Recently, Korean beauty giant Amorepacific’s brand Laneige, announced its entry into the North American and Mexican markets. Before this, Japanese beauty company Kosé announced the launch of its popular Japanese cosmetics brand, ADDICTION TOKYO, in the United States. Against the backdrop of their retreat from the Chinese market, Japanese and Korean beauty brands are increasingly viewing the North American market as a new growth opportunity. However, despite the growing importance of the Chinese market, focusing on the North American market has not brought a turning point for Japanese and Korean beauty companies.
The growth rate in the Chinese market has slowed down
As the world’s second-largest cosmetics market, China has been an important component for Japanese and Korean beauty brands operating within it.
Over the past decade, the amount of cosmetics imported from Japan and Korea to China has consistently ranked within the top three. In 2017 and 2018, South Korea became the largest importer of cosmetics to China, with France in second place and Japan in third.
From 2019 to 2021, Japan replaced China as the top import country for cosmetics in mainland China. In 2019, Japan’s exports of cosmetics to mainland China exceeded $3 billion for the first time, reaching $3.134 billion. In 2020, the figure surpassed $4 billion, reaching $4.292 billion.
With the rising popularity of Korean and Japanese dramas in China, Japanese and Korean beauty companies, such as Shiseido and Amorepacific, have gained favor among Chinese consumers. However, due to factors such as the lag in localizing Japanese and Korean beauty products in China and political reasons, the presence of Japanese and Korean beauty brands in China has gradually declined. This change can be observed directly from the financial reports of representative Japanese and Korean beauty companies.
Shiseido, as a typical representative of Japanese beauty brands, has always considered the Chinese market as one of its most important components. In 2021, sales in the Chinese region increased by 16.5% compared to the previous year, achieving double-digit growth once again. Furthermore, the Chinese region officially surpassed Japan to become Shiseido’s largest market, a position it maintained in 2022.
Although the Chinese region holds a significant position in Shiseido’s performance, the growth rate of Shiseido’s overall performance has also slowed down. In 2022, Shiseido’s annual sales in the Chinese market amounted to 258.2 billion yen, a year-on-year decrease of 6% (or 18% on a constant currency basis). Its core operating profit decreased by 8 billion yen from 40.95 billion yen in 2021, resulting in a loss of 3.941 billion yen in the Chinese market. There are signs of declining performance and operational efficiency for Shiseido in China.
Taking Amorepacific, a representative Korean beauty company, as an example, its revenue reached 5.645 trillion Korean won in 2016, reaching a new high in nearly a decade. Due to its growth in China, its overseas business increased by 35% year-on-year. However, in the following years, Amorepacific’s growth rate in the Chinese region slowed down, leading to an overall slowdown in performance. It experienced a 9.2% decline in 2017, followed by growth of 3% and 5.7% in 2018 and 2019, respectively.
In 2020, due to the impact of the pandemic, Amorepacific’s revenue plummeted by 20% to 4.4322 trillion Korean won, falling below 5 trillion Korean won for the first time since 2016. In 2021, its revenue showed some recovery, with a 9.7% increase compared to 2020. However, the Asia region, where Chinese business accounts for 70% of revenue, only grew by 2%. In 2022, Amorepacific’s performance declined by 15% to 4.1349 trillion Korean won, with Chinese business, which accounts for 60% of revenue in the Asia region, experiencing a significant drop of 24%.
It is evident that the strong development of European and American brands such as L’Oréal and Estée Lauder in the Chinese market, as well as the rise of local Chinese brands, have undoubtedly weakened the market position of Japanese and Korean beauty brands. Additionally, as the influence of Japanese and Korean culture gradually diminishes, Japanese and Korean beauty brands in the Chinese market have entered a period of decline after their previous glory.
Japanese and Korean beauty brands are shifting their focus to the North American market
Facing challenges in China, Japanese and Korean beauty brands are shifting their focus towards the North American market.
Korean companies, in particular, are reducing the number of stores in China due to sales difficulties. LG Household & Health Care stated, “The company is diversifying its business portfolio and shifting its focus from China to other markets, including the United States.”
