while offering economy, with repeated product battles caused by products and medical treatments optimized on an Mid-term Growth Strategy excessive products in the market, and many products individual basis, is a leading proposal. If we can connect The direction Kao should take is transforming into a to contribute to therapies adding beauty, and the being short-lived or being discarded without use. This this technology with many other technologies and have it leading company aiming to contribute to achieving the recycling domain for sustainable conservation of food and has not been a sustainable economy for meeting the true widely put into practical use, products that are not SDGs. We want to step into expanding intersections of the environment. I am confident that these new domains needs of the market, where only the products that necessary or ineffective will be weeded out, with only the our existing business from our business where we can are areas where we can use our R&D assets effectively to should be used are available in the minimum amount most effective products for consumers remaining. For currently use mobilize our core technologies. For help as many people as possible. Then we will aim to necessary and with the longest life possible. In terms of the issues of ocean plastic waste and global warming as example, these include the hygiene domain where our create technologies able to make possible things that Performance in FY2019 Performance medical treatments as well, if we were able to maintain well, we do not aim to have our technologies be limited bioscience can make contributions primarily in controlling have proven too difficult in the past and achieve world- lifestyles that did not overly rely on therapies and only to us, but plan to work together with many the spread of infectious diseases, the therapies domain first and world-leading social innovations with social medicines and maintain health with the minimum companies and universities with the goal of minimizing where we can further enhance our skin care technologies impact. necessary medicines, the time and cost needed for CO2 emissions and maximizing useful materials.
Essential Research Future Skin, created with Fine Fiber Technology, While the demands placed on companies to achieve a vital that we think about what forms the underlying basis, to develop the future of beauty and medical treatment
sustainable future world are tremendous, special needs what should be prioritized and what should be changed, Fine Fiber Technology enables a light, soft, natural-feeling multi-layered Corporate Governance to satisfy people’s individual desires will continue to grow and integrate this into Yoki-Monozukuri. In this sense, our and ultra-thin membrane made of superfine fibers with submicron larger. In other words, we must achieve manufacturing fundamental technology research that pursues diameters to be sprayed directly on the surface of the skin. We position that satisfies both sustainability and diversity at the same Essential Research now has the opportunity to achieve this Fine Fiber Technology as one social innovation for solving social time. For this trend, I believe that this is very much the meaningful contributions. issues, and will deepen research on this technology looking at time for us to train a laser focus on what is essential. It is developments in the medical treatment domain in addition to the cosmetics domain encompassing skin care and makeup. We will continue to use innovations based on our Essential Research to solve social issues and contribute to people leading more beautiful and enriched lives.
25 Kao Integrated Report 2020 Kao Integrated Report 2020 26 Procurement
ESG-driven Procurement Initiatives in FY2019 What Kao Aims for Acting as a strategic coordinator with a focus on ESG- 1. Sustainable Procurement of palm oil and pulp driven and stable procurement, we are aiming to Impact on business achieve sustainable competitive advantage by building Main initiatives Main Results in FY2019 operation an even stronger network with our global business ● Palm oil ・For palm oil used in the Consumer Products Business, we have confirmed traceability as partners. far as the palm oil mill. Confirmation of ・ We are participating in the organization SUSTAIN, along with our Indonesian partners and Identifying traceability NGOs. business risk Masakazu Negoro ・ We are also implementing traceability to small-scale oil palm farmers, using block-chain
technology, etc. Kao’s Managing Executive Officer ・By promoting the registration of both supplier and worker data, we are working to realize Senior Vice President, Procurement, Global effective utilization of traceability. Monozukuri Strategy ● Palm oil ・ As of FY2019, 92% of the palm oil used in the Consumer Products Business was RSPO Establishment of Utilization of certified certified, and we are aiming to increase this share to 100% in FY2020. a sustainable raw materials ● Pulp procurement Efforts of the Procurement Division framework ・As of FY2019, 91% of the paper and pulp used in the Consumer Products Business was Kao’s business operations are heavily dependent on consumers and customers is also vitally important. We are FSC- or PEFC-certified, and we are aiming to increase this share to 100% by FY2025. natural resources, and resource scarcity can have a promoting responsible procurement that is based on these significant impact on the continuity of our business. This two key aspects: ESG-driven and stable procurement. 2. Supplier monitoring from an environmental and social perspective
means that ESG-driven procurement, which embodies In addition, by acting as a strategic coordinator for our mpact on siness Kao’s Corporate Strategy ain initiatives ain es ts Achieve y FY2019 concern for both the environment—including natural individual businesses and their suppliers, and building up a operation resources saving—and society, is very important. Procurement Division is implementing strategic ・To verify compliance with supplier guidelines, we ask suppliers to join the Supplier Ethical Data Exchange (Sedex), and to respond to questions and provide us with access to data. Regarding our initiatives to address social issues, we are procurement that ensures a level of performance that will Effective utilization of To date, access rights have been established for 1,800 sites. We aim to continue Identifying business risk using dialogue to identify issues of particular concern in satisfy consumers and customers at a reasonable cost. Sedex for monitoring expanding the scope of access rights in the future. ESG initiatives relation to the working environment and living Through these initiatives, we are aiming to build ・We implement risk evaluation through Sedex assessment. We provide suppliers with Risk reduction through
circumstances of small-scale oil palm farmers and the sustainable competitive advantage. feedback on assessment results, and ask them to make improvements where needed. supply chain improvement people who work on oil palm plantations, and we are ・We participate in the Carbon Disclosure Project (CDP) supply chain program. ・We are the only Japanese company that requires suppliers to implement disclosure in the Identifying business risk putting in place a framework to realize appropriate Participation in the CDP three key areas of Climate Change, Water and Forests. corrective measures and providing working together with supply chain program
to help realize in FY2019 Performance ・ NGOs to provide necessary support. As part of these sustainable raw Through participation in the CDP supply chain program, we encourage suppliers to realize sustainable raw materials procurement. Risk reduction efforts, we provide technical assistance, together with our materials procurement through supply ・Kao was the first Japanese company to be selected for inclusion in the CDP Supplier chain improvement partners, to help local people enhance their productivity. Engagement Leader Board. Promoting Yoki-Monozukuri with ESG perspective, stable The small-scale oil palm procurement aimed at the stable provision of products to farmers in Indonesia 3. Promoting centralized purchasing of indirect materials and “green” procurement We are integrating our internal processes for indirect materials purchasing. By implementing purchasing using a single, unified system, we are able to realize the visualization of purchasing content, and ensure effective governance. Responsible procurement
Strengthening RSPO (Roundtable on Sustainable Palm Oil) SUSTAIN (Sustainability Assurance & Innovation Alliance) Corporate Governance ● ● ESG-driven Procurement of certified Stable Operational innovation competitiveness The RSPO is a non-profit organization that seeks to promote SUSTAIN is an initiative that aims to realize supply chain data procurement raw materials procurement ● Supply chain improvement over the mid- to the production and use of sustainable palm oil through the transparency through collaboration between palm oil stakeholders that ● Supplier monitoring formulation of certification standards and through stakeholder makes effective use of block-chain technology. Kao joined SUSTAIN in d ng a ta na e n r ng t e ● Business Continuity long-term ● Support for small-scale participation. Kao joined the RSPO in 2007. 2018. en ron ent and ta e pp Planning (BCP) initiatives o et oil palm farms o prod t Sedex (Supplier Ethical Data Exchange) CDP Supply Chain Sedex is a collaborative platform with the CDP Supply Chain is a program implemented in the supply chain that objective of promoting ethical, responsible uses questionnaire surveys to analyze and evaluate data on CO2 Realizing business practices in the supply chain. emissions and climate change related initiatives. Kao began asking Kao joined Sedex in 2014. suppliers to fill out CDP Supply Chain questionnaires in 2009. Strategic procurement Yoki-Monozukuri ● Strategically coordinating the operations of from an ESG The FSC promotes the use of pulp products that are certified by international bodies engaged in Rea ng ot per or per or an e Kao businesses and suppliers FSC (Forest Stewardship Council) providing certification for the management of the world’s timber-producing forests, and for the distri- and rea ona e o t perspective bution and processing of the timber extracted from these forests.
