Kao — Company History

A founding that set the price of Japanese toilet soap from the buying side

In June 1887 the 24-year-old Nagase Tomiro (長瀬富郎) opened Nagase Shoten (長瀬商店), a dealer in imported Western sundries, at Bakurocho in the Nihonbashi ward of Tokyo. He came from a sake-brewing family in Nakatsugawa, Gifu prefecture, and was in a position to find the capital to start. Soap-making technique in Japan was still immature at the time and the quality poor; every good toilet soap came from abroad. The market was split in two — high-grade imports at one end, crudely made domestic bars from small workshops at the other — and a wide gap in price and quality lay between them. Selling Western paper and imported soap at retail, Nagase came to grasp that gap from both sides of the counter, buying and selling. He entered the market from distribution rather than manufacturing, taking the order of confirming demand and how quality was judged before stepping into production.

In October 1890 Nagase manufactured and put on sale his own high-grade domestic soap, Kao Soap (花王石鹸), in a paulownia-wood box. The trademark was conceived from a moon-and-star device he had seen on a foreign pencil, the moon standing as a symbol of beauty and cleanliness. The price was 12 sen a cake, against the three or four sen of an ordinary domestic soap of the day — the price of an import. On the day of launch he placed an agent in Osaka to open the Kansai market and used newspaper advertising, treating the whole country as his territory from the very start. In an age when Tokyo manufacturers took eastern Japan and Osaka manufacturers the west as their respective markets, this way of selling had no precedent. By reading demand first and stepping into manufacturing second, an unknown shopkeeper turned into a soap manufacturer.

Three decades of taking each process in-house

After Kao Soap went on sale, Nagase Shoten took the manufacturing processes into the firm one at a time. Steam saponification was adopted in 1902, and in 1911 a process for recovering glycerine from spent soap lye was added. In 1920 an automatic stamping belt system raised the speed of volume production, and in 1924 oil-pressing and hydrogenation equipment gave the firm its first hold on its own raw materials. By 1928 it was making pure soap from fish oil and hardened oil, and edible fats for confectionery from coconut oil. Each of these was a pioneering process in the history of the oils, fats and soap industry, and Nagase Shoten moved from being merely a soap manufacturer to a company leading Japan's oleochemical industry.

In 1911 Nagase Tomiro died of illness, and 24 years after its founding Nagase Shoten lost its founder. In the same year the firm was reorganised as a limited partnership, moving a personal trade into an organised business. In November 1922 it built a plant dedicated to volume soap production at Azuma-cho on the Sumida river, later the Tokyo works. Production changed in form, from a workshop close to handwork to a factory equipped for volume. In May 1925 Kao Soap Co., Nagase Shokai (花王石鹸株式会社長瀬商会) was established, moving the business from a sole proprietorship into a joint-stock company. Thirty-eight years after its founding it had raw-material processes, a volume plant and a corporate form in place, and stood where it could decide its future capital spending as a company.

Self-sufficiency in oleochemicals, secured by spinning the raw-material arm into a separate company

In March 1935 Kao Soap Co., Nagase Shokai separated its Azuma manufacturing works and founded Dai-Nippon Yushi (大日本油脂). Selling and making soap were divided between different legal entities, so that raw materials and production could be run as an independent company. In May 1940 it established Nihon Yuki (日本有機) at Bakurocho, Nihonbashi with capital of ¥2.5 million, completing the Sakata plant in September of the same year. Nihon Yuki was a raw-material company processing oils and fats into surfactants and industrial chemicals — the upstream of soap, gathered into a new company. In December 1944 the Wakayama plant of Dai-Nippon Yushi was completed, taking on, at the government's request, the industrialisation of a technique for synthesising aviation lubricant from animal and vegetable oils.

The higher-alcohol and oleochemical technique accumulated at the wartime Wakayama plant became the raw-material footing for synthetic detergent after the war. The plant was extended several times thereafter, and by 1968 it counted as one of the four largest higher-alcohol plants in the world. Dividing the business into three legal entities — a sales company, a manufacturing company and a raw-material company — was also a posture for keeping production going under wartime controls and the rationing of materials. But having three companies each holding their own capital and plant left the task of unifying the business as one for the post-war reconstruction years. Running raw materials through to finished product inside a single company became the chain of mergers that ran from 1946 to 1954.

