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Korean Beauty Market Sees Upward Trajectory

Since first arriving in Mainland China a decade ago, Korean beauty brands have made significant headway.

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Special Issue
Beauty Inc issue 03/21/2014

Judy Liu, 36, is executive director of a publishing house in Shanghai and the mother of a five-year-old son.

This story first appeared in the March 21, 2014 issue of WWD.  Subscribe Today.

Late last year, when her company sent her to Seoul for a five-day business trip, she returned to Shanghai with a suitcase full of beauty and cosmetics products from the Korean capital for herself, as well as her friends.

“Missha, Etude House, Hera, Laneige, Sulwhasoo’s Snowise line, Nature Republic,” Liu’s list of favorite South Korean beauty brands is both lengthy and full of names that may not register with many western consumers, whose knowledge of Korean cosmetics often begins and ends with BB Cream.

But in Asia, Korean cosmetics are on a major upward trajectory, with particularly explosive growth seen in China, a dynamic that is significantly transforming the midtier section of one of the fastest-growing markets in the world.

Though Japan is currently Asia’s biggest cosmetics market, second-ranked China is growing at a much faster pace—Euromonitor International forecasts 63 percent growth in China for the five years ending 2015 compared with flat growth for Japan.

The mid to high end of China’s beauty market has traditionally been the domain of western beauty giants, such as L’Oréal, Proctor & Gamble and Estée Lauder, as well as the Japanese powerhouse Shiseido, with the lower end of the market dominated by domestic brands. But since first arriving in Mainland China a decade ago, Korean beauty brands have made significant headway.

According to Euromonitor, in 2011-2012, Korea’s largest beauty corporation, AmorePacific, had the ninth-largest share of China’s cosmetics market with 2.3 percent.

This figure may not look so impressive next to number-one ranked L’Oréal’s 19.7 percent, second-place Shiseido’s 9.7 percent, or third-place P&G’s 7.9 percent, but it’s not bad considering that Euromonitor estimates China’s beauty and personal-care market was expected to grow to an estimated $36 billion in 2013.

What is also impressive is AmorePacific’s rate of growth in China. Of the top 10 beauty companies by market segment in the country, AmorePacific grew 31 percent year-on-year, compared with L’Oréal and Shiseido’s 12 percent growth and P&G’s 5 percent bump.

According to AmorePacific’s own numbers, this increase was equally as impressive in 2013, with the company’s China sales value climbing from 1.5 billion yuan ($250 million at current exchange) in 2012, to 1.9 billion yuan ($314 million), another 27 percent rise.

AmorePacific’s China push began back in 2002 with flagship brand Laneige, which made a splash with its emphasis on “water science technology” and is now available at more than 300 counters in more than 100 cities around China. Its next entry, Mamonde, arrived in China in 2005 and is now in 2,590 retail outlets and 884 department-store counters in more than 275 cities. A luxury entry, Sulwhasoo launched in 2011 and was quickly followed by entry-level option Innisfree, which landed in 2012 and has already launched 100 makeup and 70 skin-care products one year later.

That’s only the beginning of the company’s push into Mainland China, says AmorePacific Group’s senior vice president, Seung-Hwan Kim. “AmorePacific aims to become a ‘Great Global Brand Company’ and be the number-one Asian beauty and health company in China by 2020,” he says. “We will continue to strengthen brand and channel portfolios while developing additional growth drivers. To listen to and communicate with Chinese customers more effectively, we will implement differentiated strategies by each region.”

Another Korean cosmetics giant making waves in China is LG Household and Healthcare Ltd., in particular the company’s The Face Shop brand, which has proven especially popular with young consumers.

 

The company estimates it will post sales of $62 million in China for 2013, up from $16 million in 2011. Since launching in China in 2007, The Face Shop has quickly expanded its retail reach, with more than 442 stores at the end of 2013.

Such growth comes as well-known western brands like L’Oréal’s Garnier and Revlon have exited the market, battered by the competition posed by such brands and unable to match either the perceived product innovation or geographical reach of Korean-led brands.