27 Kao Integrated Report 2020 Kao Integrated Report 2020 28 Supply Chain Management
ESG-driven Supply Chain Management Through the effective utilization of cutting-edge What Kao Aims for Demonstrating Concern for the Environment technology and collaborative innovation with individual Besides working to optimize production and logistics, we refrigerants and “green” refrigerants (hydrofluoroolefins, suppliers, we are building an advanced, socially are also linking production planning and logistics planning etc.). At the same time, in regard to our efforts to achieve beneficial and environmentally conscious supply chain together and promoting collaborative innovation with zero waste—particularly with respect to plastic waste—we that supports the stable supply of our products. suppliers, aiming to eliminate overburden, waste and are going beyond conventional supply chain activities and inconsistency throughout the supply chain and reduce our are striving to reduce waste throughout over the entire Osamu Tabata environmental impact. product lifecycle through collaboration with R&D and with
Furthermore, in addition to our existing energy-saving external actors, including government, industry and Kao’s Managing Executive Officer Senior Vice President, Supply Chain Management, Global activities, we are also taking steps to further reduce CO2 academia. *1 Responsible for TCR Promotion emissions by proactively adopting natural energy sources Monozukuri Strategy such as photovoltaic power and wind power, and making Proactive Adoption of Solar Panels *1 Total Cost Reduction (TCR) is a business innovation activity that involves effective use of biomass energy, etc. By making an active Kao is promoting the adoption of renewable energy participation by all employees from a comprehensive perspective. effort to use electric power that has been generated using facilities such as solar panels at all production sites, Supply Chain Management Initiatives both within and outside Japan. renewable energy, we are driving a further reduction in CO2 The environment of supply chain in which Kao operates is management of information, so that demand can be emissions in supply chain activities. In addition, regarding undergoing a dramatic transformation. With the forecast at the level of individual products, after which we the reduction of the use of refrigerants with a high ozone diversification of lifestyles and values, the growth of the undertake procurement based on the level of demand, depletion potential (ODP) in line with the Montreal Protocol e-commerce market, etc., products have become more implement production and then deliver products to our on Substances that Deplete the Ozone Layer, we have also Kao’s Corporate Strategy diversified, and there have been changes in the types of customers in a stable, reliable manner. So as to build an decided to try to reduce the global warming potential products that sell particularly well. In responding to this even more advanced supply chain, we are aiming to reduce (GWP) of the refrigerants that we use, in accordance with changing environment, our supply chain management our environmental impact and improve transportation the Kigali Amendment to the Montreal Protocol. We are strategy is focused on producing reliable products as efficiency, and to this end we are working to enhance our working to reduce the use of alternative CFCs efficiently as possible, and on ensuring the stable delivery of framework for collaboration with other stakeholders. (hydrofluorocarbons) that, while having an ODP of zero, Tochigi Plant (located in Ichikai-machi, Haga-gun, Tochigi Prefecture, Japan) the products that consumers need. By making effective use of environmentally conscious have a high GWP, by proactively switching over to natural We have built a supply system that is based on an production technology, undertaking production with integrated framework incorporating every stage from consistently high quality, and building an efficient logistics Demonstrating Concern for Working People procurement through to production and sales, with close network, we are able to ensure the stable supply of The building of an efficient, appropriately-managed supply which facilitates the automation of storage and retrieval in FY2019 Performance collaboration between related divisions and centralized products. chain helps to reduce our environmental impact by making operations at logistics centers, and makes for improved transportation more efficient, while also having positive product information traceability. Furthermore, in regard to Building an Advanced Supply Chain benefits for working people. chemical substance management, through inter-divisional In the future, our integrated seamless transport and activities to promote the Strategic Approach to In the future, we will be working to make our supply chain lines that are engaged in the manufacturing of multiple delivery network—which links every stage from International Chemicals Management (SAICM) we are even better. Currently, our product supply plan—which is different products—a highly complex task that requires manufacturing to the customer, and is one of the key implementing appropriate management throughout the based on our overall business plan and on demand extensive experience—we are working to make planning strengths of our supply chain—will link logistics information entire chemical substance lifecycle, from development and planning—incorporates advanced technology such as more precise and enhance operational efficiency. In this with external parties, with the further evolution of measures manufacturing through to usage and disposal, with the aim artificial intelligence (AI) into an integrated, common way, we can optimize materials order placement volume to realize joint transport with other manufacturers, etc., of contributing to the realization of a sustainable society. In platform, and we are implementing initiatives to enhance and inventory levels, thereby making it less likely that we thereby driving the enhancement of overall transport Supply Chain Management Department, with regard to Corporate Governance the precision of demand forecasting, automate production will miss out on sales opportunities due to having efficiency. This in turn will lead to an improvement in production sites that handle chemical substances at every planning and optimize inventory management, as we seek insufficient inventory, or generate large amounts of waste working conditions for people working in the logistics stage from raw materials through to finished products, in to drive supply chain improvement on a global scale. product due to excessively high inventory levels. Through industry, which has been affected by severe labor order to safeguard both operators’ health and the More specifically, we aim to improve the precision of the automation of production planning, we are aiming not shortages, and where long working hours have become environment from negative impacts, besides implementing demand forecasting through the effective utilization of AI only to realize the optimization of operations that in the the norm. conventional risk assessments and response measures, and other digital technologies, by undertaking detailed past depended on the experience and nous of individual We are also working actively to promote the we also undertake risk assessments and formulate analysis of consumer needs and market trends. In personnel, but also to achieve a dramatic improvement in Sustainable Logistics Movement by enhancing supply response measures for new substances that have just addition, by automating production planning for production productivity. chain efficiency through the active utilization of pallets with been adopted. RFID tags attached in smoother product transportation,
29 Kao Integrated Report 2020 Kao Integrated Report 2020 30 Overview of Kao’s Business in FY2019
Net Sales Operating Income Operating Margin What Kao Aims for 1,502.2 billion yen 211.7billion yen 14.1% Cosmetics Business Cosmetics Business In order to respond to the diverse beauty values of each individual billion yen billion yen 301.5 41.4 consumer, we are refining the *1 (+9.0% like-for-like ) (+13.7 billion yen year-on-year) 13.7% characteristics of our brands and +3.8 percentage delivering skin care and make-up ( of ( % of points year-on-year 20.1% 19.6 ( ) products to consumers. *2 operating income*2 ) consolidated net sales ) Skin care Make-up Kao’s Monozukuri Strategy
Skin Care and Skin Care and Hair Care Business Hair Care Business
Consumer Products Business We deliver mass-market skin care billion yen 340.8 billion yen 49.5 products and hair care products to + 14.5% (+1.1% like-for-like*1) ( 0.7 billion yen year-on-year) people all over the world so that +0.2 percentage ( % of points year-on-year they are able to express their ( % of 23.5 ( ) 22.7 operating income *2 ) desired personalities, and in doing consolidated net sales*2 ) Facial cleansers UV care Shampoos Hair styling Body lotion Bar Soaps coloring Products for so we contribute to the realization of Body cleansers products Conditioners agents agents hair salons truly healthy, beautiful skin and hair. Kao’s Corporate Strategy
Human Health Care Human Health Care Business Business 17.2 billion yen (-10.7 billion yen year-on-year*1) We deliver hygiene products which
billion yen are gentle on the skin, along with
