South Korea - Staging a comeback

After two years of stagnation in the C&T industry, 2005 marked a reverse in the slowdown of the third largest cosmetics and toiletries market in Asia Pacific. Euromonitor International's latest view indicates the South Korea is set for further positive growth in 2006

South Korea’s total C&T sales eclipsed US$5.4bn in 2005 reflecting almost 3% growth over the previous year in fixed exchange terms. Such news will resonate well with cosmetics and toiletries giant L’Oréal, who in spite of setbacks in 2004, displayed faith in the market’s recovery by pledging to continue investment in Korean consumers and employees in March 2005. L’Oréal Korea’s ceo, Klaus Fassbender’s belief that “the market goes in cycles...Korea will come back” is proven to be sound. Local players, including Amore Pacific Corp and Abel C & C, will also breathe a sigh of relief given that they have recently embarked on costly missions of international expansion. So what has been driving Korea’s growth? What are the key developments in the sectors and who and what should we watch out for in the future?

Small but strong

Although skin care, colour cosmetics and hair care count for the lion’s share of the South Korean cosmetics and toiletries market, their sales remained relatively flat over 2005. In contrast, depilatories and deodorants, although minor relative to overall market size, recorded record growth due to a flurry of new product launches. Double-digit growth was also evident in bath and shower, men’s grooming and sun care, all of which have tremendous potential. The only sector to shrink in 2005 was fragrance, but this can be largely attributed to industry reorganisation.

Recent fashion trends and increased openness among South Korean women have created a need for effective depilatories. The perception that existed previously in South Korea, that hair removal causes thicker regrowth was clearly put to one side in 2005, facilitating the successful launch of Reckitt Benckiser’s hair removal cream Veet into a market that had scarcely experimented with any products outside of razors and blades. Rigorous promotions resulted in the brand reaching impressive sales. Market leaders Schick and Dorco also unleashed advanced products that commanded premium prices resulting in an overall increase in depilatory sales of 32% in 2005.

The deodorant sector followed in the footsteps of depilatories in 2005 with its significant development, mostly attributable to its ability to overcome convictions deeply engrained in South Korea’s culture; the belief that the perspiration level of Asians is lower than Westerners is commonly accepted among South Korean consumers. However, manufacturers have refused to give up on the sector as they believe that the reason for low penetration stems from their high tolerance to body odour. Education is their preferred means by which to develop the sector’s potential as exemplified by the Face Shop’s sector entry strategy in 2005 which featured intensive media advertising heralding the product benefits.

Men go mainstream

The ‘metrosexual’ trend that was identified in Western Europe in 2001 has definitely arrived in South Korea. In a 2005 advertising survey over 75% of respondents agreed to the statement that men are getting more feminine. In part it can be attributed to the popularity of a new set of aspirational TV stars and aggressive promotion from cosmetics and toiletries manufacturers. However, changing lifestyles have been the most influential factor. A trend for delaying

marriage until later means that professional Korean men in their 20s have the most disposable income of all age brackets. They have deferred a mortgage and family obligations in favour of a rent-free bed in the family home, making them an obvious target for cosmetics and toiletries manufacturers and facilitating strong growth of 11% in men’s grooming in 2005.

All subsectors with the exception of men’s post-shave exhibited double-digit value growth since 2004. Manufacturers are injecting dynamism into razors and blades via the introduction of products with advanced features and technologies that justify increased unit prices; in early 2005 Gillette launched the M3 power with a libration function added via a motor to assist in shaving, which retails at 9,990 won.

Men’s skin care is the largest sub-sector with 60% of value sales in 2005. Growth in this area was sustained by increased categorisation. Manufacturers moved away from traditional staples of facial moisturisers to launch dedicated men’s lines of eye and nail care. 2005 saw interesting launches from local players including Amore Pacific Corp Odyssey Sunrise Cool Eye, an eye serum for men that claims to relieve signs of fatigue and LG Household and Healthcare Ltd’s Vonin The Style Photogenic, a stick concealer to correct facial tones. To sustain growth rates in this sector manufacturers should both follow successful developments in women’s skin care and attempt to increase penetration by increasing awareness among older men.

Forecasts indicate that men’s grooming as a whole will massively outperform the total cosmetics and toiletries market over the next five years, presenting a great opportunity for manufacturers able to capitalise on heightened consumer needs and product awareness.

