Singers and actresses sprinkle star dust on Korean cosmetics

Thirty-something tourist Patchalin Vongratanakunton is a big fan of Korean cosmetics. On her first trip to Seoul, she is spending $120 - more than a week's average salary in Thailand, her home country - on Laneige creams by AmorePacific, South Korea's biggest cosmetics firm.

"I love skin-care products made in Korea," she says at a crowded duty-free shop in central Seoul. "They fit Asian skin well while European brands are for Europeans,"

Young Asian women like Ms Vongratanakunton are flocking to Seoul in growing numbers to buy Korean creams and foundations sprinkled with the star dust of Korean actresses and singers from the films, soap operas and music that have taken Asian by storm over the past decade.

Encouraged by this boom in Korean pop culture, cosmetics companies are aggressively trying to wrest market share from western rivals such as L'Oreal. Their sales outside Korea are rising more than 30 per cent a year, pushing cosmetic exports to about $1.1bn last year, beating imports for the first time, according to Korea Pharmaceutical Traders Association.

AmorePacific's overseas sales jumped 35 per cent last year to Won443bn, with China accounting for 60 per cent of those. Its big domestic rival LG Household and Health Care posted a 56 per cent jump to Won446bn.

Using pop stars in their TV advertising has boosted the recognition of Korean brands in China, driving sales growth.

"Growth in the domestic market is slowing as the market becomes increasingly mature," says Lee Chang-kyoo, head of Amore Pacific's strategic planning department. "Fortunately, cosmetics consumption is increasing rapidly in China and Southeast Asia, helping us make up for slowing domestic growth."

The dearth of growth in the home market - which is among the world's most rapidly aging - has taken itstoll on the companies' share prices. Shares of AmorePacific, 36 per cent-owned by foreign investors, has fallen 24 per cent so far this year, while those of LG H&H and Able C&C have fallen 17 per cent and 57 per cent respectively.  

AmorePacific hopes to generate Won5tn of global sales by 2020 with half coming from overseas markets, compared with just 16 per cent now. China is at the heart of AmorePacific's overseas expansion as mid-priced lotions and creams from its flagship brands - Laneige and Mamonde - become increasingly popular.

LG H&H is also making rapid inroads using local partners. The Face Shop, the low-priced brand at the forefront of its overseas expansion, now has a 1,500-strong outlet network in 26 countries, driven mostly by alliances with China's Fo Shan, Hong Kong's Color Mix and Japan's Aeon. In Japan, LG H&H acquired local cosmetics firm Ginza Stefany and health food maker Everlife last year to gain a foothold in the world's second-largest cosmetics market.

Able C&C, known for its cheap Missha brand, generated 20 per cent of its Won452bn sales last year in overseas markets, as its snail cream - which originated in Chile but gained popularity in Asia through Able C&C - and BB cream became huge hits in the region.

BB cream, an all-in-one beauty balm that combines moisturiser with light foundation, illustrates the role of South Korea and neghbouring Japan, in the world of cosmetics.

BB cream was borne out of demand from school girls eager to improve their looks without flouting 'no make-up' rules and began life in Asia. International players like L'Oreal then introduced it to western markets, where it quickly proved equally popular - and not just with schoolgirls.

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Able C&C now has 1,200 shops abroad including 570 in China, which account for 40 per cent of its overseas sales.

"Korean players are doing particularly well in the low-to-mid-end segment, outpacing some western rivals, as their product quality is good relative to prices," says Yang Ji-hye, analyst at Kyobo Securities.

Following their success in mid-priced skin-care products, AmorePacific and LG H&H are now trying to go upmarket, using traditional herbal medicines under the brand names of Sulwhasoo - available through suitably swanky US retailers, such as Bergdorf Goodman - and Hu respectively.

They are also increasing production capacity overseas to meet demand. LG has five overseas plants, two in China and three in Vietnam, while AmorePacific is building a research center in Shanghai. 

However, Korean companies are still finding their feet in China compared with global giants. AmorePacific's market share in China is still small at less than 3 per cent, compared with L'Oreal's 16.8 per cent, Shiseido's 10.3 per cent and P&G's 9.8 per cent, according to Euromonitor.

It is also struggling to boost profitability as its overseas business suffered an operating loss due to heavy and increasing up-front investments. In China, the company posted operating profit margin of just 4.2 per cent, compared with its global rivals' average of 13 per cent, according to Mirae Asset. 

However, not all of these are on an upwards trajectory. Shiseido saw sales in China dip slightly last fiscal year, in part due to political tensions between China and Japan which resulted in some Chinese less buying of Japanese goods.

By contrast, South Koreans are gaining share in Asia. They do, however, face challenges replicating this success in the more mature markets of the US and Europe. "They were able to overcome their weak brand in Asia, helped by the positive effects of their pop culture, but they will face an uphill battle in other regions," says Park Yoo-mi, analyst of Mirae Asset. 

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