255.2 (8.2% of % 6.7 ( (-3.5% like-for-like*1) operating income *2 ) functional beverages promoting new -3.7 percentage health values and products that ( points year-on-year 17.0% of ( support healthier and more *2 consolidated net sales ) comfortable daily lifestyles, including Adult incontinence Baby diapers Sanitary napkins Thermo Bath additives Oral care Functional products products products beverages toothpaste and bath additives. Performance in FY2019 Performance Fabric and Home Care Business Fabric and Home
359.5 billion yen 71.8 billion yen Care Business
*1 (+0.5 billion yen year-on-year) % (+4.6% like-for-like ) 20.0 ( We provide fabric and home care ( % of -0.7 percentage products so that as many people ( of 34.1 points year-on-year 23.9% *2 ( as possible can create moments of *2 operating income ) consolidated net sales ) cleanliness in their daily lives. Laundry Fabric softeners Bleaches Dishwashing House cleaning Odor removal detergents detergents products products Chemical Business Chemical Business Chemical Business Corporate Governance We provide a wide range of
chemical products, including oleo *3
285.9 billion yen % chemicals made from natural fats 10.8 ( *1 (-6.6% like-for-like ) *3 and oils, performance chemicals 30.8 billion yen +1.0 percentage point year-on-year such as surfactants, and specialty ( % of (+0.2 billion yen year-on-year) ( 16.3 chemicals including toner and consolidated net sales*2 ) toner binders. (14.6% of Oleo chemicals Performance chemicals Specialty chemicals operating income*2 )
*1 Like-for-like growth rates exclude the effect of currency translation. *2 Share of net sales is calculated based on sales to customers. Share of operating income is calculated before the elimination of intersegment transactions. *3 Net sales and operating income of the Chemical Business include intersegment transactions.
31 Kao Integrated Report 2020 Kao Integrated Report 2020 32 Consumer Products Business
FY2019 Results and Issues What Kao Aims for
Sales increased 2.0% (increased 2.9% on a like-for- sales grew compared with FY2018. With a sincere approach to out consumers, the creation like basis) compared with FY2018 to 1,257.0 billion Home care products saw sales of products that are truly needed by society enables yen. growth in dish-washing detergents Kao to create value and achieve profitable growth. In the Cosmetics Business, the new strategy we and household cleaning products. We undertook in 2018 generated strong performance, and are also taking steps to develop high- Tomoharu Matsuda we achieved the K20 plan of net sales of 300 billion Attack ZERO value-added products and reduce the yen and an operating margin of 10% one year ahead of amount of plastic use by shifting to Director, Managing Executive Officer Kao’s President, Consumer Products, Global the plan. We will step up efforts in the growing refill products and larger-capacity container. e-commerce and travel retail sales channels, and We are also seeking out challenges in new further enhance our business in Asia. product categories as well. In the hygiene business Monozukuri Strategy In the Skin Care and Hair Care domain, we launched the brand sonae brand in the Business, sales of the new body hygiene business domain and PAF, a temporary The Social Situation Surrounding the Kao’s Business cleanser Bioré u The Body achieved pinpoint coloring product popular steady growth. While we posted with young people to bring more Conditions in the global economy are unclear due in volatility from last-minute demand before the solid performance in Asia, in the excitement to special days. Bioré u The Body part to international trade disputes and the novel consumption tax rate increase and its growth weakened Americas we were impacted by Net sales in Asia increased 3.8% coronavirus (COVID-19) pandemic as well as uncertainty as the decline in sales after the last-minute demand, but intense competition and or 6.7% on a like-for-like basis, to Kao’s Corporate Strategy surrounding the direction of economic growth in various for the full year the markets posted solid performance sales decreased. We will 206.3 billion yen in FY2019. countries. The market in Japan has been affected on a value basis. Our business in Asia is aiming to work to activate the Bioré GUARD primarily in the cosmetics market from falling demand A series of environmentally-conscious products market by shifting more maximize brand equity in concert in Indonesia for products bought for the purpose of reselling due to were launched in FY2019. Digitalization has also toward offering high- with Japan. To do this, Japan and changes in the China’s e-commerce law that took effect advanced, and the markets for household and personal value-added products Asia are working together to implement brand in January 2019. In addition, the adverse weather care products and cosmetics in Japan are seeing not and making distinctive enhancing initiatives. The business in Asia, primarily est Curél freeplus conditions in the first half of the year also affected the only e-commerce but a variety of new business models and attractive offerings Kao China and Kao Indonesia, contribute significantly seasonal products market including the market for UV including subscription models, and gaining an unique to the Kao Group. to the Kao Group’s growth. care products, etc. Economic recovery after the understanding of consumption conditions has become In hair care products, hair color products in Japan
consumption tax rate increase enacted in October has quite complex. Desire for sustainability has risen further, and the Oribe, a brand in the Americas for hair salons, in FY2019 Performance also been slow. The markets for household and and companies today are expected to respond to needs achieved strong performance. Overall, however, hair personal care products and cosmetics in Japan which and calls for product safety and reliability. care products were affected by the shrinking mass are key markets for the Kao Group, saw a great deal of market. We will strive to offer brand value and FY2019 sales by region in the activate the market with distinctive product offerings Consumer Products Business while establishing both mass brands and premium brands. Net Sales and Operating Income Composition The Human Health Care (Billions of yen) (Billions of yen) on Americas o en Business was impacted by a Europe Net Year-on- 1,500.0 1 2 0 Net Sales 7.1% % sales year 1,216.0 1,232.9 200.0 billion yen 4.9 1,257.0 1 175.7 1 9 9 (+2.0% year-on-year/+2.9% on a like-for-like basis* ) substantial decline in Japan in
173.0 Corporate Governance 1,228.8 1,225.6 1,219.8 apan 899.6 +15.7 Laurier demand for Merries baby diapers 1,200.0 155.1 160.0 Operating 134.2 137.4 Income billion yen for the purpose of resale in the Asia a 206.3 +7.6 179.9 2 (+4.2 billion yen year-on-year* ) 900.0 120.0 Chinese market, but nevertheless grew its market 16.4% 14.2% 14.3% apan Operating er a 88.8 +3.8 12.7% 1 share in Japan. Laurier sanitary napkins posted sales 71.6% 600.0 11.0% 11.2% 80.0 Margin 14.3% (+0.0% percentage points year-on-year) growth in Japan and Asia with strong sales of high- rope 62.2 -3.0 *1 Like-for-like growth rates exclude the effect of translation of value-added products. We will increase the value of 300.0 40.0 local currencies into Japanese yen. ota 1,257.0 +24.1 *2 The sales organization of Kao’s Consumer Products Business our products and build up our brand equity. in Japan was reorganized from FY2018. The operating 0 0 income for FY2017 was restated accordingly. In the Fabric and Home Care Business, Attack *2 2015 2015 2016 2017 2018 2019 a * Figures present sales to external customers, and sales by geographic region are et a e e t perat ng n o e r g t apanese GAAP IFRS ear ZERO laundry detergent was launched in Japan, and classified based on the location of the sales recognized. perat ng arg n
33 Kao Integrated Report 2020 Kao Integrated Report 2020 34 Cosmetics Business Skin Care and Hair Care Human Health Care Fabric and Home Care Professional-use Business Business Business Products Consumer Products Business
Purpose-driven Brand Management Cosmetics Business What Kao Aims for At Kao, our brand purpose is to have positive effects define the brand purpose as a higher-level concept to Toward 2020 and beyond on consumers’ lives and on the society and the the brand vision and mission, and make clear brands’ While offering products that combine our proven environment, and to realize sustainable lifestyles. purpose for existing, meaning how they will contribute quality, made possible by our industry-leading That Kao’s brands help make the world and to society and the world. expertise in the area of skin science and beauty- society that consumers live in a better place needs to Based on the brand purpose, we design brands enhancing qualities, with emotional and sensory be well understood by society and consumers and from the product development stage with universal appeal, we aim to build on the distinctive identities Kao’s brands need to be chosen. design perspectives as well as ESG perspectives of each of our brands and create a global presence
To achieve this in a world where drastic change is focused on society and the world. It is important that for our businesses. We will engage in creation of Kao’s predicted, we need to respond to consumers’ needs consumers perceive new value from outstanding strong brands by continuing to offer consumers
