Amorepacific: Global Roadmap
Jaeyong Song
Professor, Graduate School of Business, Seoul National University
Hyejun Kim
Master’s candidate, College of Business Administration, Seoul National University
Written in 2010.6.30.
1
Amorepacific: Global Roadmap
If we want to grow faster, we have to grow outside the Korean market.1 - Kyung-Bae Suh, CEO
Announcing Vision 2015, Kyung-Bae Suh, CEO of Amorepacific, declared his ambition to make the company one of the top 10 beauty companies in the world by 2015. The year 2015 will be the 70th anniversary for the company since its establishment. The founder, Sung- Whan Suh, built the largest cosmetic company in the country out of a small camellia oil store, and his son and current CEO, Kyung-Bae Suh, succeeded and elevated the company to a much bigger firm that generates annual sales of 1.5 trillion KRW (2009) only in the cosmetics business. But he was looking even further. Under the slogan Asian Beauty Creator, he had ambitions of making the company as highly acknowledged as global cosmetics companies such as L’Oreal and P&G.
Throughout its history, Amorepacific has seen a steady growth in the domestic market. Its sales almost tripled from 690 billion KRW in 1997 to 1.8 trillion KRW in 2009. (Exhibit 1 Sales trend for the last 5 years) The achievement was attributed to the firm’s organic growth over 10% every year, supported by the consistent investment in its brand and technology. But the growth was certain to be limited when bounded in the domestic market. In the Korean cosmetics market, the company has secured the first place for decades, maintaining its market share at around 40%. In order to grow further, it was inevitable for the company to expand outside the local market.
Although driven with such an ambition, international expansion was not easy. Learning from numerous failures in the past, the company is now setting its foot on the global market. AMOREPACIFIC, its representative global brand, finally placed its stores in the prestige department stores in New York, and the perfume brand, Lolita Lempicka, successfully settled in the highly competitive French fragrance market. In China, Laneige, another skincare and make-up brand, is gaining in popularity among young women in big cities. The popularity of the brand in China brings a positive effect to even other Asian countries nearby.
However, to reach sales to 5 trillion KRW with 10 megabrands as stated in “Vision 2015”, Amorepacific has various problems to solve. Only 10% of its sales from overseas operations and its brands are little known outside South Korea, compared to other global firms. The company’s strong faith on organic growth is another issue. Since many other global competitors are aggressively pursuing expansion through M&As and joint ventures, whether to open the door for inorganic growth options or to maintain to grow independently as originally pursued is not an easy question. It is also becoming more important to transfer knowledge between local subsidiaries, as it expands overseas. And above all, basic concerns regarding the roles, performances, and future objectives of each markets into which it ventured should be reexamined. It is time to look into its overall global roadmap and plan out another reap for growth.
2
I. Growth and Crisis at Domestic Market
1. Local Growth Drivers
Suh Sung-Whan, the founder, took over a family cosmetic business started by his mother who sold camellia-based hair oils and facial creams in Gaesung in the 1930s and established Amorepacific (former Pacific Chemical Industry) in 1945.2 He expanded the cosmetics business followed by a huge success of the new product ‘Melody Cream’ in 1948. Sustaining growth with a steady launch of new products, Amorepacific has been controlling about 40% of Korean cosmetic market. (Exhibit 2 Domestic market share trend)
As presented in the founding philosophy- ‘contributing to humanity by providing beauty and health through technology and heartfelt devotion’, Amorepacific has endeavored at research and development activities since its establishment.3 The company was the first in Korean cosmetics industry that hired scientists and formed a research team which has now become the Amore R&D Center. Today, over 330 scientists are devoting themselves to researches in the basic area of dermatology and obesity: anti-aging, whitening, moisturizing, weight control, and cellulite reduction. Over 200 patents are applied annually by the research center, and its new products, which employ its new technologies, count more than 1,000 items.4 (Exhibit 3 Information on major patents) It has also consistently invested 3% of total sales in R&D activities. (Exhibit 4 R&D investment of major cosmetic companies)
To complement its insufficient internal technology, it has actively cooperated with external sources of technology as well. It allied with Coty(France) in 1959 and Shiseido(Japan) in 1964. The university with brilliant scientists and accumulated experiences was also considered to be an external source of technology. The company has long participated in the joint dermatological research not only with top Korean medical schools such as Seoul National University, Yonsei University, and Kyung Hee University(College of Oriental Medicine) but also with international medical schools such as University of Michigan(US) over 10 years for anti-aging and Beijing University(China) regarding whitening.5
High quality products supported by active R&D investments were exploited by the innovation in distribution channel. In 1964, Amorepacific launched ‘Amore’, a brand developed exclusively for door-to-door sales, and established a nation-wide sales network, educating and training sales representatives. Its sales representatives, called ‘Amore Ladies’, are present all over the country and has made good use of their networks and customized services, pioneering 30~60% of sales growth for 15 years since the company adopted the door-to-door selling.6 Since this innovative channel was hard to imitate, it still remains as a core distribution channel for the company. In 2009, about 32,000 beauty consultants are actively selling the products with up-to-date supporting systems such as CRM with PDA, and their contribution to total sales accounts for 39%. (Exhibit 5 Domestic sales breakdown by channel)
3
2. Restructuring
Amorepacific became a public company through IPO in 1973, and started to expand. Especially in the 1980s when most of Korean conglomerates pursued diversification, Amorepacific entered various industries including fashion, security, insurance, and even baseball team. The aggressive and incongruous expansion, however, soon brought about a financial crisis within the company, straining even the company’s mainstay cosmetics business.7
Keeping in mind his father’s advice that the company focus on cosmetics, current CEO Suh launched an intensive restructuring program. 8 He slashed most of its unrelated businesses except the core, beauty and health business. In 1991, he sold off its financial businesses (Pacific Securities, Pacific Economic Research Institute, Pacific Investment) to SK group and merged its electronics-related subsidiaries (Pacific Electronics, Pan-Pacific Company, Pacific Systems).9 Its baseball team, Pacific Dolphins, was sold to Hyundai Group in 1995, and its women’s basketball team was sold to Shinsegae in 1997.10 After additional sell-offs including fashion, publication, life insurance, communication, and information technology business, its 24 affiliates were reduced to 10 in 2001. As of 2010, Amorepacific has only 10 affiliates, 1 for holding company, 4 for cosmetic manufacturing and sales, 1 for pharmaceuticals, 1 for green tea plantation, and the remaining for packaging. (Exhibit 6 Affiliated firms)