Stagnant skin care

Skin care, with value sales of US $17.7bn, represents the largest sector in the South Korean cosmetics and toiletries market. Minimal growth was exhibited in 2005 as manufacturers struggled to combat both the sector’s maturity and increase in volume and value sales through lower end concept brand stores such as Missha and the Face Shop.

The global trend for high performance products that fight the signs of ageing has reached South Korean skin care. One of the most notable developments in facial skin care, which accounted for 97% of value sales in 2005, was the proliferation of home peeling kits promising professional results at a fraction of the time and cost required to undergo specialist treatment at the salon. Lancôme was the trailblazer with its version, and the competition quickly followed suit with all major players in premium and mass skin care marketing some version of the product by the end of 2005. Indeed many skin care products launched in 2005 had notable anti-ageing functions. The introduction of such value added benefits will be key to driving up unit prices and capturing the attention of the lucrative over 40s segment with their increasing disposable income.

Body care displayed the highest growth over the past year with an increase of 13%, albeit off a small base. Although the market for firming/anti-cellulite body care is negligible, products of this nature that were launched in 2005 such as L’Oréal’s Nutri Lift and Nivea Q10’s firming cream aroused considerable interest from consumers. Although it is currently in a trial phase, there is huge potential for manufacturers to develop this sub-sector further if they can educate consumers and convince them of the products’ efficacy.

Local leaders

The C&T market in South Korea remains dominated by local household names Amore Pacific Corp and LG Group. Multinational manufacturers blame the Korean Cosmetics Act of 2000 for preventing them from making significant inroads into non-luxury sectors. Placing significant restrictions on product formulations, the act makes it hard for multinational corporations to gain approval for innovative new products that use more developed ingredients than local alternatives. If pressure exerted by the European Union Chamber of Commerce, which is lobbying on behalf of manufacturers such as L’Oréal and Chanel, is successful in overturning the act, there could be substantial implications on the cosmetics and toiletries landscape. Global players obviously have existing products with active ingredients to substantiate claims that they will be able to get to market very quickly. This may force Korean manufacturers to invest to protect share.

The high popularity of Korean culture (pop music, TV drama and movies) in other Asian countries, notably China and Thailand, has enabled local companies to make successful inroads into these markets over the course of 2005. Amore Pacific Corp’s La Neige added 30 outlets to the Asian region to reach a total of 130 stores at the end of 2005. Both Missha and the Face Store have gone global with stores opening in Thailand, New York and Australia. Perhaps the UK could be a target destination for the latter two manufacturers given that their low price entry points could attract the new generation of PRAV’s (proud realisers of added value) who are more concerned about value than brand names.

Retail change

2005 saw the acceleration of developments in the retail arena that began in 2004. The most evident shift in the cosmetics landscape over this period was the increasing power of brand shops (standalones). In 2004, Missha and the Face Shop began the trend for low end brand shops drawing competition from mass market players of Somang Cosmetics Co Ltd and VOV Cosmetics Co Ltd. In 2005 the next generation of brand stores made an appearance - Amore Pacific (Etude House) and Abel C & C (with an organic concept brand, Swiss Pure) adopted a differentiation strategy which focused on product image and exclusivity with a limited number of openings. This activity enabled specialist stores to increase value sales by 9% on the previous year. New drugstores have contributed to the growth of the pharmacies channel; GS Retail Group has provided new competition with GS Watson parallel to expansion from existing players of Olive Young and W-store. A possible future development in this channel could include department store brands being sold in drugstores, as is the case in Hong Kong. This would have a significant impact on the distribution landscape as department store brands are influential in South Korea.

Echoing the trend throughout Asia, supermarkets/hypermarkets continued to grow with a 1.4% increase in sales. Consumers’ primary motivations to purchase in this channel were reasonable prices and convenience, but some were also spurred on by services offering dedicated consultants to provide product information and customised advice. Cosmetics and toiletries players in South Korea are aware of the potential of this network and are willing to be flexible in terms of approach. The internet, included within direct sales, is clearly an area of future opportunity given that South Korea has the highest residential penetration of broadband connections in the world.

