K-Beauty Faces Setbacks from Stronger Won [Weekend Money]

Won-Dollar Rate Down Over 4% from Q2

Shin Young Securities: "Still, Q3 Results Worth Watching"

Low Exchange Exposure for Domestic ODM Trio

Indie Brands' Reduced Online Sales Also Mitigate FX Impact

The strong won acts as a negative factor for export-oriented companies. This is because the amount received after converting foreign earnings into won decreases. This trend has also impacted K-beauty stocks, which saw rapid growth this summer. Share prices of the three leading cosmetics ODM (Original Design Manufacturing) companies and APR, which had been reaching record highs until August, have slowed in September due to concerns over the strengthening won. Nevertheless, it is being analyzed that actual third-quarter performance figures may tell a different story.

In a recently published report, Lee Gyoseok, a researcher at Shin Young Securities, stated, "While the impact of a strong won trend is inevitable, the decline in profitability for the cosmetics industry is expected to be limited," adding, "In fact, there is a high possibility of solid third-quarter results."

Why is profitability holding up even though the exchange rate dropped 4%?

During the third quarter (July 1 to September 8), the average exchange rate of the won against the U.S. dollar was KRW 1,436—more than 4% lower than the second quarter average. However, the impact is expected to vary by company.

The ODM trio is the least affected. Researcher Lee explained, "Their main clients are indie brands that have entered the Korean market, so the proportion of sales settled in foreign currency is not large to begin with."

In contrast, large brand companies such as Amorepacific and LG H&H are surprisingly closer to being beneficiaries of the strong won. Both companies generate more than half of their revenue domestically—a factor that has long been cited as a reason for their slower growth compared to indie brands, which have been achieving triple-digit growth overseas, while domestic-focused players often struggled to hit even double digits. The situation changes, however, when raw materials are imported, products are manufactured domestically, and finished goods are sold in won. With a stronger won, cost burdens decrease, while sales revenue recorded in KRW remains unchanged. In other words, what was once a weakness in growth rate turns into a strength in terms of protecting profitability.

On the other hand, companies like APR and Dalba Global, whose overseas sales ratios exceed 80%, are directly impacted by the exchange rate. However, as many expenses such as advertising costs and sales commissions are also paid in foreign currencies overseas, their cost structure means that both revenue and expenses decline together. Researcher Lee estimated, "If the exchange rate falls by 5%, the decrease in the operating profit margin for these two companies will be around just 1 percentage point."

A Third Quarter Without Amazon’s Discount Events: A Boon for Cosmetics

Indie brands have typically experienced a decline in operating profit margins in the second half, when their sales are at their highest. This is because major discount events like Amazon Prime Day are concentrated in the latter part of the year. To sell products on platforms such as Amazon or TikTok Shop, brands bear most of the advertising, commission, and air freight costs themselves.

However, B2B and offline channels, which involve bulk supply to retailers, usually have lower unit prices but also shift responsibility for shipping costs to the distributor, with much lower advertising expenses. As the B2B ratio increases, profitability improves in tandem.

This seasonal pattern has shifted this year. With Prime Day moved forward to June from July, the period of strong online sales also moved to the second quarter. In fact, U.S. Amazon and TikTok Shop sales for K-beauty brands in July and August have trended lower compared to June. At the same time, the third quarter is a restocking season for retailers as they prepare for fourth-quarter events, leading to consistent reorder increases from outlets like Target, Ulta Beauty, and Walmart for brands such as APR. This combination—shrinking online share and growing offline/B2B proportion—acts favorably for third-quarter profitability, according to Lee’s analysis.

Lee said, "If share price corrections widen in September, expectations for the cosmetics sector should be raised from October, when earnings previews begin," adding, "In particular, attention should be paid to Amorepacific, as it is expected to post strong domestic performance unaffected by exchange rate movements in the third quarter, alongside improved overseas subsidiary profitability due to lower online sales ratios."

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