Korean brands have also been helped in this market by the perception of the country as a technological innovator in the beauty sector. Since 2002, Korean products, such as BB Cream and other color-correcting products, have become must-have items for Chinese women.

Joyce, 30, doesn’t want to use her full name because of the “gray market” nature of her job. Based in Changsha, a city of more than seven million people in central China’s Hunan Province, she is the proprietor of a store on TaoBao, China’s e-commerce behemoth, specializing in dai gou cosmetics and beauty products.

The dai gou model—the term basically means to buy something on behalf of someone else—has always been predominant in Chinese culture. Traditionally, when one villager would go to the nearest urban center to stock up on supplies, he would also shop for his neighbors.

In its modern incarnation, Chinese people living or traveling overseas buy hard-to-find items or goods that are heavily taxed in China and send or bring them back for friends and family members (as Judy Liu did on her trip to Korea).

E-commerce entrepreneurs such as Joyce have taken dai gou a step further by opening TaoBao stores stocked with products procured overseas, in her case on twice-monthly shopping trips to Hong Kong, where international cosmetics brands are priced as much as 30 to 40 percent less than on the Mainland.

 

Though she sells brands from around the world, including Chanel, Fresh, Bioderma and Kiehl’s, Joyce has noticed a definite up-tick in the demand for beauty products from Korea, particularly in the last two years. According to Joyce, her customers are increasingly drawn to Korean products because they are perceived to be “more suitable for Asian skin” than their western counterparts, and at the same time “prices are generally lower” than for American, French or Japanese brands in the China market.

“Korean products have become very popular,” she says. “The development of Korea’s pop culture in China has been happening for a long time and this has led more and more people to have a strong interest in skin-care products from Korea.”

The broader trend of Chinese consumers traveling overseas has spurred the dai gou industry in general, as well the popularity of Korean beauty brands specifically. According to a report released in January by China’s National Tourism Administration, 2013 saw a record 97 million Chinese travelers head abroad, many of them to shop. In 2012, Chinese shoppers spent a record $102 billion while traveling internationally, and National Tourism Administration researcher Song Rui believes that number reached an estimated $110 billion in 2013.

 

This is particularly good news for Korea, with its physical proximity to China proving a boon for beauty brands. A two-hour flight from Shanghai, Korea has become a hot travel destination for shoppers who may have already “done” Hong Kong and are looking for another close and relatively affordable destination. According to Korea’s Ministry of Culture, Sports and Tourism, 3.74 million tourists from Greater China (which includes Hong Kong and Taiwan) visited South Korea in 2012, an increase of 30 percent from the year before. Those numbers are expected to increase even further with the South Korean authorities announcing multiple rounds of easing on visa restrictions for some Chinese nationals, the first set of which went into effect on September 1, 2013.

The influence of the “K-Wave” of pop stars and soap operas is also being strongly felt across China. Though the Chinese consumers interviewed for this story unanimously agreed that the quality and price of Korean beauty brands were bigger draws than their Korean celebrity ambassadors, Emma Li, a researcher at think tank L2, says the celebrities used to sell the products in China, where they are widely revered beauty icons, have had a measurable impact. “Korean cosmetics brands have successfully leveraged the ‘Korean Wave’ in China, particularly among younger consumers,” she says. “With the rising popularity of Korean pop music, films and TV shows in China, Chinese consumers have sought to emulate their favorite Korean actors and musicians, which has boosted Korean apparel and beauty brands.”

Western beauty brands often strike a careful mix of western and Greater China celebrity spokespeople. L’Oréal China, for example, runs ads in China featuring local megastar Fan Bingbing as well as Hollywood favorite Julia Roberts, a face of Lancôme. Estée Lauder, meanwhile, has featured Chinese supermodel Liu Wen in advertisements for a number of years, while the company’s Osiao brand, which has been developed specifically for the Asian market, signed Hong Kong actress and Cantopop singer Miriam Yeung to be its celebrity spokesperson.