The aggressive restructuring not only helped the company overcome the Asian financial crisis in the late 1990s, but also provided a sound financial ground for further growth. For the last 10 years, its annual operation income was maintained at 15~20% of total sales, increasing proportionally as its sales increased. (Exhibit 7 Financial performance trend in domestic market)
3. Building Brand Portfolio
Along with the restructuring program, Amorepacific also devoted itself to gain competitiveness in the cosmetics industry. Most importantly, it focused on expanding its brand portfolio, introducing various new brands and products targeting a diverse range of customers. In addition to its established brand, Amore, it launched ‘Mamonde’ in 1991, targeting the mass market. It also introduced ‘Laneige’ in 1994 for relatively younger customers, followed by ‘Hera’ in 1995 with higher quality and price. ‘Iope’, the first Korean cosmeceutical brand introduced in 1996, pioneered a new era and recorded the best seller for the launching year. ‘Sulwhasoo’, a premium line which contains oriental medicine ingredients like ginseng, was launched in 1997 and recorded sales of 500 million KRW in 2008 for the first time in Korea. The brand was created to compete directly with global companies in every perspective including quality, brand image, distribution channel, and price. On the other hand, the company introduced Innisfree to cope with the domestic low- priced competitors, AMOREPACIFIC and Lolita Lempicka for the overseas market, and
4
Hannule for the growing herbal medicine cosmetic market. At present, more than 10 cosmetic brands are held by Amorepacific. (Exhibit 8 Brand portfolio)
4. Motivations to Globalize11
In 1986, the South Korean government liberalized the trade, removing tariff barriers for foreign cosmetics products. Global companies such as L’Oreal and P&G began to introduce high-end products with their refined brand images through department stores. Although Amorepacific could maintain its position based on its diversified portfolio, foreign products began to control over 30% of the domestic cosmetics market. Despite fierce competition, the size of Korean cosmetics market was not growing. There was no way for Amorepacific to avoid competition with global players.
Besides competition, there were plenty of reasons to look further to overseas market. A growing interest in oriental beauty and health in Western countries, rapid growth of emerging economies including China, and Korean wave in Asian market opened the door for expansion. But even after a series of initial efforts, Amorepacific was far less recognized in the foreign market. Its revenue structure was highly lopsided to the domestic market and did not seem to change. Although the company began exporting to Thailand, U.S., China since the 1970s, established sales branches in New York and Tokyo in 1980s, and built local subsidiaries in China and France in 1990s, none of these attempts made a significant outcome. By 2000, 95% of total revenue of Amorepacific still come from Korean market.
The desire for globalization, however, increased further in 2000. In 2001, Suh mentioned that “While traveling in France, I saw our product dusted at the corner of the store. Then I made a resolution to build a globally recognized product on the company’s honor”.12 In 2002, he changed the company’s name from Pacific Corporation to Amorepacific, announcing the plan to establish a global brand with the identical name, AMOREPACIFIC. He also geared up for local manufacturing for each overseas market. The company established a manufacturing plant of extensive capacity in Shanghai (China) in 2002 and another plant with up-to-date facilities in Chartres (France) in 2004.
II. World Beauty Industry
1. Market Composition
The global beauty industry is a 240-billion dollar industry. U.S. is the biggest market, followed by Japan, France, German, Brazil, and UK (Exhibit 9 Cosmetic Market size of major countries). Overall growth rate is kept at 3~4% for the last decade, but the difference in growth rates between regions is significant. Although the European market shows a similar rate as the world market, the North American market presented only 1~2% in its growth rate. On the other hand, countries in Middle East, Africa, and South America all show a high growth rate of 6~7%, although accounting only for a small portion of the world market in terms of the size. (Exhibit 10 Market size and annual growth rate by region)
5
In particular, a rapid growth of emerging economies called BRICs is also noticeable in the cosmetics market. Between 2004 and 2009, cosmetics sales in BRICs countries doubled (Exhibit 11 Market growth of BRICs cosmetic industry). Especially, the Chinese market has seen a high rate of growth in both mass and premium products. Considering that per capita consumption of cosmetic products in China is only 10% of that of Brazil and that only 100 million out of 1,300 million people are using the cosmetic products, a growth potential of the Chinese market seems obvious. The rapid advancement of middle-class economy in China provides another opportunity, maintaining a growth rate of 15% of premium products, a segment that accounts for 20% of the total cosmetics market.13
Furthermore, consumers’ preferences in the product category are also distinct in each country. Whereas consumer prefer whitening products in East Asian countries, such as Japan, South Korea, and China, European countries, such as France, Italy, and German, or South American countries, such as Brazil, consume fragrances much more frequently than Asian countries. In Japan, skin care products account for 51% while fragrance accounts for 3.2%. In France, on the other hand, skin care products account for 30.4% while fragrance accounts for 18% (Exhibit 12 Cosmetic market breakdown of major countries by product category).
2. Industry Characteristics
Despite its long history, the cosmetics industry is expected to grow further with consumers’ increasing interests in beauty and health. In particular, the industry which previously targeted women is gaining another opportunity for growth by covering girls and men as well. Men’s cosmetics market that had originally been limited to shaving-related products is expanding its boundary to skin care products, and milder and lighter products are introduced in order to target teenagers.14
It is important to know about the role of technology in the cosmetics industry.15 Many global companies’ growth comes from an introduction of technologically advanced and innovative products based on intensive R&D activities. It is technology that enabled cosmetics products to express various colors and functions. Technology is also important to keep products safe from various harmful effects, while enhancing the intended effects at the same time.16 In the U.S., FDA approval is highly recommended, although not required, and the product without approval should include the label that says ‘warning-the safety of this product has not been determined’.
