- South Korean labels were the big winners in FT Confidential Research's latest survey of China's most popular cosmetics brands, as they catch up on dominant US and European companies.
- Their popularity is strongest among young consumers, supported by the fashion for Korean pop music and television. We expect global market leaders to continue to tap into this trend with more acquisitions in the Korean cosmetics industry.
- Online cosmetics sales look set to continue to grow faster than the overall market and established brands will increasingly focus on this sales channel to drive revenues.
Recent intergovernmental spats over anti-ballistic missile systems have failed to harm actress Song Hye-kyo's standing among young Chinese shoppers. China's official displeasure with Seoul over its agreement with the US to deploy the Terminal High Altitude Area Defense system has reportedly triggered restrictions on Korean cultural imports such as those starring Ms Song.
But the star of South Korean drama Descendants of the Sun is also the face of cosmetics firm Laneige, a big winner among respondents to FT Confidential Research's latest survey of 2,000 urban Chinese consumers. Laneige is one of several Korean cosmetics brands that have surged in popularity to overshadow their Japanese and Chinese rivals.
Korean brands gain on western giants
Western brands still dominate. L'Oreal was out in front, selected by 19.2 % of respondents as one of the two most frequently purchased brands. But the pressure is on: the 76.1 % of respondents who chose European and American brands was down 5.2 percentage points from our survey in the fourth quarter of last year.
Although only 16.2 % of respondents said they most regularly buy Korean brands, this is up sharply from 10.1 % in our previous survey. The popularity of these brands is reflected in data from the General Administration of Customs showing a 229 % jump in the import value of Korean cosmetics last year.
Ms Song's star power helped push up Laneige's popularity to 5.2 % among respondents in our latest survey from 2.4 % in the fourth quarter of 2015, while Amorepacific also gained in popularity. The Seoul-based company's China revenues jumped 60.5 % last year to Rmb4.22bn ($620m) while L'Oreal's increased just 4.6 per cent. Japanese and Chinese brands were also laggards in our survey, reflected in China sales growth of just 3.7 % last year for Shiseido.
Young consumers turning to regional brands
Crucially, the Korean brands' rise is being driven by younger consumers. Amorepacific, the leading Korean brand, was chosen by 26.4 % of respondents aged 18 to 24 (see chart). In contrast, Korean brands were selected by just 6.5 % of over 35s, whose overwhelming preference - among 81.7 % of respondents - was for established European and US brands.
This trend has not been lost on western companies. LVMH, the world's biggest luxury group, announced a $50m investment in South Korean cosmetics maker Clio in July. Estee Lauder last year bought a stake in Korea's Have & Be, owner of skin care brand DR Jart+ and male grooming range Do The Right Things. We expect further acquisitions of Korean cosmetics companies by western brands in coming years.
Colour cosmetics buck slowing sales trend
At the heart of demand for Korean brands is a fashion for BB and CC creams, all-singing, all-dancing skin care products that include properties ranging from moisturizing to skin whitening to anti-aging. Among cosmetics purchasers, 73.8 % of respondents said BB and CC creams were the products they bought most regularly.
While cosmetics sales growth in China slowed to 8.8 % last year, compared with 10.7 % growth in total retail sales, sales of color cosmetics rose 10.9 per cent. Within that, the premium color cosmetics segment grew 12.6 %, according to Euromonitor.
This market remains in its infancy, accounting for just 18 % of the overall cosmetics market, compared with 48 % in South Korea, according to Euromonitor. Chinese consumers are catching up, however. The most popular cosmetics-related internet search term last year was "the correct steps for makeup", according to China Internet Watch.
Narrowing international price gap
Government policy is helping boost sales. In October, a 30 % consumption tax on cosmetics was scrapped for mass-market products and cut to 15 % for premium ones. Narrowing price differentials and increased availability of these goods were already reflected in a March FTCR survey showing spending on cosmetics by Chinese travelers to Korea had grown just 3 % year on year, down from 39 % in 2015.
As the price gap narrows further, buying sprees in duty-free shops overseas may become a thing of the past. It certainly spells trouble for daigou - professional shoppers or friends and relatives shopping overseas on behalf of domestic consumers - which is how 15 % of respondents source their cosmetics, our survey found.
Online sales outperform
Unsurprisingly, e-commerce was the most popular purchase channel for our youngest group of buyers (61.4 %), while the over-35s preferred the shopping mall or supermarket (47.2 %). We expect online channels to outperform as the incomes of younger consumers continue to rise (see chart).
Despite L'Oreal's middling overall sales growth last year in China, the company reported a 37.9 % increase in sales via its e-commerce channel to account for 20 % of the total. A manager with L'Oreal China told FTCR the company was introducing packaging designed for online sales rather than developing it exclusively with physical stores in mind.
These article was first published on Nov. 9 by FT Confidential Research.
FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. Team of researchers in these key markets combine findings from proprietary surveys with on-the-ground research to provide predictive analysis for investors.