Singers and actresses sprinkle stardust on Korean cosmetics

November 25, 2013 7:23 am

Singers and actresses sprinkle stardust on Korean cosmetics

By Song Jung-a in Seoul

Thirtysomething tourist Patchalin Vongratanakunton is a big fan of Korean cosmetics. On her first trip to Seoul, she is spending $120 – more than a week’s average salary in Thailand, her home country – on Laneige creams by AmorePacific, South Korea’s biggest cosmetics group. “I love skincare products made in Korea,” she says at a crowded duty-free shop in central Seoul. “They fit Asian skin well, while European brands are for Europeans.”Young Asian women like Ms Vongratanakunton are flocking to Seoul to buy creams and foundations sprinkled with the stardust of Korean actresses and singers from the films, soap operas and music that have taken Asia by storm over the past decade.

Encouraged by this boom in South Korean pop culture,cosmetics companies are trying to wrest market share from western rivals such as L’Oréal. Their sales outside Korea are rising more than 30 per cent a year, pushing cosmetics exports to about $1.1bn last year and beating imports for the first time, according to the Korea Pharmaceutical Traders Association.

AmorePacific’s overseas sales jumped 35 per cent last year to Won443bn, with China accounting for 60 per cent of those. Its big domestic rival LG Household and Health Care posted a 56 per cent jump to Won446bn.

Using pop stars in their television advertising has boosted the recognition of Korean brands in China, driving sales growth.

“Growth in the domestic market is slowing as the market becomes increasingly mature,” says Lee Chang-kyoo, head of AmorePacific’s strategic planning department. “Fortunately, cosmetics consumption is increasing rapidly in China and southeast Asia, helping us make up for slowing domestic growth.”

The dearth of growth in the home market – which is among the world’s most rapidly ageing – has taken its toll on companies’ share prices. Shares of AmorePacific, 36 per cent-owned by foreign investors, has fallen 24 per cent so far this year, while those of LG H&H and Able C&C have fallen 17 per cent and 57 per cent respectively.

AmorePacific hopes to generate Won5tn ($ of global sales by 2020, with half coming from overseas markets, compared with just 16 per cent at present. China is at the heart of its overseas expansion as mid-priced lotions and creams from its flagship brands – Laneige and Mamonde – become increasingly popular.

Korean players are doing particularly well in the low- to mid-end segment, outpacing some western rivals, as their product quality is good relative to prices

– Yang Ji-hye, Kyobo Securities

LG H&H is also making rapid inroads using local partners. The Face Shop, the low-priced brand at the forefront of its overseas expansion, has a network of 1,500 outlets in 26 countries, driven mostly by alliances with China’s Fo Shan, Hong Kong’s Color Mix and Japan’s Aeon.

In Japan, LG H&H acquired local cosmetics firm Ginza Stefany and health foodmaker Everlife last year to gain a foothold in the world’s second-largest cosmetics market.

Able C&C, known for its low-cost Missha brand, generated 20 per cent of its Won452bn sales last year in overseas markets, as its snail cream – containing snail extract – and BB cream became huge hits in the region.

BB cream, an all-in-one beauty balm that combines moisturiser with light foundation, highlights the growing role of South Korea and neighbouring Japan in the world of cosmetics.

The cream was created as a result of demand from schoolgirls eager to use cosmetics without flouting “no make-up’” rules and began life in Asia. International groups such as L’Oréal then introduced it to western markets, where it quickly proved equally popular – and not just with schoolgirls.

Able C&C now has 1,200 shops abroad, including 570 in China, which account for 40 per cent of its overseas sales.

“Korean players are doing particularly well in the low- to mid-end segment, outpacing some western rivals, as their product quality is good relative to prices,” says Yang Ji-hye, analyst at Kyobo Securities.

Following their success in mid-priced skincare products, AmorePacific and LG H&H are now trying to move upmarket, using traditional herbal medicines under the brand names of Sulwhasoo – available through high-end US retailers, such as Bergdorf Goodman – and Hu respectively.

They are also increasing production capacity overseas to meet demand. LG has five overseas plants, two in China and three in Vietnam, while AmorePacific is building a research centre in Shanghai.

As manufacturing conglomerates’ contribution to the economy decreases, South Korea is trying to boost creative industries such as its pop music and smaller companies

However, Korean companies are still finding their feet in China compared with the global brands. AmorePacific’s market share in China is less than 3 per cent, compared with L’Oréal’s 16.8 per cent, Shiseido’s 10.3 per cent andProcter & Gamble’s 9.8 per cent, according to Euromonitor.

It is also struggling to boost profitability after its overseas business suffered an operating loss due to heavy and increasing upfront investments. In China, the company posted operating profit margin of just 4.2 per cent, compared with its global rivals’ average of 13 per cent, according to Mirae Asset.

Not all of these rivals are on an upwards trajectory, however. Shiseido’s sales in China dipped slightly in the past fiscal year, partly due to political tensions between China and Japan which resulted in some Chinese buying fewer Japanese goods.

By contrast, South Korean companies are gaining share in Asia. But they face challenges replicating this success in the more mature markets of the US and Europe.

“They were able to overcome their weak brand in Asia, helped by the positive effects of their pop culture, but they will face an uphill battle in other regions,” says Park Yoo-mi, an analyst at Mirae Asset.