AmorePacific, LG H&H struggle to rebound in Chinese market

By Kim Jae-heun

AmorePacific Chairman Suh Kyung-bae

AmorePacific and LG Household & Health Care (LG H&H), Korea's two largest cosmetics makers, have been struggling to rebound in the Chinese market, as consumers there continue to shun Korean-made beauty products, according to industry analysts Thursday.

The analysts said that the two Korean firms have been losing market shares steadily to Chinese brands, which have improved product quality and design rapidly with government support, adding that the ongoing consumption slump there has been affecting their respective bottom lines negatively. AmorePacific and LG H&H also failed to win loyalty from Chinese consumers who continue to prefer L'Oreal, Chanel and other Western brands over Korean ones.

The declining popularity of Korean cosmetics in China has affected LG H&H's sales and operating profit to drop by 3.4 percent and 5.9 percent, respectively, in the fourth quarter of last year.

AmorePacific has not yet revealed its performance, but local securities firms expect its operating profit to decline by more than 10 percent compared to the consensus they made previously for the same period.

“In the fourth quarter of 2021, AmorePacific is expected to achieve a turnaround with an operating profit of 40.6 billion won year-on-year. But it is not close to the 46 billion won that the market expected,” IBK Securities researcher Ahn Ji-young said. “AmorePacific's effort to cut 85 billion won in labor costs helped improve its operating profit, but this is only a temporary phase.”

LG Household & Health Care CEO Cha Suk-yong

Various factors are contributing to the downturn of the two companies' overseas business, including the prolonged COVID-19 pandemic and shrunken consumer confidence in China affected by the sluggish real estate market there.

AmorePacific's sales coming from China take up more than 70 percent of its revenue created in Asia, which accounts for 94.5 percent of the cosmetic firm's overall overseas business. LG H&H's portfolio is similar to AmorePacific's.

The emergence of Chinese cosmetic firms supported by their government also weakened Korean brands' competency in the market there, where global luxury firms like L'Oreal and Estee Lauder showed solid performance to push AmorePacific and LG H&H out of the top 10 list of basic skincare brands in China in 2021, according to Euromonitor.

China is the largest cosmetic market for the two Korean companies and they must achieve a rebound there.

“Last year was hard for us. Daigou (surrogate shoppers from China) have been asking for very high discounts on our luxury brand products. We could not go along with that because it would tarnish our brand image. We are still working on a solution to this problem,” an AmorePacific official said.

Meanwhile, LG H&H plans to strengthen its marketing strategy for the already well-established brand The History of Whoo as well as other premium brands like Su:m and O Hui. It will also boost its sales through online channels.

At the same time, LG H&H hopes to disperse its dependence on China by targeting the North American market. Its CEO Cha Suk-yong said the company will expand its business in the United States.

“In order to become a true global luxury cosmetic company, it is necessary to continue expanding our business in North America, the world's largest market. Our luxury brands will be a key player in the scheme,” Cha said. Currently, LG H&H's cosmetics sales coming from America take up 20 percent of its overall international revenue.

AmorePacific will target Chinese customers around the world on e-commerce platforms mainly with its luxury beauty brand Sulwhasoo. It will also reduce the number of its budget cosmetics brand Innisfree's stores in China from 280 to 140 by the end of this year.

“We plan to expand our market dominance in the Chinese luxury cosmetics market with Sulwhasoo, while improving our sales coming from local social media platforms like TikTok and Kuaishou to the 30 percent range,” an AmorePacific official said.