Unifying the business by a three-way merger, and the 1949 listing

In October 1946 Kao Soap Co., Nagase Shokai changed its trade name to Kao Co. In May 1949 Nihon Yuki renamed itself Kao Soap Co., Ltd. and at the same time listed its shares on the First Section of the Tokyo Stock Exchange. The Kao Soap name thus passed to what had been the raw-material company, while the company selling soap traded as Kao Co. In December of that same year, 1949, Dai-Nippon Yushi and Kao Co. merged to become Kao Yushi (花王油脂), bringing manufacturing and selling together in one legal entity. One step remained, the union with the raw-material company: in August 1954 Kao Soap Co., Ltd. absorbed Kao Yushi.

With the three-way merger complete, Kao Soap was a unified company with capital of $538,889 (¥194m) and three plants. Fukushima Masao (福島正雄), who came from Keidanren, the federation of economic organisations, became president and led the company for fourteen years, until May 1968. Its output of toilet soap ranked second in the industry in 1955, and its products ran well beyond soap to detergents, processed oils and fats, chemicals for the textile industry, surfactants and plasticisers. It followed a policy of retaining profit inside the company and turning it into investment, sustaining capital spending of more than $13.9M (¥5bn) over several years with no outside borrowing. Holding raw materials through to finished product inside one company gave the switch to synthetic detergent that followed its footing in plant and equipment.

Wonderful, and the Wakayama line that settled what Kao made

In 1951 Kao Soap launched Wonderful (ワンダフル), a powdered synthetic detergent. It was among the first companies in post-war Japan to bring a synthetic detergent to market, a product timed to the years when household laundry was moving from hand-washing to machines. Demand for synthetic detergent then grew at a pace of around 50 per cent a year and became the mainstream household cleaning agent in place of soap. The surfactant technique built up since Nihon Yuki transferred across directly, and both product development and raw-material supply were completed inside the company. Because this came immediately after raw materials, manufacturing and selling had been gathered into one company, detergent grew from trial production into a mainstay within a few years. Making its own raw materials also left it more room to move prices in step with its competitors.

In December 1957 a plant dedicated to synthetic detergent was completed within the grounds of the Wakayama works. The investment in the dedicated plant came to about $2.1M (¥750m); instead of making detergent on equipment shared with soap, a new volume line was laid to run detergent alone. The Wakayama works had equipment for synthesising higher alcohols from animal and vegetable oils, so raw material and finished detergent could be run through the same site. In March 1960 the shares were also listed on the First Section of the Osaka Stock Exchange, widening the window for raising capital-spending funds. The Kawasaki plant was completed in March 1963, giving four plants — Tokyo, Sakata, Wakayama and Kawasaki — making detergent and oleochemical products. In products and in plant alike, the mainstay had changed from soap to detergent.

A decade-long distribution reform: cutting out the wholesalers to deal with retailers directly

In 1964 Kao Soap began a reform that switched to distribution without wholesalers, signing resale contracts with some 270,000 retail shops across the country. Maruta Yoshio (丸田芳郎), then vice-president, led it from the front, building a structure in which the route to the shop counter was held from Kao's side. Under wholesaler distribution it took time for prices and stock movements at the counter to reach the company, and when detergent was made a supermarket loss-leader there was no time to respond. Even as detergent demand grew at 50 per cent a year the wholesalers were not accumulating capital, and Maruta judged that the distribution network had to be modernised against the coming entry of foreign capital. He drew up a plan to consolidate the 600 or so wholesalers, large and small, into 150 sales companies handling Kao products exclusively.

The sales companies — hansha (販社) — were wholesalers dealing in Kao products alone, set up district by district with joint capital from the wholesalers themselves; the work began in 1966 and by 1974 there were 99 of them nationwide. A wholesaler that did not invest could not handle Kao products, and one that took part could sell nothing but Kao products, so almost no independence remained on the wholesalers' side. When the plan was announced, 200 wholesalers in Tokyo formed a council to crush the sales companies (販社粉砕協議会), and the wholesale trade turned fiercely against it. The disruption of the switch reached the results as well: in 1971 Kao Soap surrendered the top share in detergent to Lion Fat & Oil (ライオン油脂). Even so Kao Soap did not stop rebuilding the route, and across 1972 and 1973 it took back first place in the detergent market.