The recent trend shows how the cosmetics industry is placing bigger emphasis on technology. The new category, cosmeceutical, emerged, blurring the boundary between cosmetics and pharmaceuticals. Cosmeceutical products, involving biologically active ingredients and high tech formulation, appeal to customers who want to receive drug-like benefits from the products. Products with eco-friendly and organic ingredients, which are gaining more popularity these days, are also related to technology. 17 Moreover, an increasing number of customers values environmentally safer products and is creating a new
6
market for products with botanic ingredients or natural extracts, such as natural vitamin, green tea, and aloe.
Another important trend to consider is that image and perception matter considerably for consumer’s purchasing behavior.18 The basic psychological incentive to wear cosmetics is in the pursuit of beauty, but motivation can be extended to self-satisfaction, self-improvement, and pursuit of ideal image when behavior strongly influences their lives19. Therefore, their purchasing behavior is affected not only by virtual utility but also by images represented by the brand or company. Furthermore, images can be created from the country from which brands or products were originated from, which is called the Country-Of-Origin effect.20
3. Global players
The world cosmetics industry has been developed by companies from developed countries. According to Woman’s Wear Daily(2009)21, L’Oreal(France) and Estee Lauder(US) are one of the biggest companies specialized in cosmetics, ranked first and fourth respectively. Two conglomerates, P&G and Unilever, are in the second and the third place, respectively, with a variety of consumer goods sold all over the world. Japanese companies such as Shiseido and Kao Corp also succeeded in the global market, based on the developed domestic market with sophisticated customers. For Amorepacific, all these companies are not only pre- globalized companies to learn from but also the competitors to beat in order to establish its ground in the global market. How the three representative companies -L’Oreal, P&G, Shiseido-grew and expanded to the world is explained in this section.
L’Oreal S.A. (France), the first cosmetics group worldwide, is a global company with 23 international brands, currently present in 130 countries. According to WWD “Beauty Top 100,” L’Oreal was #1 worldwide player in cosmetics, with sales of 25.81 billions in US dollars, in 2008. The company also has No. 1 R&D force in the industry, spending about 609.2 million euros on R&D in 2009.22 The group first conquered Europe and North America and then began to venture into Asian countries for globalization. In the Asia zone where growth in the cosmetics industry has been fast for the past couple of years, L’Oreal reported an annual growth rate of 8.3%, 2147.8 million euros of consolidated cosmetics sales, and 6.8% market share in 2009.23 Asian countries like South Korea, China, Japan, and India continue to be major markets for L’Oreal, and countries like Indonesia are the next targets for its global ventures.
In the case of China, although L’Oreal entered the market later than its competitors, it has successfully used the multi-brand strategy by providing a variety of brands ranging from mass to luxury that virtually cover everyone’s needs. It also provides a myriad of sales distribution channels such as pharmacies and department stores. Acquisitions have been a chief global strategy for L’Oreal as the acquired companies, such as Yue-Sai and Mininurse, could help L’Oreal access a greater number of customers and localize successfully. L’Oreal has the same organizational structure in all markets, but a majority of employees in each market is comprised of local employees. Although L’Oreal already has a strong presence in
7
many major markets, it hopes to double its consumer base to 2.5 billion customers by focusing on conquering the emerging markets.
The Procter& Gamble Co. (USA) is one of the top global cosmetics groups, investing about 2 billions in US dollars in innovation each year, and most of its sales growth comes from new products.24 P&G’s brands are currently sold in more than 80 countries and have been growing fast in Asia Pacific region. The company first began to venture outside North America in 1915 by setting up the manufacturing facility in Canada. Soon afterwards, the company expanded to Europe and Asia Pacific region and globalized its operations mainly through acquisitions and joint ventures. In 1993, more than 50% of sales came from outside the U.S. In China, P&G uses management localization by having more than 98% of its employees as Chinese nationals.25 Rejoice, Safeguard, Olay, Pampers, Tide and Gillette are currently No.1 brands in China's hair care, personal cleansing, skin care, baby care, powder detergent and male grooming category respectively.26
Shiseido(Japan) is one of the top global cosmetics brands originated in Japan. It currently has 21 core brands and hopes to become a global player representing Asia. Specifically, within 10 years, Shiseido aims to surpass net sales of 1 trillion of yen, more than half of which will be derived from overseas.27 Shiseido first entered into other Asian markets in the 1950s, such as Taiwan and Hong Kong, for globalization and then expanded to North America and Europe. It recently acquired Bare Escentuals, a U.S.-based mineral foundation brand, in order to broaden its customer needs, gain synergies with distribution, sales, and R&D, and further strengthen its position as a global company.28 Although its net sales from overseas markets decreased to 260.9 billions of yen in 2009 mainly due to an economic downturn in North America and Europe, it has seen an increase in profits in Asia Pacific region, especially China.
III. To be a global player
1. Amore Pacific in France
1) Learning from failure France, with Paris as the center of fashion, culture, and art, is home to many prestigious cosmetics brands including Lancome(L’oreal), Christian Dior(LVMH), and Chanel(Chanel). Often the country is called a ‘litmus paper in cosmetic industry’, implying success in the French market can be transferred to all over the world.29 By entering into the French market, Amorepacific expected to become a global cosmetic company and learn from other global companies.
In 1988, Amorepacific began exporting skin-care products, SOON, to France. But it made such a critical error that it entered with the label ‘Made in Korea’ in ignorance of the inferior status of the country in the French market. To make matters worse, the products exported focused on whitening segments in which French women had no interests. Eventually, the brand that depended solely on technology was turned away by French customers and called
8
back.
