South Korea’s beauty industry had enjoyed a blush of renewed optimism that its year-long China nightmare was coming to an end as the two countries looked to be moving past a diplomatic stand-off over a US missile shield.
The rosier outlook encouraged makers of beauty products to ramp up marketing to attract Chinese consumers, eyeing a rebound in sales after being hit by Beijing’s economic blockade against South Korean products.
But they face a battle to regain lost ground in China’s $53bn beauty market with the ascent of local brands threatening their competitiveness. And it is a trend that is likely to continue as tensions between Seoul and Beijing rise once again.
As South Korean companies were grappling with the commercial fallout in China of a political spat over Seoul’s deployment of the US-built Thaad missile shield, Chinese groups took the opportunity to grab market share by poaching Korean executives, copying hit Korean products and using Korean celebrities for product promotions.
While South Korean brands are still considered trendsetters in the region, Chinese rivals are rapidly gaining ground even in the mid-range to premium segment in which Korea has traditionally been strong.
“Chinese companies have caught up so fast in terms of design and quality, moving up the value chain. Korean companies will now have to target more of the premium segment for further growth in China,” says Sohn Sung-min at Foundation of Korea Cosmetic Industry Institute.
China’s beauty market is projected to grow to nearly $62bn by 2020, according to research firm Euromonitor, as demand among young and affluent consumers picks up.
South Korean brands have enjoyed broad popularity in Asia as the appeal of Korean pop music and television gives its consumer goods cachet.
Yet some leading Chinese brands from Shanghai Jahwa United, Shanghai Pehchaolin Daily Chemical and Jala Group are now outselling Korean ones, aided by heavy spending on research and development, and consumers’ preference for herbal and traditional Chinese medicine.
They also have benefited from government backing, with Beijing keen to nurture homegrown brands and protect local industries.
“Cosmetics do not require huge technology. It is more of a battle for brand and marketing,” says Lee Ji-yong, analyst at Shinhan Investment. “The emerging Chinese brands will make it difficult for Korean companies to recover sales in the low- to mid-priced segment even after this Thaad-related backlash eases.”
Exports of South Korean cosmetics to China rose 20 per cent to $1.3bn in the first nine months of last year, with China taking about a third of South Korea’s cosmetics exports of $3.6bn.
But that was a sharp slowdown from the 66 per cent average annual growth of the previous five years, according to government data.
Beijing’s bans on group tours to South Korea have taken a toll on sales. South Korea’s 21 listed cosmetics groups saw a 5.3 per cent fall in January-September sales, with operating profits at AmorePacific and smaller player Clio slumping 30 per cent and 70 per cent, respectively, in the first nine months.
But industry experts remain optimistic. “Despite the diplomatic tension, Chinese preference for Korean beauty products remains intact especially in the luxury segment,” says Yang Ji-hye, analyst at Meritz Securities. “Technology and quality are important but emotional appeal and brand power count more in this market.”
Carver Korea, which is the country’s third-largest cosmetics company and was acquired in September by Unilever, saw sales of its main AHC skincare brand more than triple last month on Singles Day, the Chinese version of Black Friday.
Adverts on Alibaba’s Taobao site featuring a popular South Korean actress promoting products signalled an easing of unofficial restrictions on Korean culture in Chinese media.
However, analysts warn against overreliance on soft power, arguing that the image of “ Korean cool” will not last for ever.
“Even Chinese consumers are very globalised these days. If you do well just in Asia, this may not be enough to sustain growth in the long term. You need to build a global brand,” says Cara Song at Nomura.
Recognising the need to reduce reliance on China, some South Korean companies are stepping up their push into south-east Asia, the Middle East and western countries.
AmorePacific, for instance, recently introduced the high-end, herbal medicine-based brand Sulwhasoo to France and launched its Innisfree range, highlighting natural ingredients, in the US in September.
“Local Chinese companies are growing so fast, moving from the mass market to the prestige market now on the back of improving quality,” says Ms Song. “Differentiation with exciting new product launches will be the key for Korean players to stay ahead in this highly competitive market driven by young, trendy consumers.”
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