The Right Time for Reform
Back in the 1920s, Shiseido led the domestic cosmetics industry in establishing a then-revolutionary distribution model based on a sales company and a network of independent chain-store outlets. While leaving this model intact, we have in recent years implemented various reforms to address specific needs. For example, in 1996 we ini-tiated a strategy whereby brands are designed in accordance with the characteristics of specific sales channels and allocated accordingly. In 1998, we established our global multibrand strategy whereby we have promoted new brand positioning by integrating our domestic and overseas marketing activities.
  As we move into the 21st century, far-reaching socioeconomic transformations are profoundly altering consumers’ value perceptions. In this context, the need to reconfigure our long-standing distribution model, which is the foundation of our cosmetics business value chain, is increasingly apparent. The time has now come for a full-scale reform of our business system, centering on the Company’s domestic cosmetics business. As well, we must accelerate our overseas market expansion activities. We fully expect that our reform efforts in these areas will more advantageously position the entire Shiseido Group.

Sales-Counter Savvy: Strategic Customer Orientation
The sales counter is the crux of Shiseido’s reform initiative. Two concepts—“customer orientation” and “strategic orientation”—are key to realizing the potential inherent in the sales-counter exchange. To maximize sales of a given product, sales-counter techniques must correspond to the product’s image, and correct information about the product must be effectively communicated. Put simply, Shiseido’s reform initiative focuses primarily on the form and content of information flows at the sales counter, while also making reform provisions at all stages of the product cycle, from R&D and production to distribution and sales. Reform activities are concentrated chiefly in three areas: marketing reform, supply-chain reform, and organizational reform. As an integral part of these reforms, we will install computerized information terminals in the sales counters of all of our chain stores. These will form the infrastructure
effectively linking all stages of the entire product cycle.

Marketing Reform: Firmly Establishing Shiseido as a Prominent “Skin-Care House,” and Sales System Reform
Our marketing reform activities primarily aim to translate our established strengths in skin-care products into a more supportive earnings foundation for the Company. Our ultimate goal is to become the No. 1 company both domestically and overseas in all skin-care categories, including anti-aging and skin-lightening. Specifically, we will firmly establish Shiseido as a prominent “Skin-Care House” by pursuing progress in such key areas as skin-care-oriented line positioning, R&D, advertising and promotion, sales-counter activities, and customer services. In addition, our sales system reform will encourage both salespersons and chain stores to make greater contri-butions to over-the-counter sales.

Supply-Chain Reform: Inventory Level Optimization
By preventing stock maldistribution and depletion, inventory levels can be optimized and inventory turnover improved. These are key factors in raising the profitability of our cosmetics business. In April 2001, we established the Logistics Division, which is charged with ensuring seamless materials procurement, production, and product supply via a centralized inventory management system based on sales data from our retail outlets. In October 2002, we will consolidate five domestic cosmetics production plants into an integrated production system to be managed by a single production subsidiary. Through more flexible production management, we will seek to raise
the agility and efficiency of our production system.