Learning from failure, Amorepacific came to acquire the cosmetics manufacturing plant in France and established local subsidiaries,PBS, in 1990. Lirikos, the first brand of PBS, was produced and launched in France, hiding its origin. By marking the product as ‘Made in France’, the company tried to enjoy the country-of-origin effect, overcoming weaknesses caused by the ‘Made in Korea’ effect. Although the company looked like a French company, however, it maintained the same organizational culture in every aspect. Since PBS hired French employees only for minor places, a conflict between Korean management team and French minor employees arose frequently. Management also suffered from hostility of French, due to both lack of market information and centralized organization structure.30 Although ‘Lirikos’ recorded an unexpected success in Korean market when it was reimported, it was a complete failure in terms of entry to French cosmetics market.
2) Successful entry, Lolita Lempicka31 After several failures in France, Amorepacific revised its strategy to enter the fragrance market in France, instead of the skin-care segment. The skin-care market was already dominated by local incumbents, whereas fragrance market was not dominated by any particular countries, allowing various new players competing in the segment. In addition, the fragrance market seemed more attractive for Amorepacific because product-related characteristics such as originality or emotion counted more than the country-of-origin effect or the credibility of the company.
France has a large fragrance market with over 150-thousand bottles of perfume sold everyday.32 90% of French women wear perfume, and 65% of them wear perfume more than once per day. Since a myriad of companies are competing for such an attractive market, even a leading brand accounts only for 4% of the total market share. Only 1% of market share can indicate the success in the market, and new products also account for 10~12% of total sales.
Amorepacific prepared for the entry for a long period of time and established the local subsidiary, PLL(Pacific Lolita Lempicka), in 1995. In contrast to the previous subsidiary, it was comprised of 90% of local employees, reducing the Korean expatriates to 1 or 2 managers. Independence from the Korean headquarter was secured in maximum, and the company left full discretion to Catherine Dauphin, a product and marketing specialist who formerly designed perfumes for Yves Saint-Laurent and Christian Dior. Under the judgment that the French fragrance market is in need of a new image, Catherine Dauphin explored and licensed Lolita Lempicka, a rising star designer in wedding dress and feminine suits. She also prepared thoroughly for the perfume and the bottle. She cooperated with Annick Menardo, a notable perfumer formerly worked for Giorgio Armani, Hugo Boss, and Yves Saint-Laurent, and Alain De Morgues, a bottle designer formerly worked for Hermes and Jean Paul Gautier. They designed the product, Lolita Lempicka, with a romantic and fantastic image.
In April 1997, Lolita Lempicka was launched. Soon after, the product was highly praised by major press, such as Le Monde and Vogue, and accomplished 1% of market share in
9
November, 1998. It was also chosen as “the best women’s perfume” from FIFI, the most honorable fragrance institution, and ranked fourth in French fragrance market, marking 2.6% of market share in 2002. (Exhibit 13 Top 10 Perfumes in France)
3) Product extension and geographic expansion The Lolita Lempicka brand extended its line to include men’s perfume, Lolita Lempicka au Musculin, in 2000. In 2006, the second line following Lolita Lempicka, L, was introduced. Under the applause, L was sold at 18 million euros in a single year. In succession, the designer brand, Lolita Lempicka, introduced another new product, Si Lolita, in 2010.
On the other hand, the French subsidiary launched another designer brand, Castelbajac, in May, 2001. Castelbajac was a licensed perfume by Jean Charles de Castelbajac, a designer characterized by his use of vivid colors and creativity. His image was fully represented in the ingenious bottle design. Although its market share could not reach 1%, the brilliant and inventive design was awarded ‘2001 Best Bottle Design’ by France Perfumery Association.
By 2008, the French subsidiary was hiring 270 employees and recorded 58 million euros in sales. It also established a 18,000m2-wide manufacturing plant in Chartres, investing 16 million euros. The new plant was now equipped by 13 production lines composed of perfumes and cosmetics, along with the up-to-date R&D center, inventory warehouse, and office building. Except for a Korean head, the organization was entirely composed of local employees from France, sustaining high autonomy. PLL considered Amorepacific a major stockholder of the same industry, rather than a parent company or headquarter.
Although Lolita Lempicka is present in more than 80 countries, its sales are still concentrated in France, accounting for 60% of total sales. (Exhibit 14 Sales breakdown by region) Considering that most perfumes beloved by French customers such as J’adore by Christian Dior(LVMH), No.5 by Chanel(Chanel), and Angle by Thierry Mugler(Clarins) are well-known globally(Exhibit 15 Top 10 global brands in premium fragrance), Lolita Lempicka needed to expand its business to other countries. Building the global distribution channel, however, seemed to require extensive efforts.
2. Amore Pacific in China
1) Exploration to Great Continent Amorepacific’s first launch in China was triggered by a joint venture with a local company in Shenyang in 1993.33 The first target region-three cities (Harbin, Shenyng, Changchun) in Northeast China-was selected on the ground of a high cultural similarity with Korea. In December, 1994, the first local production of ‘Miro’ and ‘Mamonde’ commenced, and the brands began to be recognized in the region. The first entry, however, was bounded to the northern area and thus limited in covering the whole country. In an effort to overcome such limitation, Amorepacific accepted the license contract suggested by a trade company in Beijing in 1997. With this contract, Amorepacific could carry both the joint venture for its brand, Mamonde, in the northeastern area and licensed sales for Laneige through the agency
10
in Beijing. Both ways, however, were vulnerable to tariff barrier, and this obstacle motivated the company to enter the Chinese market more actively, on its own initiative.
In 2000, Amorepacific established its wholly-owned subsidiary in Shanghai and aggressively ventured into the Chinese market. Before introducing its products, it went through a careful preparation by conducting three years of market research and scrutinizing over 3,500 local customers.34 After the investigation, the company decided to launch Laneige, a popular brand targeting young segment in Korea, in prestigious department stores.35 In May 2002, the first store of Laneige entered the SOGO department store, the most prestigious department store in Hong Kong, followed by the store at Parkson department store, one of the premium department stores in Shanghai. In July, 2002, the newly established manufacturing plant in Shanghai ran its operation for the mass production of Laneige.
