Cosmetic Rivals Crying and Laughing Over the China Market Strategy

[Asia Economy Reporter Jo Yoo-jin] The beauty rivals AmorePacific and LG Household & Health Care experienced contrasting fortunes in their performance last year due to their results in China. Compared to LG Household & Health Care, which has diversified businesses including household goods and beverages, AmorePacific, which is more concentrated on cosmetics, is expected to have a slower recovery in performance.

According to the Financial Supervisory Service and related industries on the 9th, AmorePacific's provisional consolidated operating profit last year was 427.8 billion KRW, which is about half of its peak in 2016 (848.1 billion KRW), while LG Household & Health Care (1.1764 trillion KRW) posted nearly three times the profit gap compared to AmorePacific, setting a record high performance.

During the same period, AmorePacific's sales increased by 5.7% to 5.5801 trillion KRW, but net profit decreased by 37.2% to 210.4 billion KRW. The main cause was the continued impact of the THAAD retaliation in China, which had been a key growth driver. Most of its major affiliates, including Innisfree (-22%) and Amos Professional (-2%), experienced negative growth last year.

On the other hand, LG Household & Health Care achieved its highest performance since its founding last year, continuing its profit growth streak for 15 consecutive years. Sales reached 7.6854 trillion KRW, and net profit was 788.2 billion KRW, increasing by 13.9% compared to the previous year, achieving record results both in scale and substance.

The main factors behind the strong performance were high growth in the Chinese business and sales diversification. LG Household & Health Care achieved 48% sales growth due to strong sales in overseas markets including China. In particular, the luxury brand "Whoo" performed well. Although Whoo is a latecomer compared to AmorePacific's luxury brand Sulwhasoo, it gained recognition as a premium brand after it became known that Peng Liyuan, wife of Xi Jinping, uses it, and sales have continued to be strong.

AmorePacific has 90% of its sales concentrated in cosmetics, whereas LG Household & Health Care has a diversified sales structure with 60% cosmetics, 20% household goods, and 20% beverages. Especially, the performance of the household goods sector led the dual growth in results.

The differing strategies focusing on marketing (AmorePacific) and sales (LG Household & Health Care) are also cited as reasons for their contrasting fortunes. A beauty industry insider said, "AmorePacific continues to invest in selling and administrative expenses to enhance brand power despite no significant progress in recovering from the THAAD impact," adding, "It is a strategy that pursues external growth through brand strengthening rather than profit increase by cost reduction."

Despite decreasing annual profits, AmorePacific has increased its selling and administrative expenses every year since 2016, with 3.1477 trillion KRW in 2017 and 3.361 trillion KRW in 2018. Last year, it also increased by 8.3% (based on cumulative Q3) compared to the previous year. The increase was significant in Asian regions including China, where it is focusing on strengthening brand power.

The strategic differences between the two companies are also evident in their purchase quantity restriction policies. AmorePacific applies uniform quantity and amount restrictions across all brands to prevent brand damage by daigou (Chinese resellers), limiting up to 10 items per product and under 2,000 USD. In contrast, LG Household & Health Care has a somewhat relaxed policy, imposing quantity limits of up to 5 items only on set products of some brands.

AmorePacific is expected to continue struggling in the first quarter of this year. This is because the first quarter, which is under the influence of the novel coronavirus infection (Wuhan pneumonia), and the first half of the year are expected to inevitably suffer performance damage due to consumption contraction.

According to FnGuide, AmorePacific's operating profit in the first quarter is expected to decrease by 7.34% year-on-year to 172.9 billion KRW. An industry insider said, "As the number of confirmed cases and deaths due to the infection is increasing, it is currently impossible to gauge how much impact it will have on first-quarter performance," and predicted, "Sales stagnation and profit decline are inevitable."

This content was produced with the assistance of AI translation services.