In an effort to put pressure on South Korea to reduce the deployment of anti-missile weaponry, the Chinese government has restricted its citizens from going there. This has had deleterious effect on the cosmetics sector as South Korea was one of the top destinations for Chinese consumers in 2016, particularly duty-free Jeju Island, where these tourists are not required to have a visa.
Korea became a cosmetics destination for Chinese shoppers due to China’s high tax rate. The government used to impose a 30% consumption tax on beauty products within China and while the rate was lowered to 15% in 2016, the purchase price for a Korean beauty product was almost 200% higher than the in-Korea duty free purchase price for the same product.
“As such, travelling to South Korea is seen as rather economical for Chinese consumers, as they can buy beauty products for cheaper prices as well as sightsee and enjoy the local food,” said Sunny Um, research analyst, Euromonitor International.
When it comes to K-beauty products, Chinese women regard the innovative, interesting and inexpensive cosmetics as better able to meet their skin needs.
“Hallyu - the ‘Korean Wave’ phenomenon arose from Korean TV shows and K-pop where Chinese consumers idolized the celebrities’ pale, bright skin texture,” added Um. “They believe the secret behind it lies in their skin care and makeup products and have actively tried to re-create the celebrity look.”
According to the South Korea Tourism Organization statistics, between January and September of 2017, the number of Chinese tourists in South Korea declined 50% compared to the same period last year. Furthermore, South Korea was not figured in the list of Top 10 destinations for Chinese tourists during the most recent national holiday, Chinese Golden Week, which is held Oct. 1-8.
Um informed Happi that duty-free sales have been the most negatively impacted among all distribution channels, as 70-80% of them were coming from Chinese tourists.
According to the Euromonitor International analyst, initially the loss in sales was slightly offset by the increasing inflow of Southeast Asian tourists, driven by the South Korean government’s efforts to provide a more Muslim-friendly travel environment. but this group was “not big or sustainable enough to compensate the loss from Chinese tourists.”
In addition, Asia trends expert Florence Bernardin reports beauty powerhouses like Amorepacific were deeply shaken, having reported a 28% decline in operating profit in Q2 2017 compared to the same period of last year.
“The sales profit of Amorepacific brands’ duty free shops also dropped by 14.7%,” said Bernardin, the CEO of Asia-Franco firm Inspiration and Information.
According to Bernardin, Japan, Thailand, Indonesia and Singapore are now the top Asian destinations for Chinese tourists. Consumers are looking for products soon after they have been introduced to the market and will not want to wait the obligatory year for their registration at home. As a result, they are travelling to other places. Hong Kong is one of those markets primarily picking up the inflow of tourists since the Terminal High Altitude Area Defense (THAAD) dispute broke out.
“This has led to the positive growth of Hong Kong’s cosmetics sales, after two years of decline resulting from the city-state’s anti-China Umbrella Revolution in 2014,” Um told Happi.
Timely enough, the Japanese government relaxed its visa requirements on Chinese tourists in 2016, which further encouraged Chinese tourists to visit Japan. Meanwhile, the Chinese mobile payment app used by millions, Alipay, is on top of its game, having joined up with Japanese merchants to enhance their shopping experience.
The China Effect
On a wider scale, this publication wondered if Western cosmetics companies will start to pull out of R&D partnerships and investment in South Korea as a result of the challenging climate.
Alain Khaiat, VP-technical and scientific affairs, ASEAN Cosmetic Association, does not believe this will be the case.
“I don’t think so. Investments are made on a long-term basis, political situations can change and one cannot predict these,” he told Happi.
Korean beauty firms are reported to be re-thinking their strategy though, with many calling for the diversification of exports, particularly to the US. Beauty companies on the peninsula have come to realize that being too dependent on China is not such a good thing.
Michelle Yeomans is an award winning multimedia journalist. She has been reporting on cosmetics industry movements in EMEA, US and Asia for five years and has won an award for her coverage of the complexities of operating in the Middle East. Michelle’s passion lies in tracking the beauty culture and trends of the Asia Pacific region. Ever the AV enthusiast, she also relishes the opportunity to create engaging video and podcast content for the B2B industry.