With forecast sales growth of 25% to 2010, the future is much brighter for South Korean cosmetics and toiletries than it was this time last year. Manufacturers looking to exploit the potential of South Korea should tap into sectors where penetration is currently low - namely men’s grooming, sun care, depiliatories - and look to export innovations in skin care that have been successful in targeting the ageing population in more developed markets as the opportunity to drive growth in this category is definitely evident. Multinationals keen to corner the market will need to continue their battle against the Korean Cosmetic Act. Another tactic could be partnership with global retailers that are expanding in South Korea, namely Tesco. Local players are likely to have continued success overseas and should target markets where consumers have a penchant for good quality products rather than brands; the aforementioned UK and also Germany, where discounters are fiercely popular in food.

Although skin care, colour cosmetics and hair care count for the lion’s share of the South Korean cosmetics and toiletries market, their sales remained relatively flat over 2005. In contrast, depilatories and deodorants, although minor relative to overall market size, recorded record growth due to a flurry of new product launches. Double-digit growth was also evident in bath and shower, men’s grooming and sun care, all of which have tremendous potential. The only sector to shrink in 2005 was fragrance, but this can be largely attributed to industry reorganisation.

Recent fashion trends and increased openness among South Korean women have created a need for effective depilatories. The perception that existed previously in South Korea, that hair removal causes thicker regrowth was clearly put to one side in 2005, facilitating the successful launch of Reckitt Benckiser’s hair removal cream Veet into a market that had scarcely experimented with any products outside of razors and blades. Rigorous promotions resulted in the brand reaching impressive sales. Market leaders Schick and Dorco also unleashed advanced products that commanded premium prices resulting in an overall increase in depilatory sales of 32% in 2005.

The deodorant sector followed in the footsteps of depilatories in 2005 with its significant development, mostly attributable to its ability to overcome convictions deeply engrained in South Korea’s culture; the belief that the perspiration level of Asians is lower than Westerners is commonly accepted among South Korean consumers. However, manufacturers have refused to give up on the sector as they believe that the reason for low penetration stems from their high tolerance to body odour. Education is their preferred means by which to develop the sector’s potential as exemplified by the Face Shop’s sector entry strategy in 2005 which featured intensive media advertising heralding the product benefits.

Men go mainstream

The ‘metrosexual’ trend that was identified in Western Europe in 2001 has definitely arrived in South Korea. In a 2005 advertising survey over 75% of respondents agreed to the statement that men are getting more feminine. In part it can be attributed to the popularity of a new set of aspirational TV stars and aggressive promotion from cosmetics and toiletries manufacturers. However, changing lifestyles have been the most influential factor. A trend for delaying

marriage until later means that professional Korean men in their 20s have the most disposable income of all age brackets. They have deferred a mortgage and family obligations in favour of a rent-free bed in the family home, making them an obvious target for cosmetics and toiletries manufacturers and facilitating strong growth of 11% in men’s grooming in 2005.

All subsectors with the exception of men’s post-shave exhibited double-digit value growth since 2004. Manufacturers are injecting dynamism into razors and blades via the introduction of products with advanced features and technologies that justify increased unit prices; in early 2005 Gillette launched the M3 power with a libration function added via a motor to assist in shaving, which retails at 9,990 won.

Men’s skin care is the largest sub-sector with 60% of value sales in 2005. Growth in this area was sustained by increased categorisation. Manufacturers moved away from traditional staples of facial moisturisers to launch dedicated men’s lines of eye and nail care. 2005 saw interesting launches from local players including Amore Pacific Corp Odyssey Sunrise Cool Eye, an eye serum for men that claims to relieve signs of fatigue and LG Household and Healthcare Ltd’s Vonin The Style Photogenic, a stick concealer to correct facial tones. To sustain growth rates in this sector manufacturers should both follow successful developments in women’s skin care and attempt to increase penetration by increasing awareness among older men.

Forecasts indicate that men’s grooming as a whole will massively outperform the total cosmetics and toiletries market over the next five years, presenting a great opportunity for manufacturers able to capitalise on heightened consumer needs and product awareness.

Stagnant skin care

Skin care, with value sales of US $17.7bn, represents the largest sector in the South Korean cosmetics and toiletries market. Minimal growth was exhibited in 2005 as manufacturers struggled to combat both the sector’s maturity and increase in volume and value sales through lower end concept brand stores such as Missha and the Face Shop.

