LG H&H drops franchise business as consumer demand shifts

LG Household & Health Care's Nature Collection store [YONHAP]

LG Household & Health Care (LG H&H), owner of cosmetics brands The Face Shop and The History of Whoo, is dropping its once-thriving franchise business in Korea.

The move is driven by consumers now favoring online platforms and drugstore chains that sell diverse brands.

The company said Friday it had sent a proposal to shop owners of its own franchise network, outlining a potential shift in the contract structure for offline franchisees from a "franchise agreement" to a "product supply agreement." Presently, discussions are underway with franchise owners to finalize the arrangement.

As a result, LG H&H's physical franchise stores can offer products from other company's brands, just like drugstore chain giant CJ Olive Young.

The strategic move comes as consumer preferences shifted towards online platforms and multi-brand Health & Beauty (H&B) stores such as Olive Young, according to the company.

"In light of the evolving consumer behavior in the domestic cosmetics market, shifting towards online and H&B stores, our single-brand road shops have encountered a crisis," LG H&H said. "Faced with various business owners considering closure or withdrawal, we recognize the urgency of this essential transformation."

The once familiar road shops, commonly found in subway stations and bustling intersections, have gradually disappeared. Consumers are increasingly shopping at drug stores, which offer a wider range of brands. Additionally, the pandemic further accelerated the adoption of online cosmetics purchases.

According to statistics from the Fair Trade Commission, the number of cosmetics franchise stores experienced a decline from 3,407 in 2018 to 1,588 in 2021.

On the other hand, Olive Young, the H&B giant, is continuously increasing its physical stores from 1259 in 2020, 1265 in 2021 and 1298 in 2022.

By adopting the supply agreement model, franchisees will gain increased flexibility, enabling them to introduce not only LG H&H's cosmetics line, including The Face Shop and Nature Collection, but also products from other companies' brands. Owners will also be able to adapt their signage.

"This change allows business owners to freely introduce popular products from small venture brands, expanding their customer base beyond existing clientele and attracting trend-sensitive young consumers in their teens and 20s," added the company.

The proposed contract modification will apply to 406 franchise stores of LG Household & Health Care, including The Face Shop and Nature Collection, operating in Korea. However, the company's directly-managed stores, such as those located in shopping malls, will remain unaffected by this transition.

Despite facing similar challenges in performance, rival Amorepacific continues to uphold its beauty franchise business, featuring brands such as Aritaum, Innisfree, and Etude House.

BY SEO JI-EUN [seo.jieun1@joongang.co.kr]