[Why&Next] LG Household & Health Care Faces Earnings Shock Amid K-Beauty Boom

Betting on the Chinese Market, but the U.S. Remains the 'Holy Land' of K-Beauty
Competitor Amorepacific Achieves Growth in Both Sales and Operating Profit

Amid the global surge of the 'K-Beauty' craze last year, LG Household & Health Care reported disappointing results. This was due to increased investment in China instead of the rapidly growing markets in the United States and Europe. As LG Household & Health Care has pledged to further increase its investment in the U.S. this year, attention is focused on whether it will succeed in turning its performance around.

Seoul LG Household & Health Care cosmetics store. Yonhap News

According to the Financial Supervisory Service's electronic disclosure system on the 23rd, LG Household & Health Care announced that its estimated annual sales last year increased by 0.1% year-on-year to KRW 6.812 trillion. During this period, operating profit was KRW 459 billion, down 5.7%. While sales remained virtually flat, profitability, which had been declining since 2021, continued to underperform last year.

The market had expected LG Household & Health Care's operating profit last year to be in the KRW 465 billion to 470 billion range, but the actual results were essentially an 'earnings shock.' However, net profit rose by 25% to KRW 204 billion during the same period. This was due to a reduction in goodwill impairment losses from the U.S. subsidiary 'Avon' in 2023 and increased foreign exchange gains from a high exchange rate effect.

Betting on the Chinese Market... But the U.S. Remains the 'Holy Land' of K-Beauty

LG Household & Health Care's poor performance was largely influenced by China. The Chinese economy, still sluggish after COVID-19, has yet to recover. Especially, the cosmetics market is recovering slowly, compounded by the Chinese consumers' 'patriotic consumption (Guochao)' trend.

However, LG Household & Health Care bet on the recovery of the Chinese market. It rebranded the popular domestic brand 'The History of Whoo' and expanded online distribution channels, focusing on stimulating consumption within mainland China. As a result, cumulative sales in China as of the third quarter last year reached KRW 569.1 billion, an increase of about KRW 40 billion compared to the previous year. The sales proportion also rose by 1 percentage point. However, aggressive marketing such as the Chinese Singles' Day promotion did not improve profitability, leading to a decline in overall operating profit.

This poor performance contrasts sharply with the domestic cosmetics industry's record-breaking results last year. Domestic cosmetics companies expanded their sales regions to North America, Europe, and Southeast Asia, achieving the highest export volume ever. According to Korea Customs Service's export-import trade statistics, last year's export value was USD 8.575 billion (approximately KRW 12.36 trillion), up about 20% from USD 7.182 billion recorded the previous year.

In particular, K-Beauty showed the fastest growth rate in the U.S. market. Last year, K-Beauty surpassed France to become the top cosmetics importer in the U.S. Domestic cosmetics companies entered Amazon, the largest e-commerce channel in the U.S., creating a K-Beauty category that quickly attracted local consumers. According to global data analytics firm Euromonitor, the average quarterly sales growth rate of U.S. e-commerce cosmetics over 2023-2024 was 22.5%, but K-Beauty's growth rate reached 63%. Narrowing the scope to basic cosmetics sold on Amazon, K-Beauty's average growth rate was 101.5%, while the overall Amazon cosmetics category recorded 42%.

Competitor Amorepacific Successfully Restructures in China

Competitor Amorepacific also benefited from the K-Beauty boom. During the COVID-19 pandemic, both Amorepacific and LG Household & Health Care saw their performance sharply decline as Chinese sales, which accounted for 20-35% of total sales, dropped.

However, after the endemic phase, the two companies adopted different strategies. Amorepacific diversified its channels into the U.S., Europe, and Japan while conducting intensive restructuring of its China business. Amorepacific particularly focused on the U.S. and European markets, positioning brands such as 'Laneige,' 'Innisfree,' and the acquired brand 'COSRX' as its main brands.

As a result, as of the third quarter last year, overseas sales in Western markets (U.S., Europe, etc.) reached KRW 201.1 billion, a 142% increase from KRW 83.1 billion in the same period the previous year. The proportion of total sales increased from 9% to 20%. Meanwhile, sales in the Greater China region decreased from KRW 147.6 billion to KRW 97.6 billion, and the sales proportion dropped from 16% to 10%.

LG Household & Health Care also made moves to expand its global markets such as the U.S. and Japan, but it is evaluated as less aggressive than its competitor. It only listed brands like 'belif,' 'CNP,' and 'The Face Shop' on Amazon channels. Additionally, restructuring of the U.S. subsidiary 'Avon,' acquired in 2019, also affected its U.S. business. Sojung Cho, a researcher at Kiwoom Securities, explained, "If China's consumer sentiment improves due to economic stimulus measures, it will support performance recovery, but this trend does not align with the cosmetics industry's direction. Although there is exposure to the U.S., the momentum for channel growth remains unclear."

LG Household & Health Care plans to restructure its overseas business focusing on the Americas this year. According to the New Year's address by CEO Lee Jung-ae, 'global business rebalancing' is emphasized as a mid- to long-term business strategy. This is interpreted as focusing on channel expansion by promoting brands suited to the Americas, Japan, and Southeast Asian markets. LG Household & Health Care plans to strengthen products appealing to young customers centered on belif, CNP, and The Face Shop in the U.S., and to increase marketing investments by expanding online channels like Amazon and offline channels.

In Japan, the company plans to expand online influence by promoting 'Hince,' 'CNP,' and oral care products. It will also venture into Southeast Asia, Europe, and Africa. In the New Year's address, China was mentioned as a lower priority, with CEO Lee stating, "We will focus on growth based on profitability." Regarding this, an LG Household & Health Care official explained, "This does not mean reducing the scale of marketing activities previously conducted in China."

This content was produced with the assistance of AI translation services.