Cosmax's 'Aching Finger' US Subsidiary... Will It Shed the Deficit Label This Year?

Cosmax USA $200 Million Capital Contribution
US Subsidiary's ODM Share Exceeds 80% in Q4...Target Achieved
ODM Demand Expected to Rise Due to Indie Brand Strength

Analysis suggests that COSMAX Group's "ugly duckling," its U.S. subsidiary (COSMAX USA), will transform into a "swan" next year. This is because ODM (Original Design Manufacturer) companies have experienced an unexpected boom as indie brands have entered the U.S. beauty market?previously dominated by large brands?by partnering with ODM manufacturers. Attention is focused on whether the U.S. subsidiary, which has never turned a profit in 11 years, can finally shed its deficit label this year.

According to the distribution industry on the 4th, COSMAX announced that COSMAX WEST, its U.S. subsidiary, will convert the $200 million loan it had lent to its subsidiary COSMAX USA into equity. This means COSMAX USA will no longer have to repay the principal and interest of the loan borrowed from its parent company COSMAX WEST, effectively forgiving the U.S. subsidiary’s debt.

COSMAX has continuously invested in its U.S. subsidiary. COSMAX and Chairman Lee Kyung-soo invested 50% and 47% stakes respectively in COSMAX WEST, and COSMAX provided 16.3 billion KRW in support to COSMAX WEST. However, contrary to expectations, the U.S. subsidiary’s deficit widened, prompting COSMAX to undertake a rigorous structural reform. The conversion of the loan into equity was also intended to reduce financial burdens such as interest.

COSMAX USA, established in 2013, expanded its local business by acquiring L’Or?al’s Ohio factory the following year but has never turned a profit, remaining in the red for 11 years. In 2017, it made a bold move by acquiring the U.S. cosmetics ODM company NU-World, but both COSMAX USA and NU-World struggled, increasing their losses. The net loss was 58.5 billion KRW in 2021 and 86.7 billion KRW in 2022.

Thanks to a focus on profitability enhancement, last year’s performance improved somewhat. COSMAX decided to halt operations at the Ohio factory and operate only NU-World’s New Jersey factory. Although sales decreased, fixed costs were reduced, leading to a smaller loss. Most of the factory facilities previously in Ohio were relocated to New Jersey, and sales of unused equipment and factory land are underway.

This year, the performance improvement trend is expected to be more pronounced. The ODM ratio of COSMAX’s U.S. subsidiary is on the rise. In the fourth quarter of last year, the ODM sales ratio of COSMAX USA reached 80%, nearing its target. This was thanks to securing a large number of indie brands as clients locally. ODM sales are directly linked to COSMAX USA’s performance because ODM sales are much more profitable than OEM (Original Equipment Manufacturer) sales, which have lower margins. In the third quarter of 2022, the ODM sales ratio was only 40%, but it doubled in just over a year. A COSMAX official said, “The target for this year was about 80%, and in some months, it even exceeded 80%. The quarterly average for the fourth quarter rose to around 75-80%, higher than the third quarter.”

Currently, the U.S. beauty market is dominated by small and medium-sized indie brands. Since COVID-19, online channels have become the main sales route, leading to an influx of small products into the market. Among these, reasonably priced and high-quality products have gained popularity through word of mouth. Accordingly, local cosmetics companies are partnering with ODM manufacturers that can quickly develop and supply products rather than spending a long time developing cosmetics and launching them via OEM. Researcher Park Eun-kyung of Samsung Securities explained, “The continued rise in online shopping usage in the U.S. despite the endemic phase means new brands can keep emerging in the U.S. beauty market.” Additionally, large brands like L’Or?al and Shiseido, long-time clients of COSMAX, are reportedly increasing their order volumes.

With rosy prospects presented for ODM companies, COSMAX is cautiously expecting to turn a quarterly profit in the second half of next year. In October last year, it already surpassed the monthly break-even point (BEP). This optimism was also reflected in this year’s New Year’s message. Lee Byung-man, CEO of COSMAX’s holding company COSMAX BTI, emphasized, “Many indie brand companies will emerge this year, so we must become a service company that supplies fast and valuable products,” adding, “For indie clients, we need to establish a production system that allows for small minimum order quantities in the long term.”

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