and concerns in relation to their changing values and product performance leveraging the technology exciting brand experiences. At the same time, Kao Monozukuri Strategy social issues, and co-create value together with innovations that we have built up as our strength. This will seek out various growth opportunities from the consumers. value experience can deepen the bonds between increasing cross-border exchanges of people and Key here is positioning the question of what value consumers and Kao. Through this robust information as well as new digital technology to the products Kao create can offer consumers as the engagement, we believe information will be conduct forward-looking and innovative business starting point of product value creation, and taking communicated by consumers. In this way, we will operations. the approach in day-to-day marketing of integrating create feelings of empathy with consumers and build this into product development and communications. up our brand value.
At Kao, we conduct Life Value Solution marketing In the future, we will expand our purpose-driven Kao’s Corporate Strategy aimed at providing benefit for consumers’ Life Value brands that offer ways for consumers to realize better Offering Solutions to Social Issues through our business activities. lifestyles and begin solving social issues. This kind of To realize the sustainable society that we are aiming business activity leads to the company achieving Through beauty, the Cosmetics Business engages in social value creation with the ability to offer moments of joy in daily to create together with consumers, we must take sustainable and profitable growth, and realizes a cycle life. By managing our business with an ESG perspective, Kao is contributing to realizing a society in which fulfilling lives actions through our brands, which are the greatest point where this is then invested in addressing new social are possible for all, throughout the world. In promoting the use of environmentally conscious, renewable resources in of contact we have with consumers. issues. our ingredients, containers and packaging, the use of renewable energy in production and distribution processes and As a first step, we will clarify the social issues that Having our products be close to consumers’ daily waste reduction in the use stage by the consumer, Kao makes contributions to the sustainability of the world across the each brand will focus on addressing as well as lives, and creating this daily reality, is what truly brings value chain. update the brand design guide that forms the us joy. Performance in FY2019 Performance foundation for the respective brand’s value design, Strategy
Global Portfolio sold via beauty We established the New Global Portfolio, consisting of consultants who have five business entities in the Cosmetics Business, in May received specialized Making Making Making 2018. For the 11 brands selected as global strategic education, and self- my everyday thoughtful the world more choices for healthier brands (G11), Kao will actively pursue expansion of the selection brands, and beautiful society & cleaner areas in which they are offered. Meanwhile, by also revise how the brands
enhancing our travel retail business, Kao will accelerate are designed and sold. Corporate Governance their development in Japan and elsewhere in Asia and in Global strategic brands “G11” Europe. Kao has designated eight regional brands (R8) for priority development mainly in Japan and will Management reform concentrate investment in them to support their In January 2019, we introduced a brand team system to development. better respond to the fast pace of change in the business environment. The brand teams will implement Reorganization of counseling and self-selection brands the Plan, Do, Check, Action (PDCA) cycle in more In Japan, Kao will drive creation of strong brands with adoptable and faster cycles. Authority will be delegated clearly redefined brand positioning. Kao will reorganize to brand team leaders, who will conduct targeted its existing brands into counseling brands, which are marketing at a brisk pace.
35 Kao Integrated Report 2020 Kao Integrated Report 2020 36 Cosmetics Business Skin Care and Hair Care Human Health Care Fabric and Home Care Professional-use Cosmetics Business Skin Care and Hair Care Human Health Care Fabric and Home Care Professional-use Business Business Business Products Business Business Business Products Consumer Products Business
Skin Care and Hair Care Business Toward 2020 and beyond Human Health Care Business Toward 2020 and beyond What Kao Aims for Kao will develop unique products with high-added- Kao will offer high-value-added products and value to drive our global expansion as a highly solutions that support the physical and mental profitable business. With a sharp focus on health of people all ages with the goal of enhance consumers’ attitudes to beauty and changes in people’s vitality and contributing to the creation of lifestyle habits, Kao will accelerate the shift toward healthy lifestyles around the world. Kao will promote delivering high-value-added products and play a product development that focuses on both physical leading role in invigorating the market by creating and mental health in our hygiene health products. In distinctive and attractive product offerings that are our hygiene products, Kao strives to create Kao’s unique to Kao. To contribute toward the realization of products that are gentle on the skin and provide Monozukuri Strategy healthy, beautiful skin and hair for people throughout high levels of comfort and peace of mind. In the world, Kao will enhance its business operations functional beverages, Kao offers differentiated by launching and developing distinctive, appealing products with enhanced functional health value. new products, and by engaging in marketing activities that stay ahead of consumers’ changing purchasing behavior. Kao’s Corporate Strategy Offering Solutions to Social Issues Offering Solutions to Social Issues
The impact on the global environment of the excessive use of plastic is a source of concern. We have developed new Kao will support people around the world to help them enjoy improved health through activities focused on mothers thin-film refill containers as well as the Smart Holder, which allows consumers to insert a pump directly into refill and infants in maternity wards, first menstrual education in elementary schools, and enlightenment on adult products and use them, providing a solution that is both environmentally conscious and easy to use. With the incontinence products and oral care in hospitals and care facilities. We will also help to enrich people’s lives by helping introduction of new air-in film bottles, we reduce the amount of plastic needed, and speed up of initiatives to reduce them to keep in better physical condition, leading to reduced fatigue and lower stress. plastic usage. Through those efforts, we are working to reduce CO2 emissions on a product lifecycle assessment basis, from production to disposal, thereby contributing proactively toward the sustainability of the world. Performance in FY2019 Performance Strategy Strategy
Skin care products that provide real value in consumers’ daily We strive to enhance people’s vitality by offering Kao is accelerating our global We will strive to expand our business domain with bold lives. In our business for hair salons, we have developed advanced, high-value-added products on an ongoing expansion with evidence-based, moves via development of new technology to address a thorough understanding of hair stylist needs, and we basis. high-value-added products offering environmental stressors that affect skin, centered on UV are meeting these needs through the development and With the aim of being the most gentle on the skin unique health care propositions. care and deodorant, and to meet needs in provision of innovative new products and services. diaper in the world, Merries contributes to the healthy First, led by Merries, Laurier and the hygiene domain in addition to physical and emotional development of babies. We aim MegRhythm brands, Kao intends
reinforcing our unique positioning and Business area expansion to help solve health and wellness challenges at each life to offer products with greater Corporate Governance further enhancing our high-value-added The global skin care brands Bioré and Jergens will stage with products such as customization to fit local health care needs while offerings in the cleansing products, which evolve to facilitate their global growth as we develop MegRhythm, which uses Kao’s collaborating with and creating a network of universities, constitutes the core element in the skin their product lines to drive expansion into the countries original thermo technology, medical professionals and other experts in each country. care. and regions in which they have not previously been Healthya contributing to Based on consumption patterns and distribution offered. In our business for hair salons, while driving wellness for people with conditions in each country, we will work to efficiently Hair care growth in the high-end segment through Oribe, we will visceral fat and high blood expand product lines new and the countries and regions While working to bring greater clarity to our product be working steadily to create synergies with Goldwell in pressure issues and advanced through strategic use of distributors and growing portfolio with its many different brands, we are working the North American market, while also accelerating oral care products contributing e-commerce channels. to create new value by precisely targeting current trends global expansion. to a lifetime of teeth and gum and actively pursuing development of high-value-added health.