Its domestic detergent share fell from 40.1 per cent in the year to March 1973 to 37.4 per cent in the year to March 1975, then recovered to 42.4 per cent by the year to March 1978. Over the same period P&G Japan grew from 1.9 per cent to 11.6 per cent, and Kao Soap still held first place. After the first oil shock Lion's prices collapsed under P&G's discounting, whereas Kao's own prices held far better thanks to sales companies that handled Kao products alone. When detergent and soap came off resale price maintenance in 1974, Kao products, whose stock was managed through the hansha route, did not fall in price. By 1978 about 60 per cent of all its products reached retail shops directly by way of 84 sales companies nationwide, a route both thicker and shorter than that of rivals who still went through wholesalers. Distribution costs ran at 7.84 per cent for Kao against 11.61 per cent for Lion, and after head office, plants and sales companies were put online from 1977 stock fell from 1.4 months to 0.9 months, freeing up some $29.9M (¥6bn) of interest.

¥120bn directed into integrated production, from raw material to finished goods

Over the three years from the year ended March 1978, Kao Soap carried out capital spending totalling $597M (¥120bn). In August 1979 president Maruta Yoshio stated plainly that the figure for that year would be $217.4M (¥50bn) and that investment and lending over three years would run to ¥120bn–130bn, with depreciation expected to reach ¥60bn over the three years. The sequence was to come through the depreciation with a stronger constitution and then go out into the European and American markets: profit earned at home was turned to plant and research rather than held back for defence. In the year to March 1978 sales were $929.4M (¥187bn) and ordinary profit $36.8M (¥7bn), a third consecutive year of higher sales and profits, with ordinary profit about seven times that of Lion Fat & Oil. The centrepieces of the investment were a new plant at Kashima in Ibaraki prefecture, expanded fatty-acid and higher-alcohol capacity at Wakayama, and a coconut-oil business in the Philippines.

The investment locked in an integrated production system running from the refining of coconut oil through to the finished product. Fatty-acid capacity rose from 50,000 to 120,000 tonnes a year and higher alcohols from 20,000 to 40,000 tonnes, with capacity for fatty amines and surfactants raised as well. The Kashima plant was completed in April 1980, and in the Philippines, Pilipinas Kao was established in January 1977 to handle chemicals made from coconut oil. Vice-president Ito Katsuro (伊東克郎) described the programme as capital spending on which the company's fate depended if it was to survive as a world toiletry company in the twenty-first century. The Kyushu plant was to be all but unmanned from packaging through to the process lines during 1980, running automatically 24 hours a day and 365 days a year, and the 500 to 600 people freed by the rationalisation were moved to the research laboratories.

Making everything from the raw material upward produced goods outside soap and detergent as well. The Wakayama laboratory developed a polymer absorbent, Wonder Gel (ワンダー・ジェール), and the sanitary product built on it, Laurier (ロリエ), went on sale nationwide from May 1980. Laurier took a share of 24 to 25 per cent within two years, second in the industry behind Unicharm. Sofina (ソフィーナ), a prestige cosmetics line born of emulsification technique using surfactants, went on test sale in Shizuoka prefecture from October 1980 and nationwide in the autumn of 1982. The same absorbent technology produced the Merries (メリーズ) disposable nappy in 1983, and in 1987 came Attack (アタック), a compact laundry detergent. In 1985 cosmetics sales companies were set up at nine locations around the country to sell cosmetics nationwide, and in the same year the trade name was changed from Kao Soap Co., Ltd. to Kao Corporation.

Growing information media to ¥80bn, and walking away in 1998

What took Kao into information recording media was the expansion of basic research that president Maruta Yoshio set out in 1980. The floppy disk came out of the applied-physics laboratory, and when it went on sale in Japan in 1985 there were voices that doubted a detergent maker's entry. The problem of dispersing magnetic powder evenly was solved with surfactant technique, and the business was grown mainly on original-equipment manufacture abroad. In May 1986 Kao acquired Didak Manufacturing of Canada and entered information-related business in earnest; by 1991 worldwide sales had reached a scale of about $185.9M (¥25bn). It was on course to lead in Canada and rank high in the United States, and as a transfer of detergent technology into another industry it was producing results.

