Big beauty brand’s strategy yields ugly results

The performances of Korea’s largest cosmetics companies continue to diverge.

LG Household & Health Care posted record results in its second quarter, while Amorepacific Group suffered an on-year drop in operating profit in the second quarter.

It all has to do with the strategies.

Aggressively marketing luxury brands like Whoo, which is particularly well-received in China, is seen as the primary reason for LG’s success whereas Amorepacific’s investments across a wide range of brands is seen as weakening its performance.

Amorepacific in the second quarter posted 110.4 billion won ($99 million) in operating profit, a 35.2 percent drop from the same period the previous year, on 1.57 trillion won sales, which inched up 1 percent on-year. LG, on the other hand, posted 301.5 billion won in operating profit in the same quarter, a 12.8 percent jump on-year, on 1.83 trillion won in sales, a 10.9 percent increase from the same period a year ago.

LG’s operating profit in the first half reached 623.6 billion won on 3.71 trillion won in sales. Amorepacific Group’s operating profit in the same period stood at 315.3 billion won on 3.21 trillion won in sales.

“The strategies of Amorepacific and LG are different in that Amorepacific aims to achieve fair growth across all its brands, including luxury and mass brands,” said analyst Shin Su-yeon from Shinyoung Securities. “But focusing on luxury brands has become important as the consumption patterns in China have become polarized. Amorepacific Group’s mass brand products, likes those from Innisfree, are cheaper than luxury brands but more expensive than the cosmetics from Chinese brands.”

In overseas markets, Amorepacific brands, which include Hera and Sulwhasoo, generated 20.1 billion won in operating profit in the second quarter, a 56 percent dip on-year, on 512.1 billion won in sales. The company did not provide sales by country.

LG’s sales in China jumped 30 percent on-year in the second quarter to 198.2 billion won.

China is also a big market within Korea, as large number of “daigou” shoppers purchase huge quantities at local duty free shops and bring the products back to China.

“Amorepacific needs to change its investment structure since luxury brands are showing high return on investment,” said analyst Kim Hye-mi from Cape Investment & Securities. “The relatively low return of road shop brands does not seem to be a short-term issue.”

Although it may be difficult for Amorepacific to achieve a turnaround this year, the group’s strategy to raise its presence globally could be effective in a long term.

“The proportion of sales taken up by countries [apart from China] like Australia may be small, but the group’s effort to enter new countries could positively affect the future sales once the sales there stabilize,” said Shin, while emphasizing the need for LG to bolster the sales of its other luxury brands, like Su:m37 and O Hui, to maintain the streak of the company growth.

On-year growth of Su:m37 and O Hui in the second quarter was 7 percent and 12 percent, respectively, compared to 24 percent by Whoo.

Industry insiders forecast the sales of Amorepacific and LG could be affected by China’s revision if its e-commerce law announced earlier this year, which is likely to be strengthened in the second half. If so, it could weaken the daigou purchases of Korean cosmetics products through duty free channel, which accounts for a high portion of domestic cosmetics sales.

BY JIN MIN-JI [jin.minji@joongang.co.kr]