37 Kao Integrated Report 2020 Kao Integrated Report 2020 38 Cosmetics Business Skin Care and Hair Care Human Health Care Fabric and Home Care Professional-use Cosmetics Business Skin Care and Hair Care Human Health Care Fabric and Home Care Professional-use Business Business Business Products Business Business Business Products Consumer Products Business
Fabric and Home Care Business Toward 2020 and beyond Professional-use Products Toward 2020 and beyond What Kao Aims for People’s attitudes to and their habits in relation to For our corporate customers, including restaurants housework, such as laundry and cleaning, are and other food services businesses, medical and undergoing a major transformation due to the care facilities, hotels and laundry firms, we provide greater diversity of living environments and lifestyles products which make full use of our cleaning, as well as other social factors. Different countries anti-bacterial, odor removal and other technologies, and regions each have their own emerging needs as along with total solutions that match individual client standards of living improve. While staying attuned to companies’ needs. By providing products that are what different consumers want in life, we will use the used safely, securely and effectively and which are Kao’s insights we gain from them to take the lead in environmentally conscious, and delivering solutions Monozukuri Strategy activities to solve various social issues. By offering for customers’ issues, we not only help to enhance products and solutions with high-added-value that the corporate value of our customers, but also enable anyone around the world to live each day in contribute to society by realizing clean environments greater cleanliness and comfort, we contribute to and enhanced hygiene management in a wide range realizing greater contentment in daily life. of living environments outside the home.
* Professional-use products are included within the Fabric and
Home Care Business. Kao’s Corporate Strategy Offering Solutions to Social Issues Offering Solutions to Social Issues
Kao believes it is our role to accurately understand consumers’ changing attitudes and habits in the area of laundry, Food poisoning incidents resulting from unsatisfactory hygiene management, and infection by norovirus, coronavirus, cleaning and other housework, and to take the lead in helping to solve various social issues. In the Fabric and Home Care etc., constitute ongoing social issues. Through the provision of effective cleaning products and by assisting front-line Business, we have taken actions to reduce our environmental impact at every stage of the product lifecycle, for example workers in the achievement of thorough hygiene management, we are working to help solve these issues. In the aging by making products more concentrated so that their containers can be more compact, thereby reducing the amount of society, we offer solutions for the realization of human-centric care environments that not only enhance quality of life for plastic used, and by increasing the use of refill and replacement products. In the future, we will be proactively contributing care recipients but also reduce the burden on care providers. With regard to the labor shortage due to the trend toward toward the sustainability of society through initiatives aimed at reducing the amount of plastic used, for example by declining birthrate, by offering efficient, effective operational systems we are striving to contribute toward the resolution eliminating eye-catching plastic stickers used on products, and switching over to larger-volume containers, etc. of this issue. Performance in FY2019 Performance
Strategy Strategy
Our strategy is to develop high-value added products country and region to We aim to provide an extensive range of high-quality share held by existing businesses and also taking up the utilizing the results of our Essential Research, and offer realize thorough products through our expertise in R&D and through challenge of expanding into new business areas. solutions that are easy to understand, easy to use, and localization and product development that is oriented toward the actual In addition, in 2018 we acquired U.S.-based company otherwise accessible to a wide range of people. Kao will contribute to making needs of professional workplaces such as restaurants and Washing Systems, LLC (WSI), a firm engaged in the create even more Kirei in everyday life to deepen our ties consumers’ lives better. other food service providers, hotels and other types of development and sale of professional-use cleaning
to consumers and contribute to increased market The Attack brand in accommodation, medical institutions and care facilities, products. WSI, which received the 2019 Green Chemistry Corporate Governance revitalization. the fabric care and the etc. We also contribute toward the enhancement of our Challenge Award (awarded jointly by the U.S. Environmental Standards of living vary in different countries and Magiclean brand in the customers’ corporate value, by offering hygiene Protection Agency and the American Chemical Society), regions, and laundry home care have won widespread popularity among management solutions. has been contributing toward reducing the environmental environments (clothing, water consumers in Asia, and Kao will develop them into Viewing the major changes taking place in the impact of the U.S. professional-use cleaning industry by quality, washing methods) and well-loved brands. We will also speed up our business professional-use products business environment— providing cleaning agency delivery living environments also differ development not only in countries where we already including the trend for the food services market to be systems that incorporate throughout Asia. Kao will apply have business operations, but also in neighboring dominated by a handful of major chains, growing demand environmentally conscious cleaning the value-added sanitation emerging markets in Asia and elsewhere. for take-out food, the continuing increase in inbound agents. In the future, WSI will be technology we have built up in tourist visitors to Japan, and the acceleration of the aging making effective use of synergy with Japan in ways that fit each of the population—as opportunities for business growth, Kao’s R&D expertise to achieve we grow our business still further by increasing the market further growth as a global business.
39 Kao Integrated Report 2020 Kao Integrated Report 2020 40 Consumer Products Sales
Promoting Sales Activities Integrating What Kao Aims for Viewing changing circumstances surrounding our ESG-driven Mnagement business as growth opportunities, build a new sales Going forward, we will fully implement sales activities structure and sales channels aiming to achieve further integrating ESG in partnership with retailers. growth. To expand sales and profit at both retailers and us, we must continue to offer new value to people and Toshiaki Takeuchi contribute to the enrichment of people’s lives.