As part of these efforts, in 2022, LG Household & Health Care acquired a controlling stake in The Crème Shop Inc., a beauty brand based in Los Angeles, for $120.2 million. In May 2022, LG Household & Health Care Global Pharmaceutical Company finalized a deal to acquire the Asian and North American business rights of Physiogel for £125 million. Physiogel is a derma-cosmetic and personal care brand originating from Germany, with sales in Asia, Europe, and South America, particularly popular in Korea. Additionally, LG acquired the premium toothpaste brand Euthymol from the UK and later acquired Arctic Fox, a popular vegan hair care brand among millennial and Gen Z consumers in the United States.
Another Korean beauty giant, Amorepacific, announced earlier this year that the United States is one of its main growth markets and has formulated extensive international expansion plans with recent innovative support. According to recent financial data, Amorepacific’s overseas sales reached 1.8 trillion Korean won in 2022, accounting for 37% of total sales, and the company aims to surpass this figure this year.
In the United States, Amorepacific’s three major brands – Sulwhasoo, Laneige, and Innisfree – have expanded their e-commerce and retail business through renowned retailers such as Sephora and Bloomingdale’s. On September 1, 2022, Amorepacific announced the official acquisition of Tata Harper, a high-end clean beauty skincare brand in the United States. This acquisition, with a focus on the North American beauty consumer market, undoubtedly signifies Amorepacific’s determination to continue global market expansion.
As a representative of a Japanese beauty and cosmetics company, Shiseido has also begun planning to shift its focus to the North American market.
In October 2019, Shiseido acquired the American brand Drunk Elephant for $845 million. Shiseido stated in a press release that “Drunk Elephant will be able to leverage Shiseido’s global platform and resources to expand into new and existing markets both in the Americas and internationally including Europe and Asia.”
Earlier this year, Shiseido Americas restructured its leadership and announced the appointment of Agnes Landau as Chief Marketing Officer for the United States, a newly established position. Landau previously worked at Estée Lauder and held positions such as Senior Vice President of Strategic Transformation for MAC Cosmetics North America and President and Global General Manager of Darphin. She also served as Chief Marketing Officer for Clinique.
“Today, the Americas region continues to be dynamic, resilient, and most of all, a compelling opportunity for growth,” said Ron Gee, president and CEO, of Shiseido Americas, and global leader, of M&A for Shiseido. “As a key strategic priority for Shiseido, we will continue to focus our energies on the Americas region, particularly among our marketing, commercial, and digital functions.”
Recently, another Japanese beauty brand, Kosé, launched the popular Japanese makeup brand ADDICTION TOKYO in the United States, indicating that Japanese beauty brands are also focusing on the North American market.
According to financial data for the first half of this year, Japanese and Korean beauty brands have achieved certain results in the North American market. Financial reports indicate that LG Household & Health Care experienced significant sales growth of over 20% in the North American region. However, overall, LG Household & Health Care’s overseas sales only slightly increased by 1.6% in the first half of the year, mainly due to underperforming performance in the Chinese market. This indicates that the growth in the North American region is not sufficient to offset the slowdown in the Chinese market.
On the other hand, Amorepacific Corporation saw a year-on-year increase of 27% in overseas sales for the first half of this year. Amorepacific achieved triple-digit sales growth in the North American and EMEA (Europe, Middle East, and Africa) regions. At the same time, sales in the Chinese market also grew by over 20%, leading to a turnaround from a loss to a profit in operating profit for the second quarter of 2023.
Shiseido had a similar experience, with comparable net sales growth of 23.3% in the Americas region in the first half of this year. However, its overall comparable net sales growth was only 8.5%, significantly lower than in the Americas region. This also indicates that the sales in the Americas region did not successfully drive overall performance growth for Shiseido.
Looking at LG Household & Health Care and Amorepacific’s investments in the North American market, both Korean beauty giants achieved significant growth in the North American market, but their overall performance growth differed. LG Household & Health Care saw a significant decline of over 20% in operating profit and net profit for the first half of 2023, while Amorepacific turned losses into profits. The main reason for this difference is that LG Household & Health Care’s growth in the Chinese market in the first half of the year fell short of expectations, while Amorepacific experienced growth of over 20%.
It is evident that although Japanese and Korean beauty brands have achieved significant growth in the North American market after focusing on it, it has not resulted in a noticeable overall performance growth.
An act of helplessness
The focus of Japanese and Korean cosmetics shifting to the North American market is an act of helplessness due to the irreversible decline of their brand influence in China.