Its main European and American markets then flattened, and it had no choice but to shift its selling to the domestic market. But unit prices at home were falling hard — a disk that had sold for ¥300 five years earlier was down to the ¥130s — and some fifteen companies were crowded into the market. The information business handled media alone, with neither hardware nor software, and so was pushed about by every change in the market. Ten years of expansion took sales to about $611.2M (¥80bn) at their peak, but there was no road to a general information industry. In 1998 president Goto Takuya (後藤卓也) decided on a complete withdrawal from the information business, defining personal care and household products as Kao's core businesses and gathering resources there. It left information-related business in March 1999, and profits continued to rise after the withdrawal, with consolidated ordinary profit at a record high.

Goto took the withdrawal to be the responsibility of top management and, to mark the point, demoted some directors and cut their bonuses. The bonus cuts were not applied evenly: some executives lost a great deal and others almost nothing, and those covered were all the representative directors and the director in charge of the information business. Around the same time as the withdrawal, Kao was buying production and sales bases in Europe and America. It acquired Andrew Jergens of the United States in 1988 and Goldwell of West Germany in May 1989, gaining bases in hair care and skin care. At home it revised its distribution policy in 1993, putting about 75 per cent of household products through the sales-company route while also using shared distribution centres and wholesalers designated as agents (代行店) to deliver to small and medium-sized retailers. In 1998 P&G's Joy, marketed on the claim that it could disinfect the sponge, took a large share of the dishwashing detergent market from Kao and broke the near-monopoly it had held.

Completing the union of making and selling, and a yardstick that measures against the cost of capital

In 1999 the eight sales companies that had handled household products in the various regions merged, and Kao Hanbai (花王販売) was founded. The distribution reform that began with the resale contracts of 1964 reached here a provisional completion, as a single body of making and selling. In July 2004 Kao Hanbai was made a wholly owned subsidiary through a share exchange, and in April 2007 it was merged with Kao Cosmetics Sales to become Kao Customer Marketing. On the foundation of a distribution network that held demand, what was needed next was a mechanism for measuring how much capital to direct to what. Kao had run product-by-product profit management since the mid-1960s, and from 1986 had continued a Total Cost Reduction activity that pursued cost savings across the whole company.

In April 1999, under president Goto Takuya, Kao became the first operating company in Japan to adopt EVA as a management indicator. It is a measure that gauges a business by the profit left after deducting the cost of capital, and the second company to follow was Sony. Investment decisions were switched to a system judged by movements in EVA, and the capital efficiency of each business could be set against the others on the same scale and argued out. Under this yardstick Kao recorded 22 consecutive years of higher consolidated profit from the 1981 financial year and 12 consecutive years of dividend increases. The Total Cost Reduction activity produced cost savings of around $87.8M (¥10bn) a year, and the operating margin held at about 13 to 14 per cent. Goto said that the adoption of EVA raised the tension in the organisation, and named a sound sense of crisis and a refusal to be satisfied with the present as the driving forces of growth.

In 2002 Kao made a run of acquisitions. In March it acquired KMS Research, an American maker supplying hair salons, through its German subsidiary Goldwell, and in September it bought John Frieda, the American prestige hair-care maker, for about $151.7M (¥19bn). John Frieda's annual sales were around $159.6M (¥20bn) and those of KMS Research a little over $39.9M (¥5bn). In June it established Kao (China) Holding Co. as a holding company bundling its Chinese subsidiaries. The year before, in 2001, it had contested the acquisition of the American hair-care group Clairol and lost, bidding $4.5B (¥550bn) against P&G's $5.0B (¥610bn). In July 2005 it bought Molton Brown of the United Kingdom for $308.7M (¥34bn), building up its European and American channels through small acquisitions.

The ¥410bn Kanebo acquisition and a ten-year integration

In December 2005 Kao announced that it would take full ownership of Kanebo Cosmetics, and completed the acquisition in January 2006. It put in about $3.7B (¥410bn) in enterprise value, moving from fourth to second in domestic cosmetics with a share of roughly 12 per cent. The largest maker of detergents and household goods, Kao was a late entrant that had stayed in fourth place in cosmetics, unable to get inside the department-store and specialty-shop counter-selling networks held by Shiseido and Kanebo. Kao was strong in mass retailers and Kanebo in specialty shops, so the two could complement each other's channels, and the design adopted at first preserved Kanebo's managerial independence and kept both brands side by side. Under the burden of the acquisition, the run of 24 consecutive years of higher ordinary profit came to an end in the year to March 2006.

