Not so pretty

Tougher times in China

When China and South Korea announced in November that they had agreed to move beyond a year-long stand-off over the latter’s installation of the US THAAD missile defence system, most Korean companies, especially cosmetic brands, let out a sigh of relief (see this week’s “Entertainment” section).

After all, at its peak China accounted for 40% of South Korean cosmetics exports. Beijing’s unofficial economic sanctions – through banning group tours to South Korea and stopping Seoul’s soap operas from broadcast in China – had badly hit Korean beauty brands, which saw their sales fall 10%-25% on the year in 2017 (see WiC357 for how THAAD dealt a blow to South Korean firms like Lotte).

Korean goods had earlier gained currency often through the country’s pop music or other soft power apparatus (see WiC227). But this hallyu, or “Korea wave”, appears to be cooling off in China. Korean cosmetic exports to the country slid 34% year-on-year, and sales to Hong Kong, a hot shopping hub for mainland visitors, were down 36% as well. By way of comparison, shipments to Southeast Asia and the US both rose 14%, and those to Japan more than doubled.

According to a survey that HSBC released in March, Chinese consumers rated South Korean cosmetics brands their least preferred from a choice of five between Chinese, French, Japanese and American. Aside from geopolitical tensions, the bank attributed Korean brands’ declining popularity to “limited marketing activities”.

SKINFOOD, a mass-market skincare and cosmetics manufacturer and retailer based in Seoul, recently shuttered most of its points of sales in Beijing, Jiemian.com reported. Its management dismissed speculation that the brand is exiting China completely, but acknowledged that its business was up against much tougher challenges.

“Korean cosmetics have been sidelined the past year,” said a SKINFOOD representative, noting that the brand is suffering from high rents and staff costs, especially in Beijing, while having to offer stiff discounts to win customers.

Some analysts believe that Korean products like SKINFOOD are losing their lustre because savvier Chinese consumers’ quality expectations have risen.

Japanese cosmetics are a major beneficiary of the demand for higher quality. Brands including SK-II, Fancl, DHC, and Kate were among the most mentioned beauty products on XiaoHongShu (or “Little Red Book”), a Chinese shopping app for foreign brands, according to New York-based research group L2. It also found that the sales growth of Japanese beauty brands was faster in China last year than that of their Korean counterparts.

Aside from quality concerns, Korean products are perhaps promoting values that more educated women in China are increasingly at odds with. “K-beauty brands like to use celebrities who have done a lot of cosmetic surgery that indicates a value proposition about women that I cannot agree with any longer as I am getting older,” 29 year-old Rita Chen told Jing Daily, a digital publication on China’s consumption trends. Chen said she had consciously switched all of her beauty and skincare products from Korean-made to Japanese brands since 2016.

Another rival to Korean products are the homegrown brands, which are gaining ground even in the mid-range to premium segment. Some are finding a successful niche by playing up Chinese elements such as using herbal and traditional medicine ingredients. Leading local brands such as Jala, Proya, Suhu, and those made by Shanghai Jahwa United are spending heavily on research and development. Others are buying overseas firms and even poaching talent from struggling Korean rivals.

Jala, for instance, hired the former head of Etude (an Amorepacific brand), as well as another Korean executive to help revamp its flagship Chando brand, Reuters reported.

Following a 40% decline in net profit for 2017, Amorepacific Group – which operates a wide array of brands including the high-end Sulwhasoo, the more affordable Laniege and lower-end Innisfree – is planning to reduce its reliance on the China market by diversifying elsewhere.

At the same time its R&D team has been tasked with studying Chinese skin characteristics to formulate new China-targeted products.

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