According to data from the General Administration of Customs of China from 2016 to 2022, the main countries of origin for imported cosmetics in mainland China are France, South Korea, Japan, the United States, and the United Kingdom. Over the past seven years, these three countries have alternated in the top three positions.
From 2019 to 2021, Japan was the number one importing country for cosmetics in mainland China. However, in 2022, France surpassed Japan and became the largest importer of cosmetics in mainland China. France’s cosmetics exports reached $4.551 billion, surpassing Japan’s $4.506 billion, accounting for 25.37% of the total cosmetics imports in mainland China. Meanwhile, South Korea’s position continued to decline, further widening the gap with Japan and France. In 2022, China imported cosmetics worth $2.571 billion from South Korea, falling below $3 billion for the first time since 2017. At the same time, the United States’ imports reached $2.03 billion, showing a trend of surpassing South Korea.
For Japanese and Korean cosmetics, the Chinese market not only offers the advantage of geographical proximity, which reduces supply chain costs but also shares certain cultural similarities. Hence, the development of Japanese and Korean cosmetics in the Chinese market has a natural advantage. However, their recent shift of focus towards the geographically distant and culturally diverse North American market is indeed an act of helplessness.
The decline of Japanese and Korean cosmetics in China can be attributed primarily to their failure to keep up with Chinese consumers’ preferences in terms of products and marketing strategies.
The initial success of Japanese and Korean cosmetics in China can be attributed to the popularity of Japanese and Korean culture in the country, as well as factors such as tourism and cross-border consumption. The endorsement of Japanese and Korean celebrities played a significant role in attracting consumers to their cosmetics. Additionally, during peak periods, millions of Chinese tourists traveled to South Korea and were enthusiastic buyers of Korean cosmetics in duty-free shops.
However, in recent years, these factors that once appealed to Chinese consumers have lost their advantages due to the rise of domestic Chinese brands. Furthermore, Japanese and Korean cosmetics have failed to keep up with the evolving trends in product development and marketing.
When Japanese and Korean cosmetics entered the Chinese market, the Chinese cosmetics market was still in its early stages, and Chinese consumers had a strong interest in foreign products. Japanese and Korean cosmetics were also reasonably priced, and the endorsement by Japanese and Korean celebrities quickly opened up the market.
In recent years, with the rise of domestic Chinese brands and the rapid development of the Chinese cosmetics market, Chinese consumers have become increasingly independent in their consumption decisions. They no longer blindly follow trends but actively seek out products that suit their needs. Additionally, domestic Chinese products are better aligned with the demands of Chinese consumers in terms of price, product efficacy, and marketing strategies. Furthermore, the rapid influx of European and American brands has made Japanese and Korean cosmetics no longer the top choice for Chinese consumers but rather an optional brand. Therefore, the decline of Japanese and Korean cosmetics in the Chinese market is a natural consequence.
While it is possible to remedy the lack of product alignment with Chinese consumers, a series of political events has had an irreversible impact on Japanese and Korean cosmetic brands in China.
For Korean cosmetics, the THAAD incident led Chinese consumers to spontaneously boycott Korean goods, and the influence of Korean entertainment in China has gradually declined, which has had a significant impact on Korean brands. While Korean cosmetics may still offer good value for money in terms of product quality, Chinese consumers believe that nothing is irreplaceable, especially with the rise of domestic Chinese brands. In 2022, China imported cosmetics worth $2.03 billion from the United States, narrowing the gap with South Korea, and surpassing South Korea may only be a matter of time.
As for Japanese cosmetics, the release of nuclear wastewater into the ocean by Japan has triggered a peak in consumer boycotts of Japanese cosmetics in China. Some media outlets have pointed out that while the safety of Japanese cosmetics may not be an issue, the issue of Japan’s disposal of nuclear wastewater into the ocean is a betrayal of Japanese cosmetic brands in an already challenging situation in the Chinese market. The damage to the brand image caused by the release of nuclear wastewater far outweighs the product itself. Not only in terms of products, but the Chinese cosmetics industry has also witnessed a wave of resistance against Japanese ingredients, which is a significant blow to the Japanese cosmetics industry.
In conclusion, the shift of Japanese and Korean cosmetics to the North American market can be seen as a necessary move. Repairing brand image will be a challenging task. After all, Chinese consumers have the freedom to choose alternatives to Japanese and Korean cosmetics.
