[Asia Economy Reporter Song Hwajeong] Concerns are growing about the cosmetics industry. This is because the growth rate of the Chinese market is showing a slowdown amid the prolonged COVID-19 pandemic, which has slowed the recovery speed. Although next year is expected to improve compared to this year, it is uncertain whether it can meet market expectations.
According to KB Securities on the 25th, the domestic cosmetics market experienced an unprecedented recession last year due to COVID-19, and the recovery has been very slow this year as well. In 2020, sales at specialty retail stores (offline channels) fell by 40%, and sales are declining further this year. Despite a 16% drop in department store sales in 2020, the sales recovery this year remains weak. Shin-ae Park, a researcher at KB Securities, analyzed, "As mask-wearing has continued for two years, the usage of cosmetics is estimated to have decreased, and there is a preference for mid-to-low priced products and discount competition, causing the average selling price (ASP) to decline," adding, "In addition to sluggish growth rates, the domestic cosmetics market is becoming increasingly fragmented due to low entry barriers."
Domestic duty-free shops generate sales mainly from high-priced foreign brands and a very small number of domestic brands. Cosmetics sales in domestic duty-free shops fell by 21% in 2020, but have shown growth in the 10% range this year as demand from Chinese peddlers has somewhat recovered. With the absence of tourist sales continuing for two years, Chinese peddlers are still driving duty-free market sales this year. Researcher Park explained, "The domestic duty-free channel is showing a severe rich-get-richer and poor-get-poorer phenomenon," adding, "Demand from peddlers is concentrated on high-priced foreign brands preferred by Chinese consumers, and among domestic brands, only a few such as 'Whoo', 'Sulwhasoo', and 'Dr. Jart+' (acquired by Est?e Lauder in 2019) are chosen by peddlers."
In particular, concerns about the slowdown in the growth rate of the Chinese cosmetics market are increasing. This is because retail sales of cosmetics in China grew by only 3% year-on-year in July and showed 0% growth in August. With a slowdown in market growth inevitable in the third quarter and a very high base of last year's performance in the fourth quarter, Park said, "Global cosmetics companies are focusing their capabilities on the Chinese market again this year following last year, and despite the slowdown in market growth, there are no signs of easing competition," adding, "This is the reason why sales estimates for domestic cosmetics companies such as AmorePacific and LG Household & Health Care in China are being revised downward."
KB Securities downgraded its investment opinion on the cosmetics sector from 'outperform market' to 'neutral.' Researcher Park explained, "Due to concerns about the slowdown in the Chinese cosmetics market growth, expectations for sales and profits of domestic cosmetics companies operating in China are being revised downward, which could weaken performance momentum and investor sentiment."
Although the situation is expected to improve next year, it remains to be seen whether it can meet market expectations. Researcher Park said, "With increasing vaccination rates and normalization of daily life, the global cosmetics market is likely to improve significantly next year compared to this year, and cosmetics companies' performance is also likely to improve," but added, "However, these expectations are already reflected in performance estimates from 2022 onward, and while the direction that next year's performance will improve compared to this year remains valid, there is uncertainty about whether it will truly meet market expectations."
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