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Morningstar | Yakult's Growth Slowed in China but we Expect a Pickup After New Operations Open in Summer

Research and development in probiotics has laid the foundation for Yakult’s business, primarily comprising beverage products and pharmaceuticals. The flagship products are probiotics drinks marketed under the namesake brand in 38 countries across four continents, making up an estimated almost 80% of group sales and 90% of profits. Expanding the international footprint and enhancing domestic profitability are the two pillars of Yakult’s growth strategy. Organic growth in China and other emerging markets, along with expansion into new geographies, most recently the Middle East and Myanmar, drives top-line growth.Yakult adopts a blended channel strategy, leveraging retailers and a home delivery system supported by a crew of 80,000 “Yakult Ladies,” mostly in Asia and South America. Yakult Ladies act as sales agents and brand ambassadors to promote the health benefits of its probiotic drinks. The adoption of retail or direct-to-consumer distribution largely depends on market size, retail development, and costs of labor from local markets. Home delivery, contributing over 50% of domestic and 40% of overseas beverage sales, has played a crucial role in many overseas markets, including Indonesia, Mexico, and Brazil. However, Yakult chose to accelerate growth in China, its largest overseas market, by leveraging retail expansion, given the massive land areas and the challenge of quickly forming a large salesforce. Rising penetration in lower-tier cities fuels volume growth.Apart from continued investment in probiotics research and brand-building activities supported by evidence-based health benefits, Yakult aims to lift domestic profitability through growth in premium product offerings. It has upped domestic advertisement spending substantially from 2016, in conjunction with a 14%, or JPY 10, price hike for Yakult 400, a premium line of its flagship probiotic drinks exclusive for the home delivery channel, as part of its endeavors to enhance domestic margins and income for the Yakult Ladies. It also rolled out a couple of premium products targeting the C-store channel, in which its presence remains minor, given a lack of product offerings meeting the channel’s demand.