Meanwhile, for consumers to lead enriched lives in the Kao’s Representative Director, Senior Managing Executive Officer Representative Director, President, Kao Group Customer Marketing Co., Ltd. true sense of the word, we must consider the global
environment and society, and contribute to creating a Monozukuri Strategy sustainable world. Based on this thinking, the Sales Department is also integrating ESG to have a greater Changes in Conditions Affecting Business positive impact on people, society and the local communities than before. The Consumer Products Sales Department has striven To address these major changes taking place in Specific sales activities integrating ESG that we are to create a better society and increase consumer society and continue providing new value, companies conducting include zero waste initiatives and increasing satisfaction by providing new value to society and must also transform themselves. Up to now, we have logistics efficiency. consumers and creating new markets together with provided value to society and consumers mainly through Kao’s Corporate Strategy retailers. Over the last several years in particular, the mass-market business, but in the future we will need to advances in digital technology and changing consumer modify our business model so that we can deliver high- values have significantly changed how consumers live added-value products to individual consumers through their lives and how they choose and buy products. one-to-one marketing using digital and other tools. 1. Zero waste initiatives Responding to these changes in society, retailers are We will shift our sales activities to meet the needs of We have taken actions to reduce waste in the past as conduct ESG-driven initiatives to reduce our also making big changes, from monopolizing market the changing times, continue to provide new value to well, including reducing the volume of promotional environmental impact together with various stakeholders. segments to focusing on the e-commerce business and consumers, and take steps that enable continuous materials. We still have many types of waste, such as developing new types of physical stores. growth at retailers and at us. discontinued products and used promotional materials, Specific actions of our zero waste initiatives however, that have impacts on the global environment. 1 n ng e nat ng prod t ret rn in FY2019 Performance We will take the activities that we have been nda enta re e ng pro ot ona ater a implementing a step further, and for issues that are 2 Meeting Needs in Increasingly Borderless Markets difficult for one company to resolve on its own, we will 3 Re e ng n tore pro ot ona prod t p an Developments in smartphones and other digital advances on all sorts of fronts in this way, we need to technologies and the globalization of the retail industry fully engage in one-to-one marketing, where we take the have rapidly advanced the borderlessness of products massive amount of data collected through digital means 2. Increasing logistics efficiency and distribution in markets. Barriers between online and and customize it for individual consumers. We will Recent increases in the volume of delivered goods and various stakeholders throughout the supply chain, we are offline channels are gradually being eliminated not only advance our efforts taken in collaboration with the delivery frequency, coupled with a shortage of truck reducing the number of trucks in operation and the time China and United States, which have been at the retailers in Japan, with e-commerce companies drivers, have caused worsening work conditions for truck truck drivers spend at work. In promoting these kinds of Corporate Governance forefront of this trend, but also Japan, other parts of Asia developing cross-border business, and with global drivers and a home delivery crisis, which have risen to the initiatives, we have also declared our support for the and Europe, and where consumers get their information retailers, and innovate our activities to communicate the level of social issues. A less-than-optimum logistics “Sustainable Logisitics Movement” put forward by the from and their consumption behavior are undergoing quality of Kao products and services to consumers in a structure also causes greater impact on the environment Japanese Ministry of Land, Infrastructure, Transport and substantial changes around the world. In order to wide range of countries and regions toward our goal of and can be cited as a problem. We are working to Tourism. communicate our value to consumers as borderlessness becoming a company with a global presence. resolve this problem by increasing our logistics efficiency. Without being constrained by traditional values, we Specifically, we are implementing initiatives including will deepen the quality of these initiatives by moving securing lead time before deliveries, alleviating wait times ahead with reforms and advance sales activities that are for truck drivers, and equalizing quantities delivered to the able to contribute to the global environment, society and logistics warehouses of chain stores. In partnership with consumers.
41 Kao Integrated Report 2020 Kao Integrated Report 2020 42 Chemical Business What Kao Aims for Business Strengths We offer innovative products and solutions as a global We are one of leading global companies in the oleo leading company, basing business decisions on the chemicals that handles derivatives and surfactants, criteria of the benefit to the environment and society. primarily from fatty alcohols and surfactants with one of the largest production capacity in the world. Leveraging Masahiro Katayose our core technologies including in nano-level surface modification and molecular design of performance Executive Officers
chemicals, we offer innovative chemical products that Kao’s President, Chemical Business, Global support industry development.
The Chemical Business can also count among its Monozukuri Strategy strengths a global business foundation and human capital as well as a broad customer base spread across many industries. Social Issues Affecting Business Social issues affecting the business are growing more heightened awareness of these changes, and economic diverse, while their degree of impact is also increasing. changes including trade frictions and the worldwide Specifically, issues that can be cited include climate change economic slowdown. In addition, we are being called on to Chemical Business Strategy FY2019 Results and FY2020 Activities
and global-scale environmental changes such as water exercise more consideration than before regarding the raw In the Chemical Business, we deliver innovative In FY2019, sales decreased due to effects from selling Kao’s Corporate Strategy and food scarcity, stricter environmental regulations that materials we use in light of biodiversity impacts and human products and solutions offering value from chemicals to price adjustments associated with a decline in prices for have been enacted in many countries backed by people’s rights issues. help customers and the industry solve issues. We make natural fats and oils in oleo chemicals, and from business decisions based on the criteria of whether a declining global demand particularly for information product or solution will benefit the environment and materials and performance chemicals. We achieved Business Opportunities and Risks society. Our basic strategy is to achieve profitable record-high operating income with strong sales of Viewing these changes rather as opportunities, through products, and we will strengthen development of growth based on this business direction and contribute high-value-added fats and oils derivatives outside technology innovations in chemicals we will contribute distinctive and sustainable fat and oil derivatives. In the to creating the future of industry and sustainability Japan. to resolving social issues, meet changing customer information materials and performance chemicals, we around the world. In FY2020, in addition to increasing our sales ratio needs and support technological advances. are currently developing innovative products with greater The synergies we demonstrate with the Consumer of high-value-added products that are less affected by Performance in FY2019 Performance In our oleo chemicals, whose main raw materials are levels of customization, aiming to further reduce Products Business are distinctive features of the fluctuations in raw material prices, we will further natural fats and oils, the market entry by raw materials environmental impact. Chemical Business. We not only supply basic raw reinforce production of eco-chemical products with manufacturers is increasing the commoditization of materials for the Kao Group companies’ consumer reduced environmental impact and create new products, the fundamental technologies that we have business. As a growth engine in particular, we intend to sophisticated through meeting the needs of world enhance our business in distinctive fats and oils markets and customers are also applied to consumer derivatives, infrastructure-related chemicals and inkjet Net Sales*2 and Operating Income products’ research and development. inks for industrial printing.
(Billions of yen) (Billions of yen) 350.0 285.9 50.0 Net Sales billion yen 285.9 1 310.3 312.8 (-8.6% year-on-year/-6.6% on a like-for-like basis* ) 300.0 288.5 288.5 Corporate Governance 273.8 40.0 30.8 Operating 250.0 Income billion yen 30.1 30.3 30.6 30.8 28.6 29.7 (+0.2 billion yen year-on-year) 200.0 30.0 Operating 150.0 10.8% 10.8% 10.4% 9.9% 9.8% 9.8% 20.0 Margin 10.8% (+1.0% percentage point year-on-year) 100.0 10.0 *1 Like-for-like growth rates exclude the effect of translation of 50.0 local currencies into Japanese yen. *2 Includes intersegment transactions. 0 0 2015 2015 2016 2017 2018 2019 (Fiscal year) et a e e t perat ng n o e r g t Japanese GAAP IFRS perat ng arg n Package using water-based pigment inkjet ink with Asphalt paving using road additives with functional pigment nano-dispersion technology polymer control technology
43 Kao Integrated Report 2020 Kao Integrated Report 2020 44 Chapter Kao’s Corporate Strategy 3 Human Capital Development What Kao Aims for Aiming to draw out the unlimited potential that every employee possesses to generate immense vitality, and utilize this vitality to the maximum possible extent as an organization.
