[Why&Next] LG H&H Sells U.S. Cosmetics Subsidiary at a Bargain... Why Is the Market Responding Positively?

Loss-Making Business Shuttered After Seven Years
Inevitable Annual Sales Gap of 260 Billion Won
Proprietary Brands on the Rise... The Creme Shop Swings to Loss
North American M&A Remain a Challenge

Avon Digital Catalog. Provided by LG Household & Health Care

LG Household & Health Care is set to sell The Avon Company, a U.S. cosmetics firm it previously identified as its bridgehead for expanding into the North American market, for approximately 8.4 billion won. This comes seven years after acquiring Avon in 2019 for 145 billion won. Since the acquisition, the total funding and support provided—including investments and loans—has exceeded 500 billion won, but the sale price amounts to only 5.8% of the initial purchase price. With its North American expansion strategy centered on Avon effectively ending in failure, LG Household & Health Care now faces the challenge of simultaneously scaling up both the size and profitability of its North American business with its core in-house brands.

Acquired for 145 Billion Won, Invested Over 500 Billion Won... Now Being Sold for 8.4 Billion Won

According to industry sources on August 30, LG H&H USA, the North American subsidiary of LG Household & Health Care, has agreed to sell 100% of its stake in Avon to Stratford Worldwide for 6 million U.S. dollars (approximately 8.4 billion won). In addition, 100% of Avon Canada shares will be transferred for 1 dollar. The scheduled closing date for the transaction is September 1.

In April 2019, LG Household & Health Care acquired 100% of the shares in New Avon, the predecessor of Avon, from global private equity fund manager Cerberus for 145 billion won. The plan was to utilize Avon's 130-year-old local sales network to penetrate the North American cosmetics market. The following year, LG Household & Health Care contributed all its shares in Avon to LG H&H USA in kind, making Avon a grandchild company of LG Household & Health Care.

However, Avon failed to deliver on its promise as a North American base. Its core strength—direct sales—no longer matched the rapidly evolving beauty market in the U.S., which was shifting toward online and specialty retail channels. Even last year, 75.9% of Avon's sales were generated through direct sales representatives, while online and other channels accounted for only 24.1%.

Avon briefly turned a profit in 2020, the year after the acquisition, recording 2 billion won in net income; however, subsequent years saw a return to net losses. Beginning with a net loss of 5.5 billion won in 2021, Avon recorded net losses of 47 billion won in 2022, 40.4 billion won in 2023, and 28 billion won in 2024. Last year alone, Avon posted a net loss of 30.1 billion won, and by year-end, its total equity was negative 136.1 billion won, indicating a state of complete capital erosion.

LG Household & Health Care continued to provide financial support. In May 2023, it made a cash investment of 60 million U.S. dollars (approximately 8.61 billion won) into Avon through a capital increase in LG H&H USA. According to the company's business report, the total capital increase for LG H&H USA in May 2023 was 130 million U.S. dollars. Ahead of this sale, the company decided to convert into equity the 205.5 million U.S. dollars (about 286.3 billion won) in loans LG H&H USA had provided to Avon. While this does not involve injecting additional cash, it means converting Avon's outstanding debt to LG H&H USA into equity. Adding the initial acquisition cost of 145 billion won, last year’s cash investment, and the loans now being converted to equity, the total amount invested and supported for the acquisition of Avon approaches 517 billion won.

In contrast, the amount LG Household & Health Care will receive through this sale is only 8.4 billion won, or 5.8% of the original acquisition price of 145 billion won. Taking into account the additional investments and funding support after the acquisition, it is difficult to avoid the assessment that the Avon M&A—carried out in hopes of breaking into the North American market—did not achieve its intended goals. Hanwha Investment & Securities described this transaction as “confirming the impairment of value of past acquired assets.”

