Purchase limits by Korean customs may damage cosmetics sales

The Korean customs authorities notified all Korean duty-free retail operators, which include three major operators, that each customer would be limited to buy no more than 50 cosmetic and fragrance products.

News of the limit was leaked last Friday and when the Korean Stock Exchange re-opened for trading on Monday, stock prices dropped significantly, with Amore Pacific share prices falling over 2% and LG Household & Health falling 6%.

Investors see cause for concern​

In the last few years the rise and rise of Korean cosmetics companies has been attributed to a huge appetite from the China market, but with prices of the products being much higher in China, consumers have taken to shopping holidays in Korea to stock up.

“The recent event poses a negative influence on the Korean cosmetics sector,”​ NH Investment & Securities analyst Han Kook-hee said in a report that was noted by the Korea Herald.

 “Though the impacts will vary by company depending on the details of the limitations, the publicisng of this issue is a risk itself.”​

Limits still not finalised​

Last year Korean cosmetics company derived approximately 25% of their sales from duty-free channels, and for the bigger players such as Amore Pacific and LG this figure is estimated to be even higher.

However, it is still not clear how exactly the duty free limits will be implemented, specifically whether or not the limits will be imposed by brand, category or from which chain of duty-free outlet.

The main objective behind the clamp down is to cut out on the emerging market for cosmetics then be sold on to third-party brokers, and then resold on to other retail channels.

China drives duty-free cosmetics sales​

Sales of Korean cosmetics have been boosted by chic advertising campaigns, Korean pop and a product innovation pipeline that boasts some of the most cutting edge products available anywhere in the world.

A large part of this success has been the huge influx of tourism from China, many of whom are going on ‘shopping holidays’ with the main aim of buying up their favourite Korean cosmetic products at a cheaper price than they would pay in China.

Current figures show that cosmetics make up the lion’s share of Korea’s largest duty free retail chain, Lotte, accounting for 58.9% of sales in the first quarter of this year, and that 70.8% of the company's overall sales came from Chinese visitors. This up from 63.3% on the previous year.