Akio Matsui
Executive Officer Kao’s Senior Vice President, Human Capital Development, Global Monozukuri Strategy
Kao’s Human Capital Development Strategies Up until now, we have realized sustainable growth for are implementing human capital development initiatives the company and for society by focusing on solving that are rooted in the Kao Way, and which take as their social issues. In the past few years, society has main pillars the key concepts of Human Capital
undergone dramatic changes, while at the same time Development, Diversity & Inclusion and Building an Kao’s Corporate Strategy the issues affecting society have grown more complex. Environment that Enhances Motivation. Through these To be able to respond effectively to this changing human capital development initiatives, we are providing external environment, there is a real need for human support so that every individual employee can be highly capital that is able to get things done by adopting a motivated and can generate innovation by proactively, flexible mindset that does not allow itself to be boldly challenging themselves, thereby contributing to hidebound by conventional approaches. In order to the future development of both Kao and society as a develop as much of this kind of talent as possible, we whole. Performance in FY2019 Performance Enhancing Corporate Value over the ● Mid- to Long-term Developing next-generation leaders. ● Promoting diversified career paths. Human Capital ● Realizing high levels of specialist Development expertise. ● Encouraging participation by Growth for both all human capital without employees and discrimination. the company. ● Promoting flexible ● Being accepting of diverse work-styles. personalities and values, and cultivating a corporate ethos ● Enhancing labor
that generates vitality. productivity. Corporate Governance
Building an ● Supporting an appropriate Diversity & Inclusion Environment that work-life balance.
46 Human Capital Development Enhances Motivation ● Generating innovation Promoting health management. 51 Finance through the participation Strengthening of diverse employees. motivation and 53 Advanced Digital Technology engagement. 55 Risk and Crisis Management
The Kao Way
45 Kao Integrated Report 2020 Kao Integrated Report 2020 46 Human Capital Development
Human Capital Development Initiatives
Building an Environment That Enhances Motivation What Kao Aims for Items 2015 2016 2017 2018 2019
・Establishment and ・Expansion of next- ・Overhauling initial It is very important to build a working environment in which employees feel motivated, so that every individual employee effective utilization generation human training for new will be filled with enthusiasm and will proactively challenge themselves to take on difficult tasks and to innovate. With of a global human capital development employees. Human capital management (with an expansion of this in mind, we have been working to promote flexible working styles, enhance productivity by making work more Capital system. liberal arts training). efficient and changing attitudes, and provide support so that employees can maintain an appropriate work-life balance. Development Implementation of next-generation leader development training. Additionally, based on the perception that health is not only the foundation of the employee’s personal life, but also an asset for the company and the source of its growth, we encourage and actively support voluntary health promotion Secession planning for the holders of key positions, and promotion of success or development. among our employees. Kao’s
Implementation of LGBT-related e-learning. Monozukuri Strategy
First-stage D&I Promotion Plan (implemented over two years). Second-stage D&I Promotion Plan (implemented over two years).
Implementation of D&I training sessions
・Adoption of real- ・Establishment of ・ Expansion of the childcare, ・Launching ・Inclusion in time captioning the promotion nursing care and family care recruitment for The Valuable for Executive department support system. positions targeted 500*1. Diversity & Officers’ speeches. “Diversity & ・Expansion of sick leave provision. at senior human Inclusion Inclusion.” capital. ・Initiation of LGBT ・Strengthening of support (D&I) awareness-raising. ・Expansion of initiatives to facilitate Kao’s Corporate Strategy maternity and participation by senior human childcare support capital. initiatives. ・ Support for the active ・Launching of the participation of diverse human Employee Survey disabled employees capital, by expanding the supporter system. range of work opportunities In order to build a better organization and a better working available to disabled persons. environment, we implement the Find employee survey on a regular
・Nadeshiko brand ・Platinum Kurumin ・Nadeshiko brand ・Semi-Nadeshiko basis, targeting all Kao Group employees. By converting the survey mark ・24th place in the brand results into numerical data that can be visualized and analyzed, we ・ *2 Awards etc. Thomson Reuters Nikkei WOMAN can verify the strengths and weaknesses of each organizational unit, D&I Index ・Prime Minister’s
( highest-placed Award*3 identify issues, discuss ways for realizing improvement, and draw up in FY2019 Performance enterprise in Japan) improvement plans. Through the implementation and review of
Review of compensation levels (ongoing implementation of compensation in line with company performance). these plans, we are able to implement the Research-Plan, Do, Check, Action (R-PDCA) cycle for organizational and workplace Implementation of the Kao Forum and Employee-Management Meetings (held twice a year, on an ongoing basis), as a venue for dialogue with employees. improvement.
Implementation of the Find employee survey (held on an ongoing basis once every two years, with the survey implemented in the first year and the action plan in the second year). Building an ・Adoption of hourly ・Introduction of ・Formulation of the Kao ・Adoption of a Human Capital Development Environment leave system. mental health Health 2020 mid-term working-from- that Enhances management home system. ・Adoption of health-related plan. We believe that when every individual employee can continue to Motivation flextime system stress checks. ・Expansion of grow by fulfilling their work and contributing to society, this will (with no required flextime system. Corporate Governance core hours). ・Commencement of enable us to realize sustainable growth. We recognize that, in order ban on smoking for Kao to be able to continue to create value for society by during working hours. transforming ourselves to drive change, it is vitally important for ・ ・ ・ ・ ・ Selected as a Selected as a Health Selected as a Health and Selected as a Selected as a each employee to set themselves high goals and to proactively, Health and and Productivity Productivity Management Health and Health and Productivity Management Stock Selection. Productivity Productivity boldly challenge themselves to achieve something new (rather than Awards etc. Management Stock Selection. ・ Awarded a Development Management Management just continuing along the same path), so that they can generate Stock Selection. Bank of Japan, Inc. (DBJ) Stock Selection. Stock Selection. Health Management Rating. innovation. Aiming to draw out the unlimited potential that every employee possesses to generate immense vitality, and utilize this *1 The Valuable 500 is an international initiative aimed at linking disabled people with business enterprises, which was launched at the 2019 World Economic Forum in Davos. vitality to the maximum possible extent, we support employees’ *2 The Nikkei WOMAN award is presented to the company that has done most to promote the advancement and participation of women overall. growth by providing a broad range of opportunities for employees *3 “Leading Companies Where Woman Shine” which is an award organized by the Cabinet Office. to challenge themselves and to learn.
