We have a new series of content starting this November 2017. Aside from Podcast, we will be writing about companies that we find interesting. For the first article, we are looking at AmorePacific, a top cosmetics and skin care company in Asia and determined to make its global footprint.
AmorePacific: Toughing it out with THAAD
Summary. AmorePacific’s strong financial and liquidity position, innovative product rollouts such as cushion foundations, sleeping packs, and snail slime, strong R&D capabilities, and its portfolio of “global champion brands” will enable it to carve out a strong market position in Asia and continue to expand internationally. The Harvard Business Review and INSEAD recently ranked its CEO, Chairman Suh Kyung-bae, as 20th best performing CEO in the world.
This year’s diplomatic tensions with China may have hurt the company’s travel retail sales in South Korea, a key market segment, and overall operating profits, but will likely remain a moderate, albeit short-term risk, that can be addressed by redefining and making changes in its channel sales strategy. Early this year, China banned tourist groups from visiting South Korea, following Seoul’s decision to deploy Terminal High Altitude Defense (THAAD), an American missile system to guard against North Korea. (Chinese tourists who want to travel to Seoul have to book the flight and hotel themselves.)
AmorePacific currently stands as seventh-largest beauty manufacturer worldwide, according to Statista, with global revenue of 5.6 billion dollars as of 2016. This year, three of AmorePacific’s five “global champion brands”— Sulwhasoo, Innisfree, and Laneige—made it to the Global Top 50 Cosmetic Brands of Brand Finance’s rankings. Sulwhasoo and Laneige are also among the Top 10 Beauty Brands in China based on Kantar TNS surveys in 2017. AmorePacific has succeeded in increasing global awareness, admiration, and loyalty of its champion brands.
A critical factor behind AmorePacific’s success is its strong commitment to research and development (R&D) for the purpose of creating value for its customers, addressing their pain points, being attuned to their tastes, and offering a great experience. AmorePacific also knows how to create well-crafted and expressive products and packaging to communicate the brand’s benefits. Amorepacific operates six R&D facilities, Seongigwan and Mizium in South Korea; Shanghai R&I Center in China; Chartres R&D Center in France; Tokyo R&D Center in Japan and Singapore R&D Center in Singapore.
A five-year snapshot from of AmorePacific’s selected financials below shows that it has had very strong financial and operational performance prior to South Korea’s political tensions with China. Sales and operating cash flow grew at double digit rates and registered healthy levels of financial leverage between 2012 and 2016. This has given the company sufficient of financial resources to expand abroad
Notwithstanding all this – AmorePacific needs to expand its sales channel beyond South Korea and duty-free shops to diversify risks. AmorePacific is still very much focused on domestic market – with sales in South Korea accounting for 71% of revenues. Chinese tourists in South Korea represent a huge customer base for AmorePacific. Domestic sales of AmorePacific from travel retail channels across all segments (luxury, premium, and mass categories) declined due to huge drop in number of Chinese tourists in South Korea in the second and third quarter of 2017. This has subsequently hurt the company’s operating profits, which dipped by 40% in the third-quarter of 2017. Statistics from the Korean Government report a 45% decline in number of Chinese tourists.
LG Household & Healthcare, AmorePacific’s closest rival, reported a 7.7% operating profit for its beauty segment, according to its third- quarter earnings report. It does not depend on travel retail sales as much as AmorePacific does, and has just begun its duty-free business in the business segment. In contrast, AmorePacific generates 24% of its revenues from duty-free shops.
Not all is lost as sales in AmorePacific’s global champion brands show resiliency in China and rapidly grow in the ASEAN region. AmorePacific registered revenue growth of 8% in the third quarter of 2017 in Asia (excluding South Korea), which is dominated by China based on its third-quarter report. While duty-free sales of Sulwhasoo— the company’s ultimate luxury brand—decline in Korea, the brand continues to strengthen its position in China and ASEAN. Further, Laneige, Innisfree, and Etude House continue to expand in ASEAN region. AmorePacific has already overtaken Estee Lauder in Southeast Asia – although it still lags very much behind L’Oréal and Shiseido, according to Euromonitor. The company has also launched several initiatives to improve and expand online and digital shopping within China and ASEAN
If AmorePacific wants to become the global leader in Asian beauty cosmetics by 2020, it has to successfully establish strong market presence in the US and maintain brand leadership in China. The US market for cosmetics and skin care still represents the biggest market (and perhaps the toughest) in the world, with an estimated market size of $85 billion based on retail sales, according to Euromonitor. AmorePacific aims to increase its market presence in the US. E-commerce sales of the luxury segment are robust in the US – however, the uptake of premium cosmetics is a bit slow. It is in the midst of restructuring its business and channel portfolio and has increased investment to diversify customer base. This has substantially slowed down sales of premium cosmetics segment in the first three quarters of this year.
The company recently appointed Jessica Hanson as President and General Manager of AmorePacific US to help expand market share in the US. The current size of Korean beauty (K-beauty) products in the US is estimated to be about $344 million based on US imports of cosmetics from South Korea. According to Kline Group, K-beauty is expected to expand by a further 16% from 2016 to 2021. AmorePacific comprises 35% of the market, presenting an opportunity to take more market share.
K-beauty products in Mainland China appear resilient to current political spate between China and South Korea. Data from Korea Customs reveal that China’s imports of make-up and skin care, including powder puffs and pads for cosmetic use, actually increased by 10% to $747 million from $678 million for the first nine months this year. AmorePacific reports that it continued to expand stores and gain new customers in China for its luxury line from June to September. Sales of its products to Asia, more than half of which come from China, grew to 406.4 billion won in third-quarter this year from 376.2 billion won in the same period last year. The tension between the two countries may have slowed down Amorepacific’s sales in Mainland China – but it has not halted the high demand for its products. AmorePacific’s substantial investments behind its brands and focus on creating value for customers through innovation will continue to help it grow and strengthen market presence in China