Politics could add to forces working against Korean cosmetics industry

Last week the Korean government announced plan to impose duty free limits to stop third party sales of cosmetics in China, and now, in an unrelated move, the China government’s threats to retaliate over Korea’s deployment of new military defence technology seems to be adding to investor fears.

Korea has taken a decision to deploy a Terminal High Altitude Area Defence (THAAD) battery, which some experts believe is one of the reasons why investors a dumping shares in Korean companies, a sector that is heavily reliant on exports to China.

Raising the bar on visas and sanitary regulations​

In the first move, perceived to be a retaliatory step by China authorities, officials recently closed a visa agency catering to Koreans, something that will make it harder for Korean companies to obtain multiple entry visas for doing business in China.

On top of this, the China trade authorities have also stepped up sanitary regulations governing Korean beauty products, a move that is also likely to put a damper on exports of certain products and make the whole process more difficult.

"Cosmetics and entertainment stocks have plummeted as China has begun taking steps against Korean companies and individuals doing business on the mainland,"​ said Daniel Cho, head of research at Daishin Securities, speaking to the Korean Times.

"The recent decline was largely engineered by the potential THAAD backlash."​

Those duty free regulations​

Simultaneously, speculation has been growing about the impact of proposed duty free regulations, which are being drawn up to protect the industry, but some experts say this has already had an impact on investors and the value of shares in the country’s big beauty players.

Last week 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.

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.

News of the limit was leaked on the previous 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%.

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.

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% compared to the previous year.