47 Kao Integrated Report 2020 Kao Integrated Report 2020 48 Human Capital Development
Development Program for Next-generation Leaders
Diversity & Inclusion What Kao Aims for In order to realize sustainable growth, it is very important for Kao to strategically develop the next We aim to help create a society in which everyone can generation of talent that will manage our operations participate fully and with enthusiasm, regardless of in the future. For a leader to be able to direct gender, nationality, ethnic background, age or disability, business operations on a global scale, they need to etc. We believe that bringing together talent from possess not only high-level managerial skills, but different backgrounds and with diverse value-schemes also exposure to knowledge in a wide range of to generate creativity through free and open-minded
fields, and the ability to strive for an effective fusion discussion will lead to innovation. Based on this Kao’s of knowledge and wisdom. We have formulated approach, we are actively promoting diversity and
leadership values that leaders should strive to inclusion. Monozukuri Strategy embody and integrate these values with personnel assessment, talent development and promotion Fostering Participation by Diverse Talent decisions. We conduct 360-degree evaluations based on these leadership values as an opportunity In order to generate innovation and address complex appointment based on motivation and ability, our putting for leadership development. Furthermore, we attach social issues, it is vitally important for each individual to in place of a system to support work-life balance and great importance to liberal arts education as a accept one another’s characteristics, leverage their systems that facilitate flexible working styles, and the means of enabling employees to discern the strengths and create synergy. To realize this goal, we building of a work environment in which these systems essential features of each issue, and guide change have adopted a common global framework in line with can be properly utilized, there has been a steady Kao’s Corporate Strategy by responding to problems for which there is no our Guidelines for Human Capital Development, and we increase in the number of female managers at Kao obvious answer, in today’s constantly changing, are promoting, on a worldwide basis, the building of (including our overseas operations), and as of uncertain business environment. workplaces in which employees from many different December 2019 female managers accounted for 29.4% nationalities can work together with strong motivation. of all Kao managers. 15.4% of Kao’s directors and Audit Investing in Education A further point is that female consumers constitute a & Supervisory Board Members are female, and 13 Kao We provide educational programs and career development Education and training expenses per employee large share of the buyers of the cosmetics products, Group companies have a female CEO. opportunities tailored to the individual growth aspirations of each 51,000 yen (FY2019) household goods etc. which constitute our main A further point is that, when it comes to promoting of our diverse employees. In order to develop talent that will drive product lines. By attaching great importance to the universal design, the viewpoint of persons with Total Kao Group Education and Training Expenditure views expressed by female employees at the product disabilities must be taken into account. In line with our growth for Kao and sustainable growth for society, the Kao (actual performance) in FY2019 Performance Group as a whole invests around 1.7 billion yen per year (on a development and marketing stages in our business positioning of ESG-driven management as a core 1.73 billion yen (FY2019) global basis) in human capital development programs. operations, we have been able to achieve growth as a aspect of our business, and with our goal of realizing the manufacturer of consumer goods. As a result of our Kirei Lifestyle, Kao joins The Valuable 500* initiative. efforts to thoroughly implement evaluation and * The Valuable 500 is an international initiative aimed at linking disabled people with business enterprises, which was launched at the 2019 World Economic Forum in Davos.
Percentage of female managers
(percentage) 30 29 27.3 Corporate Governance 25.4 25.1
20
10
0 2016 2017 2018 2019 (Fiscal year)
49 Kao Integrated Report 2020 Kao Integrated Report 2020 50 Finance
Capital Expenditures/M&A
By using EVA to make investment decisions, we What Kao Aims for Trend in Capital Investments While maintaining a stable financial foundation and promote proactive capital expenditures and M&A to maintain business growth at our business locations actively investing in business growth, Kao will continue (Billions of yen) both within and outside Japan. to improve its corporate value and achieve long-term 100.0 In the Consumer Products Business, and 89.9 89.1 90.2 82.8 stakeholder returns. 79.4 particularly in the Human Health Care Business, we 80.0 68.5 have expanded the capacity of our domestic 63.7 Kenichi Yamauchi production bases to respond to demand both in and 60.0
Executive Officer outside Japan, and we have also made proactive 41.9 Kao’s Senior Vice President, Accounting and Finance, Global capital expenditures in elsewhere in Asia, which has 40.0
strong growth potential. In the Chemical Business, we Monozukuri Strategy 20.0 are aiming to reinforce our production infrastructure
and actively investing not only in Asia, but also in the 0 *1 *2 *2 *3 Fiscal year Americas and Europe. 12 13 14 15 16 17 18 19 ( ) Kao’s Financial Foundation Our goal in M&A activity is to obtain outstanding *1 Kao changed its fiscal year end for FY2012 from March 31 to December 31. *2 The Kao Group adopted IFRS in FY2016. Figures for the fiscal year ended Kao is aiming to realize sustainable, profitable growth cash flow have enabled us to maintain high credit technologies and business models, with a particular December 31, 2015 have been recalculated based on IFRS. *3 Excluding right-of-use assets. and to enhance corporate value, by adopting an ESG ratings, and we have been able to respond flexibly to focus on B-to-B business in our business for hair Strategy that seeks to create value over the long term opportunities for investment that can lead to future salons, professional-use products business and the while also taking steps to address social issues, and by growth. Through the adoption of a global managerial Chemical Business, and to build up new assets Kao’s Corporate Strategy making Economic Value Added (EVA®) that is consistent accounting system that makes global earning aimed at expanding and creating synergy with Kao’s with the long-term interests of all stakeholders a key management faster and more efficient, and through the core technologies in line with the ESG Strategy. management matric. proactive implementation of new initiatives such as the Status of Share Repurchases In order to realize further growth, while actively use of Robotic Process Automation (RPA) to enhance Cash Dividends/Share Repurchases promoting our business activities, we also emphasize operational efficiency, we are working hard to boost We place emphasis on steady and continuous cash (Billions of yen) shareholder returns. Besides achieving cash dividend profits. dividends, and in FY2019, achieved cash dividend 100.0 increases for 30 consecutive fiscal years and In regard to the realization of the Kao Group Mid- increases for the 30th consecutive year. Stable growth in Total of 593.8 billion yen
undertaking flexible share repurchases, we have also term Plan 2020 (K20), in FY2019 operating margin was cash flows from operating activities was accompanied in 80.0 FY2019 by an increase in the cash dividend per share to 77.2 implemented efficient fund utilization through effective 14.1% with operating income of 211.7 billion yen, 70.0 in FY2019 Performance 60.0 global cash management, and have maintained a stable breaking the company’s profit record for the 7th 130 yen. With regard to share repurchases aimed at 56.8 financial foundation. Our high profitability and stable consecutive year in a row. ROE was 17.6%. enhancing the company’s capital efficiency, in FY2019 50.0 50.0 50.0 0 0 we implemented 50 billion yen of share repurchases, 40.0 36.7 29.5 30.0 30.0 30.0 bringing the cumulative total to 593.8 billion yen. 28.6 20.0 We have made a commitment to deliver a high 5.0 level of stakeholder returns in the future. We aim to 0 Use of Cash Flow and Shareholder Returns continue to implement cash dividend increases. 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19(Fiscal year) We effectively utilize the stable operating cash flow, generated steadily from an EVA perspective, as shown below. We are aiming for further growth. Performance of Cash Dividends per Share Corporate Governance (yen) 1 0 120
100 Steady and continuous cash Share repurchases and early Investments for future growth 80 dividends repayment of interest-bearing (Capital expenditures, M&A, etc.) (40% payout ratio target) debt including borrowings 60
40
20
0 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19(Fiscal year)
51 Kao Integrated Report 2020 Kao Integrated Report 2020 52 Advanced Digital Technology
FY2019 Main Initiatives in Digital Fields What Kao Aims for