The global trend for high performance products that fight the signs of ageing has reached South Korean skin care. One of the most notable developments in facial skin care, which accounted for 97% of value sales in 2005, was the proliferation of home peeling kits promising professional results at a fraction of the time and cost required to undergo specialist treatment at the salon. Lancôme was the trailblazer with its version, and the competition quickly followed suit with all major players in premium and mass skin care marketing some version of the product by the end of 2005. Indeed many skin care products launched in 2005 had notable anti-ageing functions. The introduction of such value added benefits will be key to driving up unit prices and capturing the attention of the lucrative over 40s segment with their increasing disposable income.

Body care displayed the highest growth over the past year with an increase of 13%, albeit off a small base. Although the market for firming/anti-cellulite body care is negligible, products of this nature that were launched in 2005 such as L’Oréal’s Nutri Lift and Nivea Q10’s firming cream aroused considerable interest from consumers. Although it is currently in a trial phase, there is huge potential for manufacturers to develop this sub-sector further if they can educate consumers and convince them of the products’ efficacy.

Local leaders

The C&T market in South Korea remains dominated by local household names Amore Pacific Corp and LG Group. Multinational manufacturers blame the Korean Cosmetics Act of 2000 for preventing them from making significant inroads into non-luxury sectors. Placing significant restrictions on product formulations, the act makes it hard for multinational corporations to gain approval for innovative new products that use more developed ingredients than local alternatives. If pressure exerted by the European Union Chamber of Commerce, which is lobbying on behalf of manufacturers such as L’Oréal and Chanel, is successful in overturning the act, there could be substantial implications on the cosmetics and toiletries landscape. Global players obviously have existing products with active ingredients to substantiate claims that they will be able to get to market very quickly. This may force Korean manufacturers to invest to protect share.

The high popularity of Korean culture (pop music, TV drama and movies) in other Asian countries, notably China and Thailand, has enabled local companies to make successful inroads into these markets over the course of 2005. Amore Pacific Corp’s La Neige added 30 outlets to the Asian region to reach a total of 130 stores at the end of 2005. Both Missha and the Face Store have gone global with stores opening in Thailand, New York and Australia. Perhaps the UK could be a target destination for the latter two manufacturers given that their low price entry points could attract the new generation of PRAV’s (proud realisers of added value) who are more concerned about value than brand names.

Retail change

2005 saw the acceleration of developments in the retail arena that began in 2004. The most evident shift in the cosmetics landscape over this period was the increasing power of brand shops (standalones). In 2004, Missha and the Face Shop began the trend for low end brand shops drawing competition from mass market players of Somang Cosmetics Co Ltd and VOV Cosmetics Co Ltd. In 2005 the next generation of brand stores made an appearance - Amore Pacific (Etude House) and Abel C & C (with an organic concept brand, Swiss Pure) adopted a differentiation strategy which focused on product image and exclusivity with a limited number of openings. This activity enabled specialist stores to increase value sales by 9% on the previous year. New drugstores have contributed to the growth of the pharmacies channel; GS Retail Group has provided new competition with GS Watson parallel to expansion from existing players of Olive Young and W-store. A possible future development in this channel could include department store brands being sold in drugstores, as is the case in Hong Kong. This would have a significant impact on the distribution landscape as department store brands are influential in South Korea.

Echoing the trend throughout Asia, supermarkets/hypermarkets continued to grow with a 1.4% increase in sales. Consumers’ primary motivations to purchase in this channel were reasonable prices and convenience, but some were also spurred on by services offering dedicated consultants to provide product information and customised advice. Cosmetics and toiletries players in South Korea are aware of the potential of this network and are willing to be flexible in terms of approach. The internet, included within direct sales, is clearly an area of future opportunity given that South Korea has the highest residential penetration of broadband connections in the world.

With forecast sales growth of 25% to 2010, the future is much brighter for South Korean cosmetics and toiletries than it was this time last year. Manufacturers looking to exploit the potential of South Korea should tap into sectors where penetration is currently low - namely men’s grooming, sun care, depiliatories - and look to export innovations in skin care that have been successful in targeting the ageing population in more developed markets as the opportunity to drive growth in this category is definitely evident. Multinationals keen to corner the market will need to continue their battle against the Korean Cosmetic Act. Another tactic could be partnership with global retailers that are expanding in South Korea, namely Tesco. Local players are likely to have continued success overseas and should target markets where consumers have a penchant for good quality products rather than brands; the aforementioned UK and also Germany, where discounters are fiercely popular in food.