Beauty brands shift to DTC strategy, including the rise of CAFE24, Korea’s version of Shopify
In the wake of the pandemic, the online market for cosmetics in South Korea has expanded rapidly, and brick-and-mortar retailers have fallen on hard times. Brands that had been focusing on retailing in H&B (Health & Beauty) stores and department stores have begun to shift to DTC, and some are trying to focus solely on EC.
The decline of physical cosmetics stores and the rise of DTC strategy
According to Korea’s Statistics Agency, the online transaction value of the domestic cosmetics market in 2018 was 9,852 billion KRW (US$8.53 billion). That is expected to grow to 12.471 trillion KRW (US$8.7 billion) by 2020.
On the other hand, overall retail sales of cosmetics are on a downward trend: the total retail sales of cosmetics compiled for the first half of 2021 was 14.864 trillion KRW (US$1.2 billion), down 11.4 percent from 2019. This reflects the state of cosmetics retailing in South Korea, where sales at brick-and-mortar stores have plummeted in the wake of the pandemic, and online sales are filling the void. In addition, the South Korean Fair Trade Commission has announced that the closure rate for cosmetics-related industries in 2020 was 28.8%.
Cosmetics retailers that have been responsible for discovering and nurturing new brands are being forced to close their doors one after another, including CHICOR and major cosmetics specialty stores. A H&B store chain LOHBs announced that it will completely close its stores by the end of 2022. In the Korean cosmetics market, where brick-and-mortar stores have been severely hit and a digital shift is underway, an increasing number of brands are trying to find a way out with DTC strategies that connect directly with consumers.
This includes not only emerging brands but also established mid-sized brands. The question is, how to connect directly with consumers without using traditional retail channels such as department stores and cosmetics specialty stores?
A Korean version of Shopify, CAFE24, has also been launched
In the past few years, Korea has gradually developed an ecosystem to support the launch of DTC brands. In addition, services that make it easy to build EC (domestic and cross-border EC) and realize DTC have recently become popular. CAFE24, the Korean version of Shopify, has emerged as a solution provider in this field.
One of the major differences between the two services is the monthly fee: CAFE24 is free, while Shopify starts at US$29. Other than that, there are differences in the detailed services and payment methods supported, but the services are basically the same concept.
CAFE24 also offers a one-stop-shop for a variety of services, including cross-border EC solutions, advertising and marketing, domains, and hosting infrastructure. Even if the EC operator does not have in-depth knowledge, he or she can easily and freely expand functions to build a highly original cross-border EC.
There is a full range of applications and APIs, and a dedicated page called “CAFE24 Store” that offers a variety of functions. Users can customize and expand the EC according to their preferences by simply adding what they need on the management screen. For example, if you set up a shopping app specifically for Instagram, your Instagram page and EC will be automatically linked. This is an easy way to attract consumers.
The company has a wide range of about 400 other applications, including AI personalization support, CRM (customer relationship management), push notifications, sales management, campaign automation tools, and overseas delivery support tools.
CAFE24 also discloses big data such as annual sales, number of user visits (inflow), page views within the EC, number of purchasers in relation to inflow, and cost per customer, to support data-based EC operations.
The total number of DTC shopping malls opened by CAFE24 reached 1.8 million (as of March 2021), with 132,714 new stores to be opened in 2020. Although the number is not limited to cosmetics brands, it clearly shows that the Korean retail market is shifting online.
The basic functions are free of charge, but there is an initial fee of about US$260–350 for installing the payment function and purchasing a custom design template. The business model is to charge settlement fees (3.5%) and paid APIs.
The Korean market is characterized by a tendency to prefer domestic services to overseas IT services. For example, in the search field, NAVER has an overwhelming share of the market, while Google is virtually unused; KakaoTalk is the main social networking service, and in e-commerce, Kupang and other domestic giants are strong, and it is said that there was no room for Amazon to enter the market. CAFE24, as a service that is easy to start and allows for cross-border EC, is becoming the dominant player in this field.
The use of CAFE24 by major Korean companies is also increasing. Among the slumping H&B stores in Korea, Olive Young, which has been winning by itself with its integrated online and offline membership policy, has adopted CAFE24’s platform for cross-border EC. SM ENTERTAMENT, one of the largest entertainment companies, has also built a cross-border EC using the same service to sell goods of K-pop idols.
An official from CAFE24 told the local media, “The rapid increase in the online shopping population triggered by the Covid-19 disaster has increased the demand for DTC malls, which allow companies to advertise and sell their brands at the same time. We expect the adoption rate of DTC platforms by large enterprises to increase from 11% in 2020 to 20% in 2024,” he said.
More and more brands are declining to be handled by major retailers and are strengthening their own e-commerce. In light of this situation, not only digitally native brands, but also existing brands that have been developing their business through retailers or other e-commerce platforms are increasingly trying to build and transform their DTC model through their e-commerce and media.
Meflag, which operates the vegan cosmetics brands Reduire and UNLEASHIA, withdrew from the AP Mall operated by Amore Pacific in 2021. The company has publicly stated that it concentrates on sales through its website and store.
GELATO FACTORY, a popular gel nail polish company, chose to withdraw from H&B stores including Olive Young, the largest retailer and is now shifting to a 100% DTC model with no physical store sales. By eliminating distribution margins and selling directly, the company aims to create a virtuous cycle of reinvesting in product development.
This is because APR, an online H&B company that owns brands such as MEDICUBE and APRILSKIN and has been focusing on the DTC model for some time, recorded a 38% year-on-year increase in sales to 219.9 billion KRW (US$191.6 million) in 2020 when the spread of Covid-19 infection began.
As mentioned above, the pandemic is one of the reasons why many brands, whether emerging, medium-sized, or large, have no choice but to pay attention to the DTC strategy, but another reason is that Korea has a large number of cosmetic brands relative to the size of its market, and competition is fierce.
Many small and medium-sized brands have been struggling for some time with commissions and sales promotion costs paid to large e-commerce sites and major retailers. In the early stages of a brand’s development, aggressive promotions by retailers can contribute to name recognition and sales promotion, but at the same time, advertising costs are spread across different sales channels, making it difficult to maximize the effect. In some cases, data related to the company’s products were not disclosed, and factors that were disadvantageous from a long-term perspective became more prominent.
As a result of considering these various factors, more and more brands seem to be deciding that it is time for them to switch to the DTC model. This option also has potential for overseas expansion. In South Korea, there are services such as “umma” that specialize in supporting the overseas expansion of cosmetics brands, and one of the growth strategies for Korean cosmetics brands is likely to be to operate their own cross-border EC services such as CAFE24 as a DTC brand, while also using these services to develop overseas markets.
Text: Ching Li Tor
Original text (Japanese): Jonggi Ha
