M&A boom expected in the Korean cosmetics industry as competition heats up between Amore Pacific and LG H&H
As masks go off in South Korea, more make-up is expected to go on.
The lifting of the mandatory mask-wearing in South Korea is boosting the outlook for the cosmetics industry is looking up as more customers return to brick-and-mortar stores and put on full makeup when they go out. M&A activity is expected to increase in the future as the power structure in the industry undergoes major changes following the pandemic and reorganization is underway.
As signs of an “everyday recovery” become clearer, reports analyzing competition in the post-Corona era in the Korean cosmetics industry have become prominent. The trend of M&A is attracting attention in the Korean media as a guideline for the competitiveness of each company.
Symbolic of the changing power structure of the Korean cosmetics industry is the neck-to-neck competition between the two top beauty companies, Amore Pacific and LG Household & Health Care (H&H). Amore Pacific has held the top position in the industry for decades, but lost its position to LG H&H’s cosmetics division in terms of sales in 2020; in 2021, Amore Pacific’s sales again surpassed LG H&H’s, but the two are so close that either could take the top spot.
A few years ago, it was hard to imagine LG H&H threatening Amore Pacific; as of 2016, Amore Pacific’s sales were KRW 6.697 trillion (US$5.3 billion). In contrast, LG H&H was about KRW 3.15 trillion (US$2.5 billion) — less than half. LG H&H has steadily increased its market share over the past five to six years, and one of the factors behind its rapid growth is its aggressive M&A strategy.
LG H&H has made M&A a pillar of its growth strategy since January 2005, when Cha Suk-Yong took over as CEO. Cha is a graduate of the State University of New York, Cornell University School of Management, and Indiana University School of Law. He is well versed in finance, accounting, and law, and is well connected in the U.S. financial community. He served as president of P&G Korea for two years from 1999, and as president of Haitai Confectionery & Food from 2001.
The late Chairman Koo Bong-Moo, who was leading the LG Group at the time, gave Cha the opportunity to join the company. Upon receiving the invitation, Cha presented his company’s vision of “earthquake-proof design through M&A.”
The “earthquake-proof design” here refers to an organization that can flexibly cope with crisis situations. And the gist of the vision was to achieve business diversification in the three divisions of beauty, lifestyle products, and refreshments (e.g., beverages) through aggressive M&A.
This strategy of expanding the entire group by entering new business fields through acquisitions has led to the explosive growth of LG H&H. Since 2005, sales have increased for 16 consecutive years, and market capitalization has grown from KRW 196.4 billion (US$15.8 billion) in 2001 to KRW 24.692 trillion (US$19.9 billion) by 2020.
LG H&H has made a total of 30 acquisitions and consolidations to date since Cha took office. These include cosmetics-related companies and brands such as THE FACE SHOP, a natural cosmetics company; Violet Dream, a female-care company; Ginza Stefany, a skincare company; and Everlife, a health food and aging care company. 2018 saw the acquisition of Japan’s Avon Products (now FMG Mission), and the acquisition of the Asian and North American business rights of German dermatology-based brand PHYSIOGEL in 2020. Most recently, the company acquired U.S. brand The Crème Shop on April 20, 2022.
In his book, Cha writes, “M&A that only expands in size without substance is very dangerous. I have always selected and acquired companies in necessary fields as if I were drawing the big picture and fitting the puzzle together”. LG H&H’s M&A strategy is to acquire domestic and overseas brands, manufacturing companies, factories, etc. after determining whether the acquisition will be beneficial in expanding sales channels in existing businesses and priority regions, or expanding production facilities and distribution networks.
For example, The Crème Shop is a U.S. brand that has grown through offline channels such as Ulta Beauty, and has gained popularity in North America, especially among the Millennium & Z generation, through collaborations with Hello Kitty and Disney. LG H&H decided to acquire The Crème Shop because it believes that it can utilize The Crème Shop’s brand power and sales network to expand its communication power with consumers. Over the past few years, LG H&H has been strengthening its sales channel expansion and acquisitions in North America, and is aiming for further growth.
Amore Pacific focusing on acquiring emerging large brands & digital companies
Amore Pacific, on the other hand, had not been very active in M&A until 2020, acquiring French perfume brand Annick Goutal (now Goutal Paris) for KRW 30 billion (US$24 million) in 2011. The next two relatively large deals were the acquisition of a minority stake in the Rationale Group, followed by a KRW 3 billion (US$2.2 million) investment in DMIL, a Korean multi-channel network (MCN) company specializing in beauty, at the end of 2020. Since the company’s leading position as the industry leader was unshakable, there was probably not much reason for it to actively pursue M&A.
However, entering 2021, the company announced a string of acquisitions. The most talked-about was the acquisition of COSRX, a Korean skincare brand well known as K-Beauty in the US and Southeast Asia, in September of the same year for KRW 180 billion (US$144.6 million), the largest investment ever. The name of the company is undisclosed, but it is said to have won the bidding after competing against a top-tier global cosmetics company.
Amore Pacific has announced a series of capital tie-ups and acquisitions with several enterprises including a probiotics company HEM Pharma, an apparel brand YOUR NAME HERE, an e-commerce solutions company THE COMMERCE, and the live commerce platform RXC.
Korean media analysis suggests that one of the reasons behind Amore Pacific’s shift in focus to M&A is the policy of its new management team, including president Kim Seung-Hwan, who took office in 2020. Kim was originally appointed as vice president in the midst of headwinds such as the Chinese government’s shutdown of Korean products due to the THAAD deployment issue and the Covid-19 disaster, and has been responsible for improving the management structure of domestic and overseas corporations and group companies.
In this vein, he is believed to be trying to reform the old management structure and strategy by making large acquisitions of emerging brands and investing in e-commerce-related companies. Although no official comment has been made, it is clear that the company is strongly aware that LG H&H is in hot pursuit with an aggressive M&A strategy and is decisively implementing its own reforms.
Amore Pacific’s sales are stable at KRW4.9963 trillion (US$4 billion) in 2019, KRW3.9042 trillion (US$3.1 billion) in 2020, and KRW4.9237 trillion (US$3.9 billion) in 2021. Even during the pandemic, Amore Pacific has maintained its sales by reorganizing and downsizing its offline sales outlets and strengthening its online sales channels. While LG H&H is mainly acquiring brands and production facilities, Amore Pacific is expected to focus on acquiring companies with strong digital capabilities to drive DX.
Text: Ching Li Tor
Original text (Japanese): Jonggi HA