Although the production line could not be fully operated and even temporarily stopped due to a lower-than-expected performance from initial sales, the company stuck to its initial strategy targeting a young premium market with Laneige only through the prestige channel. Patience based on the careful market analysis eventually paid off as time went by. According to local vice president, Sangwoo Lee, “it was hard to meet even the manager in Parkson department store when Laneige first launced in September 2002, but after only six months, the brand could move from the second floor to the first floor, thanks to the good reputation from customers”36
By 2004, Laneige could locate more than 50 department stores, and the figure rose to 180 by 2010. In 2009, the company earned 118 billion KRW in China. Profits occurred since 2007 and rose every year to 10% to the sales by 2010. (Exhibit 16 Sales and profit trend in China). The brand image was ranked 9th among other global brands such as Estee Lauder, Lancome, and Clinique (Exhibit 17 Top 15 cosmetic brands in China).
While Laneige was positioned as a young premium brand, Mamonde was rather a masstige brand with a relatively reasonable price in various channels. To reinforce the brand, Amorepacific started to control the subsidiary fully in the northeast region, acquiring shares from the joint venture company. Having been produced locally since 2005, Mamonde is sold in 277 department stores and 2,010 specialty stores by 2010.
Just like Korean consumers, Chinese cosmetics consumers count the whitening and anti- aging related products. Since Korean stars were also popular in China by the Korean Wave phenomenon, it was easy to appeal to Chinese consumers with the same products and marketing strategies as those of Korea. But the operation was mostly localized, having only 10 Korean expatriates out of 1,750 employees who worked for the Chinese subsidiary. In 2004, another R&D center was established in Shanghai in order to develop localized products. As a result, ‘Mamonde Age Control’ was developed and introduced exclusively for the Chinese market in 2008, and Laneige reinforced its moisturizing line with various segmented products, considering an increasing popularity of moisturization in China.
11
2) How to cover the continent China covers a great continent with 4 major cities (Beijing, Tianjin, Shanghai, Chongching) and 22 provinces. With a population of 1.3 billion people (2008) that accounts for 21% of the total world population, the company has a large cosmetics market of 124 billion RMB (approx. 20 trillion KRW, 2008). In addition to the size, the growth rate of the market is remarkable. It has recorded an annual growth of 10% for the last decade, and 15~20% for skin-care and make-up products.
After gaining brand competitiveness in China from its business foothold, Shanghai, Amorepacific tried to fully exploit the potential of the continent. A channel expansion strategy was assumed to bring another chance for a growth in sales. It was also believed to diversify the current brand portfolio. Along with Laneige and Mamonde, many of its established brands are on the list to enter the Chinese market.
3. US
1) Amore Pacific as Prestige brand Based on its huge influence on the world economy, the U.S. have played a important role in global beauty market. Quantitatively, the U.S. market accounts for 17% of the world cosmetics market, with a market size totaling 40 billion dollars in 2008.37 The market is far more influential, when considering the impact of Hollywood stars on global trends and New York’s reputation in the fashion industry. It was natural that Amorepacific who pursued globalization should enter the U.S. market.
In 2000, it launched the intensive brand development program for the global brand. In March, 2002, the company introduced the brand, AMOREPACIFIC, to the U.S. market and even changed the company’s name to Amorepacific. After two months, Amorepacific built the US subsidiary and concentrated on launching the brand. AMOREPACIFIC, targeting a superluxury prestige market, mainly focused on the oriental high-tech skin-care products. The products emphasized not only the healthy, oriental images of the nature representing green tea, ginseng, and bamboo, but also the quality based on the high technologies such as the nano- technology. The distribution channel for $400 creams and $500 ampoules was to be limited to a small numbers of selective shops. To facilitate marketing and distribution, the company cast a former manager who worked for Neiman Marcus over 10 years as a new vice president.
In September 2003, the flagship store named AMOREPACIFIC Beauty Gallery & Spa opened at SoHo district in New York City. The place provided a perfect picture of tranquility as Suh described it, “a calm and holistic approach to beauty”38. Yabu Pushelberg, a star interior designer who formerly designed W hotel in New York, decorated the shop with energetic arbor domes and exotic spa booths which symbolized the color of red ginseng.39 For the premium image of the brand, the store only targeted opinion leaders in the beauty industry including Hollywood stars and beauty magazine editors, and those who received the customized spa service with exotic Asian root ingredients in the air scented with jasmine and bamboo generated favorable buzz. The brand came to be recognized faster than expected,
12
when Hollywood stars such as Uma Thurman and Sienna Miller became known to be customers of AMOREPACIFIC.40
2) Exploitation of successful entry Along with the debut of AMOREPACIFIC gallery and spa, it opened a store in Bergdorf Goodman, the prestige department store in Manhattan, New York, for the first time as a Korean brand. Although the department store showed a skeptical attitude at the time of entry, a series of good responses from customers changed such attitude. In preparation for the launch of the Time Response Skin Renewal product, Bergdorf Goodman even recommended the product to 2,000 loyal customers with samples enclosed. Followed by the entry to Bergdorf Goodman, AMOREPACIFIC succeeded in its entry to Neiman Marcus, another prestige department store, starting from the Washington branch to 25 other branches all over the country.
Since the company secured a premium image in eastern U.S., Amorepacific had to decide on the next step. Although the sound financial status was firmly supporting the foreign businesses, the U.S. market has been far from making any profits. (Exhibit 18 Trend in profits in overseas businesses). Considering the global impact of a success story in New York, Amorepacific’s entry already seemed to achieve its purpose. Whether to be content with this image improvement or to expand for a measurable success was an issue to be considered.
VI. Strategic Challenges
The CEO’s objective was to add 6 more megabrands whose sales marked over 10 billion KRW, to increase the company revenue to 5 trillion KRW, and generate 30% of total sales from the overseas market by 2015. Although he successfully built its place in the overseas market, many questions were left to be solved in order to boost its sales and become a true global company. In this vein, how should Amorepacific develop and evolve its global strategy?
