Cosmetic Market Overview

Cosmetics is one of the major industries in Korea with a stable domestic market and growing exports. The industry first began in 1945, while most cosmetics in the market were imported. In the 1960s the government started to promote the cosmetics industry by establishing regulations establishing the steppingstones of development. The industry bloomed after the 1990s with the establishment of Kolmar Korea, the first OEM specialized cosmetics products plant. Currently LG Household & Healthcare and AmorePacific are dominating not only the domestic market but also expanding globally. This development and current growth are possible due to the OEM/ODM companies and the strong supply chain supporting the manufacturers.

The cosmetic facial mask is one of the most common cosmetic products and the competition is overwhelming. Online search results suggest that hydrogel masks account for about 1/60 of the facial mask market. However, a road shop store clerk advised that most products have similar hydrogel like features. Hydrogel masks are commonly used as eye patches, a specific type of cosmetic facial mask.

1. History of Cosmetics Industry in Korea:

Cosmetics manufacturing first started in 1945, albeit at a very minor level, and developed with the ‘Choseon cosmetic industry community’ (base of Korea Cosmetic Industry Cooperative: KCIC).

Until the 1960s, most cosmetics products were imported. In the 1960s, the government began supporting domestic products, established regulations for cosmetics raw materials, regulated illegal cosmetics manufacturing and cosmetics labeling. The industry was ready for mass production.

Little by little the domestic cosmetics industry grew and in the 1990s, the cosmetics industry received a boost with the establishment of Kolmar Korea, the first OEM specialized cosmetics production plant. With the birth of Original Design Manufacturing (ODM: Private Labelling) products in 1990s, the market size for cosmetics increased to 10,000 times compared to the market of the 1960s.

However, the sudden growth of the market in the 1990s also had side effects, especially quality control. Out of the 900 cosmetics manufacturers which were registered, only 40 had obtained the Current Good Manufacturing Practice (CGMP) for quality control.

The rapid growth of the cosmetics industry was not only achieved by consumer sales but also by support from the leading OEM/ODM cosmetics manufactures, Kolmar Korea and COSMAX, the 1^st and 2^nd OEM/ODM companies internationally.

2. Cosmetics Market Size:

Over the past few years, Korea's economic growth rate was low from 2.3% to 3.7%. In contrast, the cosmetics industry increased rapidly, with growth rates from 6.2%~19.6%. This trend is also noticeable in exports. While Korea’s exports overall have been declining since 2012, cosmetics exports have been increasing yearly. In 2012 the exports were less than USD 1 billion but in 2018, exports reached USD 6.2 billion and are predicted to show ongoing growth. Even though China, the largest export market, has been slow, Korean product technology, brand power, and enlarging export scope will keep driving the increase in exports.

Cosmetics Exports and Imports

Domestic Cosmetics Market Size

Market Size = Production + Exports - Imports

Source: Statistics Korea

Unit: USD 1million

3. Domestic Market:

There are three pipelines in the current domestic supply structure for the cosmetics industry:

1. Manufacture: Product manufactured and sold by a single company

2. OEM/ODM: Products manufactured by a company on behalf of a different company and brand

3. Import: Products imported and sold to consumers by importers or distributors

Market Leader

The domestic market is dominated by two companies which are also major global players. AmorePacific Corp. and LG Household & Health Care, the two leading companies, were ranked within the global top 20 by Women’s Wear Daily in 2015 (by revenue and market share). These two account for over 60% of the market. The third largest player, Aekyoung Industry Co.,Ltd. Holds only 1.94% market share.

Unit: %

4. Characteristics of the Cosmetics Market:

Trend sensitivity is an important cultural aspect that affects the market. New items or ideas can generate a significant impact one day but disappear the next. This cultural aspect leads to 88,806 cosmetic products registered in 2013 to grow 124,560 in 2018 with ongoing development for more products.

The cosmetics market is characterized by small batch production, mainly to achieve uniqueness. This makes it possible for small and middle-sized companies to participate actively through white labeling and Original Equipment Manufacturing (OEM; Contract Manufacturing) compared to other markets. Market entry does not require manufacturing facilities. As an outcome, close to 4,000 small and middle-sized cosmetics companies have been established in Korea only 12 having achieved revenue of over KRW 100 billion (USD 86 million).

