Stricken Skinfood goes into debt workout

Cash-strapped beauty brand Skinfood announced Friday that it has received court approval to begin a debt workout program.

The decision from the Seoul Bankruptcy Court comes 11 days after the company applied for the program. Companies in the red can apply for the debt workout program to undergo restructuring supervised by the court, which then examines whether the company should be given a helping hand or left to fend for itself.

Under the program, the court freezes all deadlines for debt settlement and mediates between the company and its creditors, sometimes writing off part of the debt or suggesting paying it back in stocks instead of cash.

Skinfood owes the Industrial Bank of Korea a total of 2.9 billion won ($2.5 million) - 1.9 billion won of which matured on Oct. 10. The remaining 1 billion won will mature on Dec. 28.

The company said in a statement that it plans to continue operating its stores to the extent allowed within the boundaries of the debt workout program. According to the Seoul Bankruptcy Court, Skinfood has to submit a workout plan to the court by Jan. 23.

“Under the workout program, we plan to improve product supply [to franchisees], focus on increasing capital and diversify our markets in order to quickly normalize,” the company said.

For months, there have been complaints online that shelves have stood empty at Skinfood stores. Some franchisees told local news outlets that they even had to order products from ecommerce websites as the struggling company failed to provide supplies.

Earlier this year, 14 of Skinfood’s product suppliers requested the court confiscate one of the company’s factories on the grounds of delayed payments worth 2 billion won.

To normalize product supply, Skinfood explained that it will receive payments from foreign offices before it begins manufacturing the brand’s bestsellers. It added that reducing the range of items it makes will also help reduce costs and time to restock stores.

“The conventional system is that the headquarters makes the products first and sells them to franchisees but there were requests from foreign offices that they want to receive certain items even if they have to pay before receiving them,” said a company spokesman.

Skinfood is also considering selling off shares or operation rights of its foreign offices in the United States or China, in order to secure cash.

“We’ve confirmed through many channels that there are stakeholders and customers that continuously want our products - therefore we plan to concentrate all our capacity to normalize finances and product supply in the near future,” the company said.

Skinfood’s downfall came surprisingly quickly - it was once one of the top three bestselling beauty brands in Korea with businesses in 19 countries worldwide.

The company’s finances were sound until 2013, but the business dwindled after that as it lost customers for refusing to offer regular discounts like other local beauty brands.

Heavy losses followed with the Middle East respiratory syndrome outbreak in 2015 and then the deployment of the U.S.-led Thaad antimissile system in 2016 drove away Chinese customers.

After four straight years of operating losses, Skinfood’s debt-to-equity ratio hit 781 percent last year with debt totaling 43.4 billion won.

Its decline is also part of a larger market trend in which customers nowadays increasingly prefer multi-branded stores like Olive Young rather than shops that sell items from a single company.

On the other hand, four Skinfood franchisees have sued the headquarters over damage claims in August, saying the company’s application for a debt workout program was an effort to dodge its responsibility for bad management.

BY SONG KYOUNG-SON [song.kyoungson@joongang.co.kr]