13
[Exhibit 1] Sales Trend by Region (2005-2009)
(Unit: billion KRW)
2500
CAGR: 12.6% 12 US 2000 97 9 174 France 96 8 129 Asia 1500 9 78 9 63 89 47 85 South 53 Korea 1000 1769 1531 1357 1167 1273 500
0 2005 2006 2007 2008 2009
Ratio of the 9% 11% 11% 13% 14% overseas market
Source: Amorepacific Annual Report
[Exhibit 2] Domestic Market Share Trend (2004-2009)
40 34.7 34.2 34.5 35.5 32.3 35.1% Amore Pacific 30
20 12.0 10.2 12.4 12.9% LG Household and Health Care 8.1 8.2 10 5.5% Estee Lauder 4.1% L’Oreal 0 2004 2005 2006 2007 2008 2009
Source: Amorepacific Annual Report
14
[Exhibit 3-1] Information on major patents: number of patents applied and issued (2009.12)
2005 2006 2007 2008 2009
Domestic Application 106 208 174 242 229
Issue 60 34 72 95 47
Foreign Application 42 44 58 45 77
Issue 7 5 9 11 16
Source: Amorepacific Homepage
[Exhibit 3-2] Information on major patents: Major technologies awarded
Name of award Date of award The New Excellent Technology mark from the Ministry of Science and Technology Aug. 21, 2007 Technology to mass-produce nictoflorine from camelliaside A and camelliaside B using β-galactosidase Products: Sulwhasoo Jaham Cream Best Technology Award (Prime Minister’s Prize) Dec. 8, 2006 Technology to stabilize the effective ingredients of cosmetics using multilamellar vesicles. Products: IOPE Retinol TX and Hera Wrinkle Retinol TX The Excellent Korean Technology mark from the Ministry of Science and Technology Dec. 8, 2005 Development of elatinate (a new substance) and wrinkle reduction technology Products: Laneige Future Age Essence and Eye Serum Excellent Technology Award (Prize of the Ministry of Health and Welfare) Dec. 8, 2005 Development of a new retinoid with an anti-aging effect Products: Laneige Future Age Essence and Eye Serum Patented Technology Grand Prize from the Korean Intellectual Property Office April 14, 2005 Development of a new thiocarbamic acid derivative (a vanilloid receptor antagonist) and pharmacological composition containing this substance Top Ten New Technologies of 2004, the Ministry of Commerce, Industry and Energy. Jan. 20, 2005 Colloid sunscreen cosmetics employing new composite materials Products: Sulwhasoo Sangbaek Cream, AMOREPACIFIC Intensive Vitalizing Cream, and others Excellent Technology Award (Prize of the Ministry of Health and Welfare) Dec. 1, 2004 Technology to suspend the effective ingredients in cosmetics using mesoporous macromolecular microspheres Products: IOPE EGCG The First and Haute Goa Whitening Essence IR52 Jang Young Shil Award April 30, 2004 Functional sunscreen materials that include colloidal inorganic macromolecular nano-sized composite
15 ingredients Products: Sulwhasoo Sangbaek Cream, AMOREPACIFIC Intensive Vitalizing Cream SPF 10, and others Excellent Technology Award (Prize of the Ministry of Health and Welfare) Dec. 4, 2003 Technology to stabilize cosmetics’ effective ingredients leveraging molecular distribution Products: IOPE Retinol 2500 Innovation, IOPE Whitegen-EX, and Sulwhasoo Whitening Powder The Excellent Korean Technology mark from the Ministry of Science and Technology Sept. 9, 2003 Technology to stabilize cosmetics’ effective ingredients using the distribution of polyols Products: IOPE Retinol 2500 Innovation, IOPE Whitegen-EX, and others The Excellent Korean Technology mark from the Ministry of Science and Technology Sept. 4, 2002 Stabilization of active ingredients by introducing 3-aminopropane phosphoric acid Products: IOPE Whitegen, IOPE Retinol 2500 Intensive, Laneige Ultra Hydro Essence, and others Prime Minister’s Prize at the Precision Technology Competition Dec. 18, 2001 Development of a new material, Neo-Ceramide, that enhances cosmetics’ skin barrier function Products: Laneige products The Excellent Korean Technology mark from the Ministry of Science and Technology June 13, 2001 Synthesis of glutamic acid silanol (SC-Powder) and development of colored cosmetics containing the substance Products: Laneige Air Light Twinpact, and others The Excellent Korean Technology mark from the Ministry of Science and Technology March 9, 2001 Technology to manufacture cosmetic materials to enhance cosmetics’ skin barrier effect using a skin-friendly neo-ceramide Products: Laneige Ultra-Hydro Essence and Cream and IOPE Hydro Lasting Cream The Excellent Korean Technology mark from the Ministry of Science and Technology March 9, 2001 Technology to stabilize a selective enzyme for skin exfoliation Products: Verite White System Vitagen and Hera White Program IR52 Jang Young Shil Award Jan. 20, 2001 Development of high-functionality whitening cosmetic materials containing Vitagen Products: IOPE Vitagen White and Hera White Force Vitagen
