Cosmetics Industry Frustrated by China Lockdown... When Will Spring Come for Amore and LG Saenggeon?

by Moon Hyewon

Published 12 Apr.2022 07:13(KST)

On the 4th, a quarantine worker wearing protective clothing stands in the middle of an empty street in the locked-down area of Jing'an District, west of Shanghai, China. Shanghai, a mega-city with a population of 25 million, known as China's "economic capital," has been under lockdown since the 28th of last month to prevent the spread of COVID-19. Photo by Yonhap News Agency

[Asia Economy Reporter Moon Hyewon] As the lockdown in Shanghai, the economic capital of China, prolongs, domestic cosmetics companies highly dependent on Chinese exports are facing difficulties.

According to export-import trend data from the Ministry of Trade, Industry and Energy on the 11th, cosmetics export value has been declining for three consecutive months this year. Cosmetics export values were ▲$567 million in January ▲$586 million in February ▲$712 million in March, down 24.6%, 5.1%, and 16.5% respectively compared to the same period last year. This is analyzed to be due to regional lockdowns and strengthened customs clearance following the recent increase in new COVID-19 cases in China.

Red flags have also been raised for the first half performance of domestic cosmetics companies this year. According to the consensus (earnings forecasts from three or more securities firms) compiled by financial information provider FnGuide, Amorepacific's operating profit for Q1 this year is expected to be 145.7 billion KRW, a 17.35% decrease compared to the same period last year. In particular, overseas segment operating profit is predicted to have decreased by 69%. Amorepacific's duty-free, overseas subsidiaries, and export sales account for 60% of total sales.

During the same period, LG Household & Health Care is forecasted to record 357.6 billion KRW, a 3.49% decrease. As of the end of last year, LG Household & Health Care's duty-free sales amounted to 1.8 trillion KRW, mostly driven by Chinese demand. This accounts for a significant 41% of total cosmetics sales.

The sales slump of cosmetics companies has continued since last year. Due to strict control policies, domestic consumption in China has contracted, and many stores have been forced to close. The duty-free business was hit hard by the decrease in foreign tourists, and demand for cosmetics declined due to mask-wearing. On top of that, the import cosmetics registration standards required by Chinese regulatory authorities have become more stringent, and the business of daigou (Chinese personal shoppers) has also shrunk, compounding the negative impact of COVID-19.

The indefinite production halt at Amorepacific’s Shanghai factory due to the local lockdown is also a burden. The Shanghai factory is a key production site in China, producing about 100 million units annually of products such as Etude, Innisfree, and Mamonde.

LG Household & Health Care, which has a factory in Guangzhou where lockdown measures have not been imposed, is also closely monitoring the situation in preparation for potential strengthening of Chinese government regulations.

An Amorepacific official said, "Since the production of main products and most research facilities are carried out domestically, there is no major problem," adding, "There is currently no inventory issue in China, but we are watching the situation closely."