The domestic cosmetics industry rapidly grew in the mid-2010s as K-Beauty became popular in China amid the Korean Wave. However, this golden era quickly disappeared after the deployment of the Terminal High Altitude Area Defense (THAAD) system in 2017, which led to the imposition of the Hallyu ban (ban on Korean Wave) in China. The cosmetics industry, which had been in a slump, began to see expectations for easing of the Hallyu ban sanctions from the end of last year. However, the novel coronavirus disease (COVID-19) is pushing the cosmetics industry into another period of upheaval. It is reducing the share of duty-free shops and road shops, which are major sales channels for existing domestic cosmetics companies, while increasing the share of online sales. Even cosmetics that need to be used on sensitive skin are becoming primarily distributed through online channels. Domestic companies are restructuring their business models from offline to online to survive. Asia Economy aims to examine how domestic cosmetics companies Amorepacific and Cosmax are adapting to the untact (contactless) environment and to gauge their future growth potential.
[Asia Economy Reporter Hyungsoo Park] Due to the impact of COVID-19, the number of companies adopting remote work has increased and external gatherings have decreased, leading to a decline in cosmetics consumption this year. While the overall cosmetics market has contracted, the sales of cosmetics original design manufacturing (ODM) company Cosmax have actually increased compared to the previous year. This is thanks to the growing number of consumers purchasing cosmetics online, which has lowered the barriers for new cosmetics brands to enter the market.
According to related industries and KB Securities on the 16th, the size of the domestic cosmetics market this year is expected to be 32.4 trillion KRW, about 7% less than last year. The use of cosmetics has decreased due to mask-wearing, remote work, and reduced outings, and sales through duty-free channels have also declined.
While the overall cosmetics market is expected to remain sluggish, the growth trend in cosmetics ODM is likely to continue. Coherent Market Insights, a U.S. market information consulting firm, forecasts that the global ODM market size will grow at an average annual rate of 5.7% until 2027. Demand for cosmetics ODM is increasing not only from new brands but also from existing brands and private label brands (PB).
Cosmax recorded consolidated sales of 1.0284 trillion KRW and operating profit of 56.2 billion KRW through the third quarter of this year. These figures represent increases of 5.2% and 51.4%, respectively, compared to the same period last year. ODM companies like Cosmax propose concepts or products they have developed to clients and begin production once orders are confirmed. Over 98% of Cosmax’s total sales come from ODM.
Cosmax’s strengths lie in its technology and quality control. About 25% of its total workforce is engaged in research and development. To strengthen expertise in various fields, Cosmax relocated its research division to Pangyo Innobally in 2011 and expanded it into the Cosmax Technology Research Institute. It is developing products that blur the lines between basic and color cosmetics and offer various functions. It has obtained international cosmetics standards certification and organic certification, establishing a quality control system that consumers can trust.
As the share of ODM increases in the domestic cosmetics market, Cosmax is expected to grow alongside it. In the past, the domestic cosmetics market grew mainly around a few famous brands, but recently interest in new brands has increased. The domestic cosmetics industry is using social networking services (SNS) as a core business tool. This is not just for product promotion but involves operating from product development to sales centered on SNS. Positive effects on actual sales and customer inflow rates have led to market expansion where small and medium-sized venture companies can penetrate. With distribution channels concentrating online, market entry barriers have lowered. Since 2014, the domestic cosmetics market distribution structure has gradually expanded from specialty stores and discount stores, which were dominated by large corporations, to H&B stores and online channels. As competition among online open market platforms intensifies, online channel sales commission rates have dropped to as low as 3-4%. The distribution channel, which was the biggest entry barrier for small capital startups, has become simpler and more profitable. This is why opportunities for small capital startups focusing on product planning and marketing while outsourcing cosmetics production to ODM companies are increasing.
While the outlook for the cosmetics ODM market is bright, it is unfortunate that Cosmax has limited capacity for investment to expand production capabilities. Yoon Jeong-han, a researcher at Mirae Asset Daewoo, analyzed, "Cosmax’s actual operating rate is understood to be over 75%. Considering the nature of the industry and idle equipment, this operating rate is at the limit." He added, "Due to the net debt ratio and issues such as accounts receivable and loans to the U.S. subsidiary that are unlikely to be recovered in the short term, investment capacity is limited. However, investments in automation equipment and production workforce efficiency will continue."
As of the first half of this year, Cosmax’s consolidated debt ratio was 291.2%, and total borrowings dependency was 47.6%.
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