As a follow up to my previous post titled How Geopolitics Impacts Your K-Beauty Sheet Mask, I've teamed up with Sandalwood Advisors, an alternative data platform that focuses on Chinese consumer transactions, to analyze the impact that the row over THAAD had on Korean cosmetic purchases in China.
summarizing what happened
At the time of my previous article dated March 30, South Korea was still in political limbo. Former President Park Geun Hye had just been impeached and the country was without a clear political leader. Tensions between Korea and China were at an all time high over THAAD, the missile defense system that Korea put into place with the help of the US. China was punishing Korea over this through economic bullying and all eyes were on the new presidential election to be held May 9, 2017 to see who would lead the country out of the mess it was in.
Fast forward - President Moon Jae In whose foreign policy is much warmer to China and North Korea was elected to office on May 9th, 2017. He has publicly opposed THAAD, which was the main instigator in China "punishing" Korea through their economic leverage. Things have now eased with this new president at the helm.
k-beauty sales in china fell off a cliff
Data from Sandalwood Advisors analyzing Chinese consumer transaction data from Tmall (China's largest B2C e-Commerce player) shows a dramatic drop in year over year transactions from April 2017 to May 2017. Interestingly, it wasn't just Korean beauty products that suffered but non-Korean cosmetics also declined. My own clients were in risk mitigation mode and split between two camps: 1) Those that realized the need to diversify their portfolio and were investing more heavily in the US market and 2) Those that were in full risk management mode and cutting investment and costs from US offices in order to make their numbers whole.
When looking at store sales of Etude House and Innisfree, both Amore Pacific brands, we see a negative year over year change starting in December 2016 with a more drastic decline this spring when tensions were at an all time high.
are we in a recovery?
Now that political tensions are lessening and economic activity between the two countries is starting to return to normal, has sales activity of K-Beauty products resumed? Are we in recovery mode? According to Frank Wang of Sandalwood Advisors, not necessarily. He says, "I'd actually say that we haven't seen evidence of the recovery yet - our offline transaction data so far is pretty negative, as well as Tmall transaction data. Tmall weekly data is pretty split on a recovery so I believe it's too early to call a recovery via the data." He continues, "Amorepacific is in-line with the overall cosmetics sector while LG H&H is outperforming. Estee Lauder is outperforming as well, which may be part of a trend of Chinese consumers moving towards higher-end cosmetics."
what does this data mean?
Industry watchers should definitely keep an eye out for a recovery but we'll need to see how next month's transaction data comes out to really see if the turnaround is real. We saw K-Beauty behemoth Amore Pacific officially declaring the US as their 4th pillar which is probably in reaction to their China exposure. Depending on how long the recovery takes (if it happens at all), I predict we will see other K-Beauty brands follow suit.