It is difficult to maintain a stable beauty business. Given brand and trend sensitivity, most of a product’s value is determined by the ‘Name Value (brand)’ and image more than the product performance itself. Once the image turns negative it will be hard to survive with all the competitors in the market.

Most of the cosmetics products produced in Korea are targeted at domestic sales due to different trends, regions, weather, skin type and so on. However, as the standard for beauty is converging globally, cosmetics companies are seeking opportunities abroad.

Trends

To differentiate themselves from competitors, manufacturers develop or add new features to their products. For example, functional, oriental medicine and organic features (cosmetics manufactured from organic materials, plants and animals, or materials, etc.) are blended into products to create unique and new products.

Until recently, most natural and semi-natural products were lumped together as ‘Natural Cosmetics,’ but as the trend of natural cosmetics became popular people started to search for all-natural products and now the term ‘Naturalism Cosmetics’ is used. ‘Innisfree’ successfully captured significant sales revenue by promoting a collaborative Naturalism Cosmetics product with JeJu Island (a resort island with natural beauty), setting a new trend of natural cosmetic products. Following the naturalism trend, manufacturers are trying to gain success by promoting organic and oriental medicine cosmetics.

Unit: %

Sales Channels

Imported cosmetics are mostly premium products, targeting women in their 40s and above. These products are usually globally recognized brands that have been well known in the domestic market for an extended period. The main sales channel for these products is department stores and brand stores. Hospitals and dermatology hospitals are also one of the sales channels that is fit for imported premium cosmetics products but currently do not have a large market share.

Compared to imported cosmetics, the majority of domestic products target women in their 20s to 30s. These younger generation women are seeking more cost-efficient products rather than branded products. This type of cost-conscious consumer preference increased the sales for small stores, brand shops and on-line shopping malls. The increase of online purchasing was driven by mobile purchasing which has showed a steep growth. The online user-tests have been a new way of promoting the products which are linked to online shopping malls and are showing positive results.

Another channel is ‘door-to-door’ sales. Door-to-door sales are specialized in customized care. Started first in the 1960s, it has had its ups and downs with the development of the internet and mass production, but maintained its sales by applying new technologies, customized care from the face-to-face data collected, lower prices compared to department stores and more quality samples.

TV home shopping is also important for the cosmetics industry. Aekyoung Industry Co., Ltd, ranked 3^rd by revenue and market share in 2015. Sells primarily through TV home shopping.

Lastly, pop-up stores are efficient for making a quick assessment of consumer preferences. There are agencies that specialize in popup stores which assist with generating sales as well as collecting data for future use.

5. Process of Cosmetics Imports and Regulations:

The process of importing cosmetics is challenging because there are constant changes. The rapid growth and development of the market have led to constant changes to the Cosmetics Act complicating the process. The import process is highly dependent on the regulations therefore to understand the process, one needs to understand the regulations.

All import approvals and processes are the responsibility of the importer. Therefore, any company wishing to sell their products in Korea must first establish a relationship with an importer or set up a local subsidiary.

The import process follows:

I. Contract with the importer

II. Classification of the product

III. Ministry of Food and Drug Safety (MFDS: formerly KFDA) approval or register exception report

IV. Standard Entry Notice of Imported Products Report

V. Customs processing

VI. Self Inspection regarding quality

VII. Sales

Contract:

Regulations require that an exporter must contract with an importer prior to import because only a local entity can undergo the registration and approval process. For ‘general cosmetics’ the importer obtains a cosmetics business & importer’s license. It is important for exporters to understand the process to make it quick and smooth. The importers might request a specific document that requires time or requests for an onsite manufacture inspection by the MFDS. However, if the exporter is unaware of the requirements and regulations and fails to cooperate, it can cause a loss on both sides.

Classification:

Cosmetics are classified as ‘General Cosmetics’ or ‘Functional Cosmetics.’ The import process for functional cosmetics is more complicated.