But Korean brands’ spokespeople are K-Wave all the way, with Laneige advertisements featuring soap-opera actress Song Hye Kyo and film star Jeon Ji-Hyun.  The Face Shop features Suzy from K-pop group Miss A, as well as male celebrities such as actor and boy-band rapper Kim Hyun Joong, who has broken the mold by appearing in advertisements for both male and female cosmetics lines.

AmorePacific’s Seung-Hwan Kim agrees that Korea’s celebrity influence has been a boon to their brands, but he is also quick to point out that product efficacy is what has earned them an increasingly prominent place in the vanity cabinets of China’s 645 million women. “While Korean celebrities have helped our brands gain awareness very quickly, we know that having roots in Asia, and having in-depth research into Asian consumers and skin conditions gives us leverage over Western competitors in this market,” he says.

This emphasis on Chinese consumers’ perception that Korean skin care is more suitable because it has been developed by Asians for Asian skin types is common among Chinese women and China beauty market analysts alike. The same could, of course, be said about Japanese skin-care brands, which have traditionally been popular in China for this reason. But the situation is significantly different, with brands from Japan periodically struggling with nationalistic Chinese shoppers who don’t want to buy products from their historical enemy.

Price is also universally regarded as a strong pull for Chinese consumers, and Korean skin care is generally priced lower than international counterparts, including those from Japan.

“I buy Korean skin care because I think it’s good for Asian people,” Judy Liu says. “The material is good, there’s a lot of choice and the price is very cheap.”

Research shows that Korean brands have been particularly effective in the fast-growing midrange of the market, as aspirational Chinese consumers eschew the perceived ordinariness of domestic brands at the mass and midrange price points. “Consumers generally consider Korean brands, like Japanese brands, to be of higher quality than domestic brands, and Korean companies have successfully marketed aspects like ethnic compatibility, natural ingredients and pushed their products as being high quality but more affordable than their Japanese or Western counterparts,” says Li. “Value for price has been a major factor in their successful occupation of the mid to low end of the beauty market in China, as Korean conglomerates have flooded the market with a wide range of brands and sub-brands.”

Laurie Du, China beauty analyst for Mintel, agrees, saying that at this point, the biggest impact has been felt by domestic beauty brands as well as international brands not being marketed as luxury products for Chinese consumers.

“There has been an impact especially on local brands. Quite a lot of Chinese local brands are now trying to ‘package’ themselves as Korean brands,” she says. “For international players, the impact is more from the low-mid end  of the market, where Korean brands are growing fast.”

Still, Li is quick to point out that Korean brands are yet to be a major threat at the premium end of the market, where Western brands have traditionally dominated and continue to do so. Fabrizio Freda, chief executive officer of the Estée Lauder Cos., continues to be laser focused on China, particularly in the development of the country’s tier-two, three and four cities. “We are [adapting] to the new growth model,” Freda told WWD in February, following the company’s second-quarter earnings call. “[In China], the companies that are flexible and adjust their models to evolving opportunities will win. Other companies may be struggling, but we remain very committed to China and Chinese consumers, wherever they shop,” he added, referring to the company’s travel retail business.

 

This is not to say that Korean brands don’t have aspirations to also make a move into the higher end of the market, with AmorePacific already finding success with its premium Sulwhasoo brand that’s based on South Korean traditional medicine and is available at 30 counters of high-end department stores in China’s first-tier cities.

Chen Jie, 26, is a Web editor from Shanghai who reports spending about $5,000 on cosmetics products per year. Half of that budget is spent on Sulwhasoo products, which she first discovered from an advertisement in a major Chinese fashion magazine. “My friends and I mostly use Sulwhasoo and Laneige,” she says. “I can afford to buy the big international brands but I personally like to use Korean cosmetics the most because they are more suitable for Asian skin. I don’t use Japanese brands because I read in the news that they have a problem with their quality.”

