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THE BACKGROUND

Ranked as the 11th largest cosmetics company in terms of sales worldwide, South Korea’s Amorepacific booked $4.8 billion in sales for 2016, all accumulated from 25 brands under its umbrella, including Sulwhasoo, Laneige, Innisfree, and Etude.

The company is known for its low to mid-range prices but high-quality products targeted towards the masses, especially young females.

By establishing Korea’s first cosmetics research lab in 1954, less than a decade after being founded in 1945, the company pioneered popular skincare trends such as boosting essences, sleeping masks, cushion foundations, and two-tone lip bars.

Forbes placed Amorepacific at No. 16 on its 2016 list of the world’s most innovative companies, and No. 7 in all of Asia.

Riding the ‘Hallyu Wave’ or South Korea’s pop culture phenomenon, the company has been largely credited to enhancing the Asian-ification multi-step beauty regime around the world.

Amorepacific Southeast Asia expansion
Amorepacific Southeast Asia expansion

The expansion of Korean Wave or “Hallyu” influenced the rise of Korean cosmetics brands. Source: Korean Joongang Daily.

THE CHALLENGE

The company reported a drop in its net profit by nearly 60% in Q2 2017 as geo-political tension between South Korea and China worsened due to the implementation of the THAAD anti-missile system earlier this year.

China was the company’s biggest overseas market, accounting for approximately 20% of total sales.

The tensions impacted a 22.5% drop in domestic sales and nearly 40%less Chinese tourists traveled to the country after travel agencies stopped selling packages to South Korea as insisted by the Chinese government.

With its two top markets performing poorly, Amorepacific had to look to other markets in order to grow and lessen its dependability on China.

THE STRATEGY

While the long-term focus was on typically homogenous markets in East Asia, the company’s ambition to tap into the global market was accompanied by a commitment to creating attractive products for new markets.

“Our growth strategy remains firmly focused on creating innovative, singular brands, and products that appeal to consumers in target markets, and we will continue to work towards becoming a great company delivering new beauty values to customers around the world,” said Amorepacific Chairman & CEO Suh Kyung Bae.

Amorepacific globalization plans seemed to start with Southeast Asia, as the company began dedicating more resources to efforts in the region.

Amorepacific Southeast Asia expansion

Amorepacific presence in Southeast Asia. Source: Pulse News.

 

“The market (ASEAN) is particularly important in that it is a gateway to India and the Middle East because ASEAN consists of multiple ethnic groups, including Indian, and is closely related to those markets,” said Na Jung Kyun, Head of Amorepacific ASEAN Regional Headquarters.

To penetrate the market, Amorepacific reformulated its products to compensate for the region’s humidity, darker skin tones, and the needs of Muslim women (“Muslimah”).

Examples include a lighter washable makeup that can be easily removed and applied for Muslimah that conducts daily prayers, which require a light washing of the face.

The company also developed darker shades of foundation for Laneige and Innisfree specifically sold in the region and aptly named “ASEAN Cushion Shades”.

In addition to localizing its product lines, the company also opened its first research and innovation lab earlier this year in Singapore. The aim is to develop highly tailored products for the ASEAN market and address regulatory issues.

Malaysia, in particular, has caught the cosmetic giant’s fancy as it invested 110 billion won ($95.7 million) to build its third overseas factory in the Nusajaya area – completion scheduled for 2020 – and opened an Etude flagship store in Kuala Lumpur early this month.

Amorepacific Southeast Asia expansion

Etude’s large range of lipstick in its flagship store.

“I believe among ASEAN member countries, the Malaysian market has the highest growth potential. In fact, it has been our goal to open a flagship store in Kuala Lumpur, and introduce the new core values of Etude House to a wider range of customers,” said Etude House CEO Geum Joo Kwon.

Not only has the company focused on traditional brick and mortar stores, Amorepacific has also taken its brands online with Innisfree launching an official brand.com web store, to offer its products worldwide.

Laneige has also opened an official store on popular Southeast Asian marketplace Lazada Indonesia and Thailand.

Often the other way around – first developed then developing markets – the company is eyeing North America for further expansion.

“Our company is operating in the Korean market, the Chinese market, and the ASEAN market. The US market will be our fourth pillar for our business, so we are very much committed to developing the US market,” revealed Amorepacific Chairman and CEO Suh Kyung Bae.

Through Innisfree, the company made its official introduction to the US market earlier this month with a grand opening of its first store in NYC, where it currently offers 900 different items from skincare, makeup, and home scents.

It also expanded to 14 different shades in its cushion foundation to serve a wider range of skin colors.

Amorepacific Southeast Asia expansion

THE FUTURE

The company’s decision to place a bet in Southeast Asia has reaped fruitful results as it overtook competitor brand Estee Lauder and doubled its market share in Asia Pacific to 6% in 2016.

Amorepacific Southeast Asia expansion

It has lagged behind L’Oreal and Shiseido, two companies with the strong digital presence in Southeast Asia.

But the experience and knowledge it picked up in this region are expected to be helpful for its venture into other new markets.

“If we can achieve success in Southeast Asia with this much diversity, it can also be a very good experience for us to enter different countries with great diversity as well,” commented Na Jung Kyun, Head of Amorepacific ASEAN Regional Headquarters.

Let me preface this by saying that I truly believe that at least half of success in business can be attributed to luck, with the other half being execution. Although it is fruitless to try and document something as idiosyncratic as luck, I will discuss what I believe were the key principles that allowed us to scale our business to where it is today.

