TOKYO — Japanese baby product maker Pigeon will launch a direct-to-consumer scheme in China to gain back an important segment it lost because of coronavirus travel restrictions.
Chinese tourists who once drove the company’s sales have been stuck at home as the pandemic has closed borders across the world. The decision to provide products directly to one of its most loyal customer bases is part of a longer-term plan, said Tadashi Itakura, a company director.
“We are planning for a potential second and third wave of the pandemic,” Itakura said last week.
Pigeon projects group net profit to end up falling for the third straight year to as low as 9.6 billion yen ($89.9 million) in 2020 — the equivalent of a 17% drop — assuming no inbound demand for the rest of the year. Usually, about 20% of its domestic sales come from foreign travelers visiting Japan.
Part of the gap will be filled through increased sales of baby wipes and bottle sterilizers, which many consumers especially in Japan have turned to amid a shortage of cleaning wipes and hand sanitizer. But this will likely only be a temporary fix until supply chains for the latter products catch up to demand.
To lift sales over the longer term, Pigeon plans to start selling its products directly to consumers in China, where 60% of the company’s profits come from.
Pigeon is launching a new line of luxury baby skin care, Ssence, in China this month. Because these products contain no preservatives, they need to get from the factory floor to consumers as quickly as possible — meaning they will be made to order and shipped directly to customers.
This could prove a turning point in Pigeon’s e-commerce strategy. The company is the top seller of baby products on Chinese e-commerce platforms. But promoting products on these platforms through frequent sales can be expensive. Pigeon was also asked to pay more to promote its products by No. 2 e-retailer JD.com at the end of 2018.
Pigeon’s expenses equaled 33.7% of revenue for the 11 months through December 2019, up from 30.3% for the year through January 2019. Pigeon could cut back expenses in a direct-to-consumer model, which could help boost its margin.
Pigeon has spent roughly 20 years building its brand in China. It is now the biggest player in the country with a 35% market share after using marketing strategies including sending child care consultants to Chinese hospitals. Pigeon is also boosted by the World Health Organization’s strict standards on baby product ads, which are barriers to local rivals.
Given these advantages, some market watchers expect Pigeon’s profits to start growing in the April-June quarter and beyond.
“Pigeon’s competitiveness and demand for its products won’t change even under the new normal,” said Wakako Sato at Mitsubishi UFJ Morgan Stanley Securities. She expects April-June net profit to come to 3.8 billion yen, an 11% increase from the May-July quarter in 2019.