Marketing

Business Mango Originals: “AmorePacific: Toughing it out with THAAD”

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

 

 

 

 

 

 

 

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Fresh Pick of the Day, October 3, 2016: “Lean Startup and Design Thinking: Getting the Best Out of Both” from Stanford Business

From Stanford Business – “In the world of entrepreneurial incubation, design thinking, a user-centered way to conceive and create a successful product, is often compared and contrasted with the lean startup approach, which is more engineering-based and quantitative. The two methods are far from mutually exclusive, however, as both seek to effectively serve customers’ needs through a systematic, low-risk path to innovating in the face of uncertainty.”

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Podcast # 31: “How do you make money from selling unpopular products?” from Business Rhythm with Frank & Jamie

From Business Rhythm with Frank & Jamie – “If you are going to put up a retail shop, what kind of products are you going to sell? Think about make-up, clothing, sports equipment, or books and music. Your instinct will tell you to sell a selection of goods that most people want to buy. After all, you have limited space and need to maximize revenue per square foot. You can also negotiate for high volume discount with the suppliers. With high turnover of goods, the chances of avoiding getting stuck with outdated goods will be great. Ultimately, profits will be high. We are seeing this strategy of selling a narrow list of high volume products with Walmart, Macy’s, Dick’s Sporting Goods, and Barnes and Noble. How about the flip side strategy of selling a wide list of items that are not mainstream? ”

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Fresh Pick of the Day, June 14, 2016: “How Millennials, Gen Xers and Baby Boomers Shop Differently”

From Knowledge@Wharton – “By gathering and examining data that was more detailed than what retailers have been able to access before, research group NPD and Wharton’s Jay H. Baker Retailing Center have unearthed a host of new information about generational differences in buying behavior. Baker Center research director Denise Dahlhoff and Andrew Mantis, executive vice president of checkout tracking at NPD Group, appeared on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111, to talk about what they’ve discovered about our retail proclivities.

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Podcast # 30: “Global Trends in Fast Food Chains” from Business Rhythm with Frank & Jamie

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From Business Rhythm with Frank & Jamie – “Fast-food chains are quick- service restaurants that have limited menu available for take-out or dine in. In addition to large kitchen area, these restaurants have dining area, parking lot, and a drive-thru; some have children’s play areas. The top global players are McDonald’s, Yum Brands, Subway, and Burger King. Mcdonald’s is the world’s biggest fast food chain. Yum Brands include KFC, Pizza Hut, and Taco Bell.”

 

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Fresh Pick of the Day, May 7, 2016: “What Do Your Social Media Posts Reveal About Your Health?”

From Knowledge@Wharton – “That last question may seem odd, but not to the researchers at the Penn Social Media & Health Innovation Lab at the University of Pennsylvania. Director Raina Merchant and her team are investigating how people’s social media language on sites such as Facebook, Twitter and Yelp can be used to assess and their health and predict diseases. The conditions they are looking at are some of the main culprits for premature death and disability (not to mention skyrocketing health care costs) in America, including heart disease, diabetes, hypertension, obesity, chronic lung problems, depression and drug abuse.”

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Podcast # 24: “Business Rhythm’s Best Business Narrative Books” with Frank & Jamie

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Business Rhythm’s Top 5 Business Narrative Books:

1. McDonald’s: Behind the Arches by John F. Love

2. Personal History by Katharine Graham

3. Titan: The Life of John D. Rockefeller, Sr. by Ron Chernow

4. Sam Walton: Made in America by Sam Walton

5. When Genius Failed by Roger Lowenstein

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Fresh Pick of the Day, November 25, 2015: “5 Valuable Sales Lessons We Can Learn From Introverts”

From Inc Magazine – “Extroverts thrive in people dominated environments. They draw energy from others. Introverts require down time to recharge their batteries so they can reengage with others. In professional selling, Extroverts tend to excel at both ends of the sales process–prospecting and closing. In general, the charming Extrovert tends to succeed at networking and cold calling, while the tenacious type excels at negotiation and closing the sale. The Introvert, however, has the upper hand in the middle of the sales process, particularly in the Needs Analysis step. This part of the process is at the heart of the sales call–asking questions, uncovering needs, qualifying, etc. This step requires a shift from the high energy activities necessary at the front end of the sale, to a more methodical approach when asking questions.”

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