As a quick primer, Althea.kr is a Korean Beauty ecommerce business. We were founded in Malaysia in July 2015 and in the past year have expanded our operations to Singapore, Philippines, Indonesia, and Thailand. Within one year, we were recognized by Forbes as the largest Korean Beauty website in Southeast Asia with an annualized revenue run rate of $10 million.

Luck aside, I think we can attribute our ability to grow so quickly to three principles – focus, localization, and financial discipline.

1. FOCUS

What differentiates Althea from many ecommerce businesses is that we exclusively focus on one niche – Korean Beauty (K-Beauty). In the past 10 years, the K-Beauty industry has experienced CAGR of 33.8% and a significant amount of that demand comes from Southeast Asia.

We estimate that the addressable market for K-Beauty in the region alone will be $8 billion by 2020.

althea southeast asia

Google Search Interest – ‘Korean skin care’

Side note on why K-Beauty is popular

To understand why K-Beauty is so popular, it helps to understand the unique dynamics of the Korean market. It comes down to the fact that Korea is a small country with a condensed, demanding and fickle population.

Companies are constantly under pressure to innovate and create new products in order to meet the differing demands of consumers and to stay relevant. In traditional beauty companies, it takes approximately two years to create a new product, whereas Korean companies do so within months. One of the best examples of this hyper innovation is highlighted in the unique ingredients used in K-Beauty products ranging from snail mucus, horse oil to egg whites.

Despite the high demand for K-Beauty, it is extremely difficult for consumers to purchase K-Beauty products in most parts of Southeast Asia. The first challenge is the limited selection – there are over 10,000 K-Beauty brands in Korea but less than 100 of them are available in Southeast Asia.

This is because the demand in Southeast Asia, although growing, is still small relative to Korea’s domestic market and their main export market, China. On top of this, the available brands usually only offers a limited selection of their top sellers, not the whole product line.

The second challenge is pricing. In other parts of the world, K-Beauty is known as a value for money product, but because of distribution agreements and import duties in Southeast Asia, customers often pay up to 100% more for the same product.

For example, Laneige sells its Water Sleeping Mask for 28,000 KRW in Korea but it costs approximately 35,000 KRW if a consumer purchases the same product in Singapore.

Althea-southeast-asia

althea-southeast-asia

At Althea, we saw that the vast price discrepancy represented an untapped opportunity. By hiring a specialized team of K-Beauty experts in Seoul to work with brand owners and distributors to build our assortment and negotiate pricing, we have scaled our assortment from 300 SKUs to 3,000+ SKUs. For brands that we have direct relationships with, they see Althea as an easy way to enter five different markets that have diverse languages, culture and regulations.

Our pricing is comparable to what customers would pay in Korea, and we can generally deliver across the region to most areas within five working days. This has established us as an authority on K-Beauty, which has two main benefits:

1. The majority of Althea traffic and transactions come from unpaid channels (Direct and Organic Search results)

2. It significantly improves cost per order (CPO) –  in our more mature markets, we are getting marketing spend ROIs in excess of 25x

althea-southeast-asia

*Blended CPO over the last 12 months in one of Althea’s more mature markets. Source: Althea cost per order, internal data

2. LOCALIZATION

Even though K-Beauty is considered a universal product, it is still important for us to localize our service and offerings. We localize every consumer facing aspect of our business and operate a different website for each of our specific markets. From changing web addresses to suit local domains such as my.althea.kr for Malaysia and th.althea.kr for Thailand to having website content in the local language.

For our marketing campaigns, we engage 150-200 top beauty influencers in each country to act as local brand ambassadors. We benchmark our pricing by market to ensure we have the cheapest prices in each country we operate in.

Payments has always been a hurdle in ecommerce, we cover most major options ranging from credit card, local bank transfer, over the counter, and cash on delivery, which is crucial to success in Southeast Asia, due to low credit card penetration.

Our logistics operations work with 15 local last mile couriers and five local return centers to facilitate ease of deliveries and returns and we’ve adopted our customer service operations to offer social network support in each market.

Althea’s localization efforts: 

  • 5 websites
  • 4 languages
  • 750+ beauty influencers
  • 70+ payment options
  • 15 local last mile couriers
  • 5 local return centers

3. FINANCIAL DISCIPLINE

We are fortunate enough to be a part of the beauty industry, one of the only industries that has maintained its margins for 100+ years. Our product margins are multiples higher than a typical ecommerce business. Combined with the inherent stickiness of the products and a highly engaged customer base (18-34 year old females), our customer LTV is attractive.

These factors mean that we can afford to be aggressive with our customer acquisition cost (CAC) and other customer centric costs. While we invest aggressively in marketing and customer service, we practice strict financial discipline in all other aspects of our business. This means that while we do business in six countries, we only operate two offices and one central fulfillment center. We have one office in Seoul, which has 10 full time equivalents (FTE), and is responsible for sourcing, logistics, HR, and legal.

Our second office in Kuala Lumpur has 20 FTEs that handle development, marketing, finance, and customer support. This asset light model has allowed us to enter a new market once every three months since launching.

We generate significant savings by not duplicating functions across local offices, and in turn we re-invest those savings into growing our business.

By adhering to these three core principles – focusing on a niche category that we can execute well, localizing all customer facing aspects of our business, being efficient with our capital and a little bit of luck, of course, we were able to enter five markets and build a $10 million a year business within one year. Looking forward, we hope to expand our business to the rest of Southeast Asia as well as the greater APAC region.

althea-southeast-asia

The Althea team at their one year anniversary party

BY DAVE CHANG, HEAD OF MARKETING & EXPANSION AT ALTHEA