LG Household & Health Care's 'Whoo' Faces 40% Discount Demand from Chinese Botaerisang

LG Household & Health Care's 'Monday Horror', Market Cap Drops by 2.4 Trillion Won
Slowing Growth in Chinese Cosmetics Market, Decreasing Dependence on Korean Cosmetics

[Asia Economy Reporter Lim Hye-seon] The 10th was a 'Monday of fear' for LG Household & Health Care. Due to securities firms' '4th quarter earnings shock forecasts,' the market capitalization of 2.4 trillion KRW disappeared in a single day. On the 11th, LG Household & Health Care's stock price continued to decline. The background is growing concerns over 4th quarter performance as demand for Korean cosmetics decreased amid a slowdown in growth in the Chinese market and the strength of imported and domestic cosmetics.

"Did not participate in promotions due to excessive discount demands from daigou in China"

LG Household & Health Care stated on the 11th, "We did not participate in December promotions as a brand management measure due to excessive discount demands from daigou (wholesalers who buy Korean products at domestic duty-free shops and sell them in China)." Securities firms expect 4th quarter duty-free sales to decrease by about 100 billion KRW compared to their forecasts. According to the cosmetics industry, LG Household & Health Care's dependence on daigou is absolute. Daigou receive discounts through commissions such as customer referral fees in exchange for bulk purchases at duty-free shops.

In this process, daigou, who previously demanded discounts of about 20-30%, additionally demanded discounts of up to 40% in December, so LG Household & Health Care reportedly did not participate in promotions to defend local prices in China. "We did not participate in December promotions as a brand management measure due to excessive discount demands from daigou," the company said on the 11th. Securities firms expect 4th quarter duty-free sales to decrease by about 100 billion KRW compared to their forecasts.

In fact, LG Household & Health Care had already sold more than usual quantities to daigou in October and November to minimize damage from the logistics crisis. Therefore, even without accepting the unreasonable demands of daigou in December, it was possible to achieve the early-year target. LG Household & Health Care viewed excessive discount rates as damaging to the brand value of the luxury brand 'Whoo' and began brand management.

However, the stock market judged that the status of Korean brands in China was shaking. According to Euromonitor, as of last year, none of the top 10 brands in the Chinese basic cosmetics market were Korean cosmetics brands. Among the top 10, eight were global brands such as L'Or?al and Est?e Lauder, and Chinese cosmetics brands Pechoin and Chando ranked 4th and 6th respectively.

In domestic duty-free shops, from the second half of last year, 'Whoo' and 'Sulwhasoo' were overtaken by SK-II and Est?e Lauder in overall cosmetics sales rankings. Additionally, the slowdown in growth of the Chinese cosmetics market had a negative impact. The retail sales growth rate of Chinese cosmetics, which was about 40% until early last year, sharply dropped to the 8% range from the third quarter.

Duty-free shop commissions doubled

The high dependence on daigou is also a negative factor for Korean cosmetics brands. Unlike Amorepacific, LG Household & Health Care has continuously strengthened its sales strategy centered on daigou. After the COVID-19 pandemic, as Chinese tourists disappeared, dependence on daigou increased further. According to the duty-free shop industry, last year, the customer referral commissions at domestic duty-free shops were tentatively estimated at about 2.3 trillion KRW.

This is more than double the 900 billion KRW in customer referral commissions at domestic duty-free shops last year. Most cosmetics brands, not just LG Household & Health Care, consider China a major market and thus accept excessive demands from daigou.

The cosmetics industry is closely watching the sharp drop in LG Household & Health Care's stock price. An industry insider said, "Due to China's domestic demand stimulus policies, Chinese cosmetics brands are growing rapidly, and with the expansion of the color cosmetics market, imported cosmetics brands continue to be strong, narrowing the space for domestic cosmetics brands compared to previous years." He added, "Moreover, since the Chinese government has conducted large-scale crackdowns on daigou every early year, we are watching the situation this year as well."

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