Source: Amorepacific Homepage
16
[Exhibit 4] R&D investment of Global companies
(Unit: million euro, %)
R&D Growth R&D Company Name Country sales OI/sales investment rate intensity L’Oreal France 581.30 6.8 % 3.3 % 17,542 14.6% Kao Corp. Japan 357.71 2.3 % 3.4 % 10,465 8.8% Colgate Palmoliv US 182.09 1.7 % 1.7 % 11,029 19.7% Shiseido US 115.61 4.9 % 2.0 % 5,742 8.7% Estee Lauder US 58.2 12.3 % 1.0 % 5,691 10.2% Avon US 50.36 0.0 % 0.7 % 7,618 12.3% Hugo Boss German 47.5 8.3 % 2.8 % 1,686 11.3% Christian Dior France 43 9.6 % 0.2 % 17,933 19.3% Kose Japan 33.99 2.5 % 2.4 % 1,430 8.4% Clarins France 23.63 4.7 % 2.3 % 1,008 11.3% Amore Pacific Korea 28.29 7.2 % 2.7 % 1,059 17.0%
Source: European Commission, The 2009 EU Industrial R&D Investment Scoreboard, 2009
[Exhibit 5] Sales breakdown by distribution channels (2009)
Internet Others Homeshopping 6% 6%
Door-to-door Discount stores sales 11% 39%
Specialty stores 18%
Department stores 20%
Source: Amorepacific 2009 Annual Report
17
[Exhibit 6] Domestic Affiliated Firms (for June 2010)
Main business Company name
Listed parent company Pacific Corporation
manufacturing and distribution of the cosmetic Amorepacific
products Pacific Pharmaceuticals
pharmaceuticals
Not sales of cosmetic products (3 firms) Etude, Amos Professionals, Innisfree listed manufacturing and sales of bottles Pacific Glass
green tea plantation Jangwon
printings and publications (2 firms) Pacific Packages, Taeshin inpack
Source: Amorepacific investor’s report
[Exhibit 7] Financial Performances in Domestic Market
(Unit: 100 million KRW)
20000 17.0% Ratio of operating income to total sales 16.7%
15000 18.3% 18.2% 18.5% 14.7% 16.8% 17.6% 16.8% sales 10000 15.8% operating income
Operating Income CAGR: 10.2% 5000 2552 3006 2323 2486 1882 1949 2170 1251 1636 1597
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Amorepacific annual report
18
[Exhibit 8] Amorepacific’s major brand portfolio
19
Source: Amorepacific 2009 Annual Report
20
[Exhibit 9] Market size of major cosmetic market (2008)
(Unit: billion dollars, %)
Rank Country Market Global Growth Rank Country Market Global Growth
size share rate size share rate
1 US 40.1 16.7 1.0 9 Spain 7.6 3.2 3.6
2 Japan 25.6 10.6 2.0 10 Russia 7.6 3.2 5.9
3 France 15.7 6.5 2.3 11 Mexico 5.7 2.4 4.1
4 German 14.5 6.0 1.8 12 Canada 5.2 2.2 2.9
5 Brazil 13.9 5.8 8.1 13 India 4.4 1.8 13.9
6 UK 13.5 5.6 3.5 14 South Korea 4.3 1.8 5.3
7 Italy 10.7 4.5 2.2 Others (48 countries) 61.4 25.5 4.9
8 China 10.0 4.2 6.3 Total (62 countries) 240.2 100.0 3.7
Note: data from the original source are standardized on the basis of the product categorization. While some sources include men’s grooming (e.g. razors) and oral hygiene products (e.g. toothpaste, toothbrushes, ect.) among the cosmetic industry, we follow the categorization generally accepted in South Korea. That is, the total market size could have been modified based on the product category data to exclude unrelated household products.
Source: 2009 Cosmetic Industry Report, Korea Health Industry Development Institute(KHIDI), Datamonitor Personal Care Market Data
21
[Exhibit 10] Market size and annual growth rate by region (2008)
(Unit: billion dollars, %)
Region 2006 2007 2008 Europe 92.8 (3.7%) 96.5 (4.0%) 89.8 (3.5%) Asia-Pacific 54.5 (4.3%) 57.0 (4.5%) 59.5 (4.4%) North America 43.5 (2.7%) 44.7 (3.0%) 45.3 (1.3%) South America 24.3 (6.9%) 25.9 (6.7%) 27.6 (6.4%) Middle East and Africa 7.1 (6.9%) 7.6 (6.9%) 8.1 (6.9%) Total 222.2(4.1%) 231.7(4.3%) 240.3(3.7%)
Note: data from the original source are standardized on the basis of the product categorization
generally accepted in South Korea.
Source: 2009 Cosmetic Industry Report, Korea Health Industry Development Institute(KHIDI),
Datamonitor Personal Care Market Data
22
[Exhibit 11] Market Growth of BRICs cosmetic industry
(actual value for 2004 and 2009, expected value for 2014)
Source: Euromonitor
[Exhibit 12] Cosmetic market breakdown of major countries by product category (2008)
product category US Japan France China Skincare 8.5 (22%) 13.1 (51%) 4.8 (30%) 3.6 (36%) Fragrance 5.5 (14%) 0.8 (3%) 2.8 (18%) 0.5 (5%) Hair care 7.5 (18%) 3.9 (15%) 3.0 (19%) 2.0 (20%) Make-up 6.1 (15%) 3.4 (13%) 1.9 (12%) 1.0 (1%) Personal hygiene 6.0 (15%) 2.1 (9%) 1.8 (12%) 1.2 (12%) Baby personal care 6.5 (16%) 2.3 (9%) 1.4 (9%) 1.7 (17%) Total 40.1 (100%) 25.6 (100%) 15.7 (100%) 10.0 (100%) Note: data from the original source are standardized on the basis of the product categorization
generally accepted in South Korea.