Operating profit in the cosmetics business fell from $46.3M (¥5bn) in the year to March 2006 to $4.3M (¥500m) in the year to March 2007. Even in 2010 the Kanebo acquisition was still seen as not having produced the results intended. In 2013 consumers using a Kanebo skin-whitening cosmetic reported vitiligo, a blotchy whitening of the skin, and the products were recalled voluntarily. The number of people who came forward with damage reached 19,584 by the end of April 2016, and the cost of the recall and of compensation turned the result into a net loss. Kao took research and production out of Kanebo and integrated them in 2014, and the integration of the sales companies came exactly ten years after the acquisition, in January 2016. The cosmetics business posted an operating loss of $177.3M (¥17bn) in the year to December 2013, and the recovery of the purchase price slipped well behind what had first been assumed.

In the year to December 2017 sales were $13.3B (¥1.49tn) and operating profit $1.8B (¥205bn) — the first time since the founding that operating profit had passed ¥200bn. Even so the operating margin of the domestic cosmetics business was only 2.1 per cent, poor beside the 8 to 15 per cent of Shiseido, Kosé and Pola Orbis. President Sawada Michitaka (澤田道隆) looked back and said the company should have done more to raise the strength of the brands after buying them. In January 2018 Kao Group Customer Marketing absorbed Kao Customer Marketing and Kanebo Cosmetics Sales, bringing the selling window into one. Twelve years were spent bringing research, production and selling over to the Kao side, and the presidency of Kanebo Cosmetics went to men from Kao for two terms in succession.

Swapping in ROIC, and proposals from an activist shareholder

In 2018 Kao acquired Oribe Hair Care and Washing Systems in the United States, and in November 2023 it acquired Bondi Sands, an Australian owner of sun-care brands. It reworked the way it assembled its overseas business, from exporting products developed in Japan to taking in, by acquisition, brands already established locally. Sawada Michitaka recast the response to environmental and social questions not as a cost but as investment that widened the field of business, and set out targets for 2030 of ¥2.5 trillion in sales, a 17 per cent operating margin and a 20 per cent return on equity. By the latter half of the 2010s EVA had become hard to apply to long-horizon investment such as overseas expansion and research and development, where the return takes time. In its medium-term management plan K27 Kao replaced EVA with ROIC, and set a target of raising ROIC — 9.2 per cent in the year to December 2024 — above 11 per cent by 2027.

Operating profit for the year to December 2023 fell 45.5 per cent from the previous year to $427M (¥60bn), and net profit fell 49 per cent to $311.7M (¥44bn). The cosmetics business swung to an operating loss of $38.4M (¥5bn), and the China business stalled over the issue of the treated-water release. Kao (Hefei) Co., set up in April 2011 for local production of disposable nappies, was liquidated in December 2024. In April 2024 Oasis Management, the Hong Kong investment fund, disclosed that it had acquired about 3 per cent of Kao's shares, and demanded that underperforming products be cleared away and shareholder returns strengthened. It pointed out that Kao's share price had fallen about 23 per cent since 2021 and compared poorly with its peers. Oasis raised its holding above 5 per cent in December 2024 and nominated candidates for outside director, and by January 2025 it held 6.6 per cent and was the fourth-largest shareholder. In that same January it put forward four shareholder proposals, including the election of five outside directors, an increase in remuneration and the introduction of share-based pay.

On 14 February 2025 Kao's board opposed all four proposals and declared that it would raise corporate value by carrying out the K27 medium-term management plan. At the annual general meeting on 21 March every proposal was voted down: support for the director candidates ran from a high of 27.34 per cent to a low of 11.25 per cent, the increase in remuneration drew 28.96 per cent and share-based pay 29.19 per cent, none of them reaching three in ten. Shareholders attending numbered 478, 60 per cent more than the year before, and the meeting ran to three hours. Core operating profit for the year to December 2024 rose 27.8 per cent from the previous year to $967.7M (¥147bn), and the operating margin returned to 9.0 per cent. Even so Oasis raised its holding above 12 per cent and in March 2026 requested an extraordinary general meeting to call for an independent investigation into the procurement of palm oil and of paper and pulp. At the extraordinary meeting of 30 April 2026 this proposal too was voted down with about 30 per cent in favour, and the pressure from the capital market continues.