Why the Securities Market Welcomes the Sale Despite Asset Impairment

However, the securities industry believes it is better to divest Avon now than to continue holding on to it. Attempting to turn around a business with significantly impaired value would require further capital injections, and ongoing losses would continue to weigh on the consolidated results of LG Household & Health Care.

Yujeong Han, a researcher at Hanwha Investment & Securities, said, “While previously M&A activity was about expanding distribution networks and sales in local markets, now our proprietary brands are directly driving growth and creating profits through major on- and offline channels. Although there will inevitably be some sales impact after the sale of Avon, removing the loss-making business allows the company to concentrate its resources on its fast-growing and high-margin brands, which is significant.”

A source at a financial investment firm said, “To pivot the business from existing sales organizations to an online and retail-centric model would in effect mean running two distribution systems simultaneously. From LG Household & Health Care’s perspective, it likely made more sense to reallocate resources to brands with greater growth potential than to inject further capital into trying to revive Avon.”

After the sale, the restructuring of North American business is expected to focus more on profitability than scale. According to LS Securities, with Avon excluded from consolidated results, LG Household & Health Care’s annual revenue will likely decrease by around 260 billion won. However, the removal of a loss-making business is expected to have a positive impact on operating profit.

Exterior view of LG Household & Health Care LG Seoul Station Building. LG Household & Health Care

Proprietary Brands to Replace Avon... The Creme Shop’s Turn to Losses Remains a Challenge

The key question now is how quickly proprietary brands can make up for the lost sales from Avon. The recent trend has been positive: in the second quarter of this year, LG Household & Health Care’s North American sales reached 205.8 billion won, a 47.3% increase year-on-year, surpassing sales in China for the first time. The share of proprietary brands in the North American business rose to 50%. This suggests that the company is now better positioned than at the time of the acquisition to expand in the region, relying less on Avon’s sales network and more on its own brands.

However, to grow those proprietary brands, a new local distribution strategy will be needed. At the time of the Avon acquisition, the company sought to leverage Avon’s established direct sales structure to enter the North American market. Going forward, the strategy must focus on expanding online channels and partnering with local retailers for brands such as Dr. Groot, Belif, and CNP. Investments in marketing will also be required to build brand awareness.

Another challenge is improving the performance of remaining North American M&A assets. Former Vice Chairman Sukyong Cha scaled up LG Household & Health Care through about 30 M&A transactions—including Coca-Cola Beverage, THEFACESHOP, and Haitai Beverage—but investments made later in his tenure targeting North America did not produce equally clear results. Following Avon, LG Household & Health Care acquired a 56.04% stake in U.S. hair care company Boinca in 2021, and a 65% stake in U.S. color cosmetics brand The Creme Shop in 2022.

The recent financial results of the two companies have diverged. Boinca and its subsidiaries recorded sales of 36.3 billion won and net profit of 2.2 billion won last year, representing improved results year-on-year. Conversely, The Creme Shop’s sales declined from 124 billion won in 2024 to 65.7 billion won last year, and it swung from a net profit of 27.6 billion won to a net loss of 15.6 billion won over the same period.

Despite these deteriorating results, LG Household & Health Care further increased its investment in The Creme Shop last year by acquiring the remaining 35% stake, raising its shareholding to 100%. The price paid for the remaining stake was 66.8 million U.S. dollars, equivalent to approximately 9.18 billion won at the prevailing exchange rate. While Avon is being divested, additional investments have been made in other North American M&A assets, making The Creme Shop’s performance recovery and Boinca’s growth the main variables that will determine the future results of LG Household & Health Care’s North American business.

An industry insider said, “Many K-beauty brands that are growing in the U.S. now are leveraging channels such as Amazon, TikTok, Sephora, and Ulta to rapidly test consumer response and expand distribution, rather than relying on local subsidiaries or M&A strategies used by major corporations in previous years. For LG Household & Health Care, the key in North America is not the number of brands owned or the scale of its local subsidiaries, but how quickly it can grow its brands in accordance with these market changes.”

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