Functional Cosmetics is defined in the Cosmetic Act as follows:

(a) Products providing aid in brightening skin

(b) Products providing aid in improving wrinkles in skin

(d) Products aiding in changing or removing the color of hair, or nourishing hair

(e) Products aiding in preventing or improving dryness, split, loss, cornification, etc. resulting from weakened functions of skin or hair

MFDS Approval:

Examination by the MFDS requires submitting documents regarding the safety and effectiveness of each product imported. The MFDS will examine product names, ingredients and quantity, usage and amount, precautions, standards and testing methods and other additional information if needed.

Requirements:

1. Examination registration form

2. Documents proving effectiveness and safety

A. Origin and how it was developed

B. Ingredients table

C. Safety documents

D. Effectiveness and function documents

E. Sun protection factor documents (If related to ultraviolet products)

3. Standards and test documents

MFDS Examination Exception:

Some products are exempt from the arduous process:

1. Products listed on the ‘Korean Functional Cosmetics Codex (KFCC)’ using the exact ingredients, types, tests, amount, standards and which has the same effects.

2. Products which were approved and have the same:

A. Effectiveness

B. Standards and tests

C. Amount and usage

D. Form (gel, spray, etc.)

If the ingredients are pre-registered the process will require 15 days, however, if not registered, 60 days is required.

Standard Entry Notice of Imported Products Report (SENIPR):

Korea Medical Device Industry Association (KMDIA) requires the SENIPR for import products.

1. Estimated Entry Notice of Imported Products Report

2. Offer sheet

3. Certificate for manufacture and sales (only for first import)

4. MFDS approval

5. Ingredients standards, safety/effectiveness approval (only first ingredient import)

6. Past Notice of Imported Products Report (only if re-import)

Documents for Import:

1. The required documents specified in the Cosmetics Law (SENIPR)

2. Shipping documents (B/L or AWB and P/L)

3. Invoice (Requires the exact item name)

4. Country of Origin marked on products

Self-Inspection (regarding quality)

A self-Inspections required before sales depending on the product. If the manufacturer is not able to carry out the self- inspection, it must be tested at an MDFS approved institution.

No.	Category	Standard	Note
1	Net content	Over 97%
2	pH	3.0~9.0
3	Pb	20μg/g or lower	If ingredient used clay powder: 50μg/g or lower
4	As	10μg/g or lower
5	Hg	1μg/g or lower
6	Sb	10μg/g or lower
7	Cd	5μg/g or lower
8	1,4 -Dioxane	100μg/g or lower
9	Methanol	0.2(v/v)% or lower	Antiseptic wipes: 0.002(v/v) % or lower
10	Formaldehyde	2000μg/g or lower	Antiseptic wipes: 20(v/v) % or lower
11	DBP, BBP, DEHP	100μg/g or lower for addition of all 3
12	Bacteria	For children or eye makeup: 500ea/g (ml) or lower other cosmetics: 1000ea/g(ml) or lower	Antiseptic wipes: 100ea/g(ml) or lower
13	Mycete		Antiseptic wipes: 100ea/g(ml) or lower
14	Escherichia coli	None found
15	Pseudomonas aeruginosa	None found
16	Staphylococcus aureus	None found

Self-inspection regarding quality can be replaced by an MFDS site inspection upon a foreign manufacturer’s request.

General cosmetics have the same import process without the MFDS inspection. However, if it contains a new unregistered ingredient, the product will have to undergo an MFDS inspection which has the same process of importing a functional cosmetics product.

Opportunities

To enter the Korea cosmetic industry will require overcoming many obstacles. Consumer products must be trendy, customized, and promoted effectively. For raw materials, changing an existing partner with a strong relationship is not a simple task. Replacing a supplier would require the existing provider to have issues such as quality, logistics, price which would disqualify him. Also, to win over the manufacturer the products need better performance, price advantages and a deal breaker which the existing partner cannot provide.

However, as much as it is difficult to penetrate the market, the global 9^th largest cosmetics market is tempting. As Korean culture such as K-pop, Korean Drama and Korean online influencers has been spreading throughout the world it has generated a strong image of Korean products in Asia and around the world. Moreover, Korea has been a gateway to Asia and especially the largest market, China.

A catchy presentation and datasheet would be useful to appeal to a potential partner. This should include information such as detail product information, quality, MOQ, indicative price range, safety information, advantages compared to existing competitors and other added value.

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Tuesday, April 28, 2020

Cosmetic Market in Korea