At the same time as they make a play for a bigger slice of the premium pie, Korean brands may also have to watch their mass-market flanks as Chinese brands jostle for position. “Korean brands will soon face tougher times in the midrange, as they will face stiffer competition from domestic Chinese beauty brands,” says Li. “Chinese brands increasingly offer similar product lines, using natural or herbal ingredients popular with local consumers, and at a competitive price point.” 

Such brands are gaining consumer trust in terms of their quality, says Li, who points out the question the dynamic raises for Korean brands: “The dilemma will soon be whether to try harder to move upmarket and compete more aggressively with Western high-end brands or continue their midrange strategy, neither of which will be easy,” she says.

Despite this increase in competition, Du sees the trend for Korean beauty brands in China continuing to grow as the market matures and the number of Korean brands entering the market increases. “China is the most important overseas market for Korean brands,” she says. “New brands are coming up constantly in the South Korean market and Chinese travelers will continue to act as the perfect channel to cultivate brand awareness,” she says. “The market for Korean cosmetics will surely continue to grow.”

GIRL ON THE GO: Model JiHye Park has an audacious goal—to be the first Korean to walk in the Victoria’s Secret fashion show—and if history is any indication, it’s one she will readily achieve. Now 26, Park moved to Seoul at age 18 to pursue a career in modeling. After establishing herself in her home country, she headed westward two years ago arriving in New York knowing no one but quickly making her mark when Alexander Wang tapped her to open his show. Since then, she’s been photographed for multiple Vogues—U.K., China, Russia and Italian among them—and has also appeared in ad campaigns for Michael Kors, Diesel and Louis Vuitton. Though she’s far from home, Park’s approach to beauty belies her roots, particularly during fashion-show season. “Going through multiple makeup applications in one day, cleansing is the most important part of skin care for me,” says Park, who uses products by Bioderma and Shu Uemura as part of her multistep regimen. She is also partial to Lancôme’s Genifique. But ask her about her style, and it’s clear she’s adopted the ethos of her new hometown. “Recently Korean style has moved more towards colorful, creative and sometimes funny styles and products,” says Park. “New York tends to be more chic, wearable and comfy, which is one reason I feel New York style is a good match for me.”

Meet Korea’s top pop and acting stars.

—Compiled by Sonya Beard

 

Jeon Ji-Hyun
Jeon “Gianna” Ji-Hyun made a name for herself through popular TV commercials. She’s starred in more than 10 films—her biggest being My Sassy Girl, which was one of Korea’s top-grossing comedies and a hit throughout Asia.
Brand Affiliation: Hanyul

 

Su Ji Bae 
Actress Su Ji Bae, known by her stage name Suzy, is a member of the Korean girl group Miss A and also starred in the critically acclaimed drama Dream High, which gained popularity in several countries.
Brand Affiliation: The Face Shop

 

Ga-in Han
Actress Ga-in Han played the heroine in the highly rated period drama Moon Embracing the Sun. She also earned rave reviews on the big screen in Korea’s top-grossing melodrama,
Architecture 101.
Brand Affiliation: Isa Knox

 

Chae-won Moon
Chae-won Moon splashed onto the scene in the teen drama, Mackerel Run. The award-winning actress went on to star in the box-office smash War of the Arrows, which also showed at theaters in the U.S. and U.K.
Brand Affiliation: Sooryehan

 

Kim Tae Hee
Known for being the “most beautiful woman” in Korea, Kim Tae Hee got her big break in the short-lived series, Stairway to Heaven. Kim is more than a pretty face, though: She earned a fashion degree from the prestigious Seoul National University.
Brand Affiliation: Hera, Ohui

 

Lee Soo-young
In a competitive arena of K-pop divas, chanteuse Lee Soo-young blazed a path with her powerful voice and heartfelt songs. With nine studio albums, the chart-topping singer is considered the most successful Korean female balladeer of all time.
Brand Affiliation: None

 

Shin Min-a
Actress and singer Shin Min-a began her career as a model. She made her small-screen debut in
the comedy Volcano High. Her role in My Girlfriend is a Nine-Tailed
Fox garnered a slew of awards and critical acclaim.
Brand Affiliation: Hera

 

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