Why are South Korean Cosmetics Sales Stagnant in China?

According to a recent Euromonitor report, the size of the Chinese cosmetics market reached US$62 billion in 2018 ^[1]. Interestingly growth in the South Korean cosmetics segment remained flat.

Amore Pacific Corp, LG Household & Health Care Ltd and other South Korean cosmetic brands failed to make their way into the list of China’s top 10 cosmetics brands.

• Amore Pacific's brands such as Innisfree and LANEIGE ranked 17^th (1.1% market share) and 37^th (0.6% market share) respectively.

• LG Household & Health Care Ltd’s high-end cosmetics brand WHOO ranked 46^th, with a market share of only 0.5% and sales in China of approximately US$310 million. WHOO’s market share in China only increased by 0.1% in the past 2 years, underscoring the high level of competition in the Chinese market.

Some South Korean media are attributing the stagnation to historical geopolitical tensions between China and South Korea, primarily the whole THAAD (Terminal High Altitude Area Defense) debacle in 2016, in which South Korea worked with the US to establish military installations right in China’s backyard. Undoubtedly THAAD was an important inciting event, but it is not the major reason why South Korean cosmetics are faltering in China. Other prominent reasons include:

Reason 1: South Korean Cosmetics Brands are positioned as affordable products in China. However their reputation has been blighted by efficacy and quality issues.

South Korean cosmetics main selling points are claims that allude to their "natural” and “healthy" characteristics. The earliest brands entering China played to these advantages while also offering a low price point and were generally well received by Chinese price conscious consumers. However, the rise of Chinese domestic cosmetic brands has eroded much of the advantages of their South Korean counterparts. Combined with issues relating to quality and efficacy, South Korean cosmetics stock has been failing of late.

The chief researcher of Euromonitor International said that South Korean cosmetic brands are facing challenges from all sides. Japanese cosmetics which are synonymous with high quality and safety and state of the art production techniques are surging, as too are European and American brands. In recent years, there has been somewhat of a renaissance amongst China’s domestic sector and many Chinese cosmetics are leveraging their localization to include traditional herbal ingredients in their products. Combined with their price advantage there has been a strong resurgence of domestic cosmetics in China.

Reason 2: South Korean cosmetics brand marketing strategies are not localized

The offline sales methods of cosmetics in South Korea are roughly divided into 3 types, brand franchise stores, retail chain stores, and shopping mall counters. Missha, Innisfree and The Face Shop are usually sold in brand franchise stores or direct-sale stores in South Korea. These kind of cosmetics’ franchise stores are mainly located in tourist attractions and universities, attracting young consumers through monthly discounts, fashion packages and popular ingredients.

              

After these brands entered China, they adopted a similar operation mode, directly opening a franchise store or setting up counters in shopping malls. However, positioning products in these retail channels connotes an inherent higher quality and breeds high expectations of exceptional efficacy and quality amongst Chinese consumers. Failure to deliver on these expectations has placed South Korean cosmetics down the pecking order in comparison to other imported cosmetics.

In addition, high-end South Korean cosmetics invest heavily in online advertising, and ignore the influence of satellite TV advertising in the Chinese market. Compared with online advertising, middle-aged people are more accepting of TV commercials. 

Reason 3: The influence of Chinese Daigou

Daigou has contributed a lot to the popularity of South Korean cosmetics in China. China and South Korea are neighbors and it is very convenient to travel back and forth. South Korea has vigorously supported the thriving daigou sector by opening duty-free shops and launching various preferential policies. Based on this the price of South Korean cosmetics purchased through Daigou is lower that other official sales channels. This phenomenon has gradually left many Chinese people with the impression that the only cost-effective way to purchase South Korean cosmetics is through Daigou.

Daigou does bring a lot of profit to South Korean cosmetic brands, but at the same time, it makes Chinese not willing to buy products at the original price, thus curbing the growth of these brands sales in Chinese department stores or Tmall flagship shops.

*Daigou: Chinese diaspora or tourists that purchase goods in foreign countries and bring them back to China and sell at a higher price.