Source: 2009 Cosmetic Industry Report, Korea Health Industry Development Institute(KHIDI),
Datamonitor Personal Care Market Data
23
[Exhibit 13] Top 5 brands in France fragrance market
Name Brand Company 2002 (M/S) 2004 2006 ANGEL Thierry Mugler Clarins 1(4.6%) 1 2 No.5 Chanel Chanel 2(4.2%) 2 1 J’adore Christian Dior LVMH 3(3.0%) 3 3 Lolita Lempicka Pacific Lolita Lempicka Amore Pacific 4(2.6%) 5 5 Flower Kenzo LVMH 4(2.6%) 4 4 Source: Secodip
[Exhibit 14] Lolita Lempicka sales breakdown by region (2004)
US KoreaAsia 60 26 30 (12%) (5%) (6%)
Europe 400 (77%)
Source: company data
[Exhibit 15] Top 10 Global Brands in Premium Fragrance (2006)
Source: Euromonitor International
24
[Exhibit 16] Sales and profit trend in China
(Unit: 100 million KRW)
1500 11% Ratio of operation income to total sales
1000 6% Sales 3% 1176 500 Operating 760 income 470 0 2007 2008 2009
Source: Company documents
[Exhibit 17] Top 15 cosmetic brands in China (only for those entered the department store)
’08 Rank Brand Company Sales(million RMB)* 1 Olay P&G 6,967 2 L’Oreal L’Oreal 3,768 3 Aupres Shiseido 3,154 4 Maybelline L’Oreal 2,450 5 Lancome L’Oreal 1,032 6 Yue-sai L’Oreal 891 7 Shiseido Shiseido 860 8 Estee Lauder Estee Lauder 859 9 Laneige Amorepacific 518 10 Avenir Kose Corp 507 11 Clinique Estee Lauder 435 12 Kose Kose Corp 435 13 Fancl Fancl Corp 414 14 Za Shiseido 394 15 Herborist Shanghai Jawha 364 * Sum of skincare and make-up sales
Source: Euromonitor
25
[Exhibit 18] Net profit trend of the overseas business
(Unit: million KRW)
2005 2006 2007 2008 2009 10
5 5 0 -2 -2 -4 -6 -5 -5 -9 -4 US -7 France -10 -9 -20 -4 Asia -4 -15 -2
-20
-4 -25
-30
Source: 2009 Annual report
26
Endnote
1 Kitchens, S., Pacific Quest, Forbes Magazine, 2006.5.8 (http://www.forbes.com/global/2006/0508/030.html)
2 60 Years of History, Amorepacific official homepage, (http://eng.amorepacific.co.kr/company/History/history_pop.jsp)
3 Ibid for this information and for most of the remaining information about company history or past performances
4 Ko, E., [Sound Company Project] part 2 ⑧ Amorepacific R&D center, Financial News, 2007.09.26. (In Korean)
5 Lee, S., Pacific chose luxury over mass, Money Today, 2006.01.02. (In Korean) (http://www.mt.co.kr/view/mtview.php?type=1&no=2005123015270861233&outlink=1)
6 Lee, G., [Family business] (58) Amorepacific: From a camellia oil merchant to the best cosmetic company in Korea, Hankyung, 2009.05.28. (In Korean) (http://www.hankyung.com/news/app/newsview.php?aid=2009052870581)
7 Kitchens S., Ibid
8 Lee, G., Ibid
9 Kim, I., Pacific’s evolution to the global beauty holding company, Money Today, 2008.01.03 (In Korean) (http://www.mt.co.kr/view/mtview.php?type=1&no=2007122111294207967&outlink=1)
10 Ibid for this information and for most of the remaining information about restructuring details
11 Ghemawat,P., Carin-Isabel Knoop, David Kiron (2006), Amorepacific: From Local to Global Beauty, Harvard Business Case, 9-706-411
12 Park, Y., A Korean perfume captivated the world, Weekly Choson, 2005.11.16 (In Korean) (http://www.chosun.com/magazine/news/200511/200511260074.html)
13 Euromonitor International, Beauty and Personal Care: State of the Industry 2010, May 2010
14 Kumar, S., Cindy Massie, Michelle D. Dumonceaux (2006), Comparative innovative business strategies of major players in cosmetic industry, Industrial Management & Data Systems, 106(3), pp285-306
15 Kumar, S.(2005), Exploratory analysis of global cosmetic industry: major players, technology and market trends, Technovations, 25, pp1263-1272
16 Ibid for this information and for most of the remaining information about industry trend
17 MARIA ELVIRA NUÑEZ FORERO(2010), Beauty and Personal Care: Demand for Both Natural and Scientific Beauty Set to Thrive, Euromonitor International
18 Ghemawat,P., Carin-Isabel Knoop, David Kiron (2006), Ibid
19 Dichter E. Handbook of Consumer Motivation. New-York. McgrowHill Book Co.1964
20 Reierson, C. (1966), “Are foreign products seen as national stereotypes?”, Journal of Retailing, Vol. 42, Fall, pp. 33-40.
21 Women's wear Daily (2009), Beauty's Top 100, WWD Beauty Biz, Posted FRIDAY AUGUST 14, 2009
22 L’Oreal, Annual Report, 2009, accessed September 16, 2010.
27
23 Ibid for this information and for most of the remaining information about L’Oreal
24 P&G Annual Report, 2010, accessed September 16, 2010.
25 P&G: A Company History 1837-Today (2006): 11(http://www.pg.com/translations/history_pdf/english_history.pdf) accessed September 16, 2010.
26 P&G Introduction, available from P&G in Greater China http://www.pg.com.cn/job/introduction.asp, accessed September 16, 2010.
27 Shiseido Annual Report, 2010, accessed September 16, 2010.
28 Ibid for this information and for most of the remaining information about Shiseido
29 Shin, C.(2005), Fragrance, Beauty, and Costmetic market trend in France, KOTRA
30 Park, Y., Ibid
31 Kim, J.(2003), Global Strategies of Amorepacific, International Business Journal, 14(2) (in Korean)
32 Fédération des Entreprises de la Beauté(2007), Les chiffres clefs 2007 de la parfumerie – cosmétique, Statistiques FEBEA
33 Shen, J. (2002), A Study on Buying Behavior of Chinese Consumer-focused on launching Korean cosmetics in China as well as Chinese cosmetic market, Graduate School of Business, Seoul National University (In Korean)
34 Chung, G. et al (2008), Global Strategy of Korean Companies, Wisdomhouse, Ch10. Chun, I., (2007), Global Strategy of Amorepacific, pp364-391.
35 Ibid
36 Yonhap News,
37 2009 Cosmetic Industry Report, Korea Health Industry Development Institute(KHIDI), Datamonitor Personal Care Market Data
38 Kitchens, S., Ibid.
39 Park, H., Amorepacific captivated the upper 2% in America, Money Today, 2007.11.28. (In Korean)
40 Son, J., Amorepacific captivated the American women, Choson Ilbo, 2007.06.20. (In Korean)
28