|A sales lady actively hollers out to tourists to visit a cosmetics shops in the streets of Myeong-dong, Seoul, Tuesday. / Korea Times photo by Shim Hyun-chul|
By Kim Ji-soo
On weeknights, the streets of Seoul's Myeong-dong are filled with consumers of all ages and nationalities browsing and buying from K-cosmetic shops and food carts.
Numerous cosmetic shops remain open late into the night to cater to foreign tourists, often on their own or in small groups, who have come to the country for their summer vacations. Notably absent, however, are the usual large groups of Chinese tourists, who had driven much of the sales for Korean tourism and consumerproducts and services.
Since Korea's decision to deploy a U.S. Terminal High Altitude Area Defense (THAAD) missile defense system, sales, particularly to the previously reliable Chinese tourist groups, have fallen. Industry watchers have been anticipating that second-quarter profits would be in line with the impact on business of political tension created by the THAAD deployment. China has taken steps to protest the deployment, including banning Korea package tours in mid-March.
The release of the second-quarter results has confirmed the concerns.
"The drop in performance in the second quarter may well be the biggest (for some companies), as (thriving) K-cosmetics companies' expectations for the quarter did not materialize," said Na Eun-chae, an analyst for Korea Investment and Securities Co. But Na expects the drop will peter out in the third quarter as companies reset their goals.
In July, AmorePacific, the maker of such popular cosmetics brands as Sulwhasoo, Mamonde, Innisfree and Etude House, announced a 17. 8 percent drop in sales for the second quarter to 1.41 trillion won from the same period over the previous year. It's operating profit dropped 57.9 percent to stand at 130.4 billion won.
Another top beauty and health consumer products maker, LGHousehold & Health Care, said its sales dropped slightly by 1.53 percent to 1.53 trillion won, although its operating profit rose slightly by 3.1 percent to 232.4 billion won.
Korea has also the world's top original developers and designers of cosmetics such as Kolmar and Cosmax. An official at top original design manufacturer Cosmax said while they did not necessarily have a positive forecast for the second quarter of the year, the industry sentiment is that original equipment manufacturers and ODM companies will do better than cosmetics companies on the back of domestic demand.
"But for the moment, it's really difficult to forecast an uptick for the industry, as there have been no significant hikes in the number of inbound Chinese tourists, for example, to Jeju Island," Na said. She said industry watchers are closely monitoring new developments, in particular in China.
North Korea's test-firing of a second intercontinental ballistic missile Friday night, and Seoul's decision to temporarily place the remaining four interceptor missile launchers of the THAAD system are not helping.
In the meanwhile, the companies have been working to diversify into other Asian markets such as Malaysia and Thailand, and also the world's top cosmetics market the United States.
"I do see more activity and resources being allocated to the U.S. and there are more brands reaching out to Soko Glam," said Charlotte Cho, co-founder and chief curator of Soko Glam, a U.S.-based retailerof K-beauty products.
Companies such as It's Hanbul and Coreana are strengthening their ties with Chinese companies to hold onto the Chinese consumer market, while The Saem has been stepping up its presence in Japan, opening Tokyo shops in both Shinjuku and Ginza. Meanwhile, Dr. G, a dermatology-based cosmetic brand by Gowoonsesang Cosmetics, will begin selling its products at U.S. pharmacy chain Walgreens in the second half of the year.
Some K-beauty companies are also shifting toward makeup products from skincare products they are known for to further promote brand awareness.
The travel industry is also significantly affected by the political tensions created by the THAAD deployment. Acknowledging the challenges posed by the absence of the Chinese tour groups, the Ministry of Culture, Sports and Tourism has announced 60 billion won in special loans to the travel industry to help beleaguered companies.
"I think for the K-beauty firms, having enjoyed big benefits from big-spending Chinese consumers, are experiencing the fallout from placing all their eggs in one basket," said Suh Yong-gu, professor of business administration at Sookmyung Women's University, adding that they should expand out to Europe, the Middle East, Japan, and the Americas as some are doing.
"A more sustainable strategy for them would be to make sure that Chinese market makes up a maximum of 40 percent of their revenue, and the rest of the world make up the remaining portion."