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Beauty & Cosmetics

LG Household’s China strategy put to test as shares crash

LG’s shares fall to the lowest level in four years as the company rejects Chinese resellers’ demands for deep price cuts

By Jan 10, 2022 (Gmt+09:00)

Shares of LG Household crashed on Monday, weighed by cooling demand from China
Shares of LG Household crashed on Monday, weighed by cooling demand from China

LG Household & Health Care Ltd.’s shares have been flying high since its market debut in 2001, and have more recently basked in the global boom of Korean cosmetics, collectively known as the K-beauty, in line with the growing popularity of K-drama.

Just like its bigger Korean rival Amorepacific Corp., LG has particularly targeted the Chinese market, which has the world’s largest customer base, for rapid expansion.

One of the key sales channels for Chinese consumers is through the Chinese individual resellers, or peddlers, who purchase popular Korean cosmetics from department stores and duty-free shops in Korea and carry them back to China for resale.

While Amorepacific, Korea’s top beauty brand, put a limit on the number of its products that Chinese resellers can buy at a time to maintain its luxury image, LG has taken a different strategy: Allow them to buy as many LG goods as they want.

That strategy has helped the underdog’s Whoo brand overtake Amorepacific’s popular Sulwhasoo brand in a relatively short period of time. However, its focus on quantity has backfired as demand from China cooled.

On Monday, shares of LG Household slumped 13.4% to close at 956,000 won, falling below the 1 million won mark for the first time in four years. From a July high, the stock has declined 46.4%.

The market took the significant slide as a shock because LG has been performing well in the past couple of years even during the COVID-19 pandemic when the global demand for cosmetics products drastically diminished.

LG Household's cosmetics brands such as Whoo, O Hui and Su:m
LG Household's cosmetics brands such as Whoo, O Hui and Su:m

CHINESE RESELLERS DEMAND DEEP PRICE CUTS

Industry watchers said LG Household’s sharp share price fall on Monday followed its recent rejection of requests by the Chinese retailers for a deep discount for its cosmetics products citing cooling demand in China.

“By rejecting the Chinese peddler’s demand for sharp price cuts, LG wanted to prevent its brand image from becoming a cheap one,” said an industry official.

Seven Korean brokerages on Monday cut their target price for LG Household, citing worsening market conditions, including intensifying competition, stricter rules on Chinese cosmetics distributors and resellers and the weakening Chinese economy.

China’s retail sales growth rate of cosmetics goods reached 40% in the first quarter of 2021, but has fallen to a range of 8% since July.

LG Household is widely expected to have taken a big earnings hit in the fourth quarter of 2021 due to the sluggish cosmetics sales through duty-free shops, its main sales channel.

Samsung Securities said it expects LG Household’s fourth-quarter operating profit to decline 9% from a year earlier to 232.9 billion won ($194 million) with its sales falling 1% on-year to 2 trillion won.

LG Household's cosmetics product under the Su:m brand
LG Household's cosmetics product under the Su:m brand

LG’s cosmetics business alone is forecast to post a 7% revenue decline to 1.23 trillion won, according to the local brokerage house.

Analysts said the popularity of Korean cosmetics products isn’t as strong as before amid tighter regulations by the Chinese authorities on foreign brands and Chinese consumers’ favor of local products.

“External uncertainties such as the weakening growth momentum of the Chinese economy and the raging pandemic has grown for LG Household,” said Samsung Securities analyst Park Eun-kyung.

The brokerage has cut its target price for LG Household’s stock to 1.31 million won from 1.61 million won earlier, while keeping a Buy rating.

Write to Sung-Mi Shim at smshim@hankyung.com

In-Soo Nam edited this article.
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