Targeting the US and European markets with product competitiveness and social media expansion, the share of exports by small and medium-sized businesses exceeds 70%... Mutual growth of ODM and distribution industry
Emerging brands such as Anua, Biodance, and Medicube are changing the overseas market landscape of K-beauty. As products targeting consumer demand, such as skin soothing and moisturizing, are quickly becoming known through social media, the influence of indie brands is growing even in the export market, which was previously dominated by large cosmetics companies. The advancement of indie brands is also contributing to the growth of the cosmetics manufacturing and distribution industry.
According to data released by the Ministry of Food and Drug Safety this month, domestic cosmetics exports from January to September this year amounted to approximately $11.1 billion, an increase of 31.1% compared to the same period last year. This is close to last year's annual export amount of $11.4 billion in just 9 months.
The strength of indie brands lies in rapid product development and sales strategies tailored to consumer response. Even without directly operating large-scale production facilities or overseas stores, you can enter overseas markets by utilizing the technology and online distribution network of domestic ODM companies. This is why overseas expansion opportunities, which were previously concentrated on large brands, have expanded to small and medium-sized brands.
#### From product competitiveness to the spread of SNS... Indie brands advance in the US and Europe
The popularity of Korean cosmetics is difficult to explain through the Korean Wave alone. Products targeting specific skin concerns, such as skin soothing, moisturizing, and UV protection, are being released at reasonable prices, and new products using new ingredients and formulations are also being introduced quickly.
Representative examples include Anua's Houttuynia cordata toner, Biodance's hydrogel mask, and Medicube's skin care products. As the number of cases where product features and usage experience rather than brand awareness lead to purchase increases, even small-scale companies are being chosen by overseas consumers.
SNS has become a channel for this product competitiveness to spread to overseas markets. Product reviews and videos are shared on TikTok and Instagram, and lead to actual purchases through online distribution networks such as Amazon. It is also advantageous to develop new products and adjust marketing strategies because consumer reactions can be quickly confirmed.
Brands that have secured a sales base online are expanding their markets by entering local offline distribution networks.
These changes are also confirmed in export statistics. Korean cosmetics exported to the United States from January to September this year amounted to $2.35 billion. The United States is the largest market, accounting for 21.1% of total cosmetics exports.
The European market is also rapidly expanding. According to the 'Growth and New Opportunities of K-Beauty' report published by Deloitte Group Korea on the 21st, cosmetics exports to the Netherlands and the UK increased by 220% and 151%, respectively, in the first half of this year. Growth continued in other European countries, such as Poland.
The export proportion of small and medium-sized enterprises has already exceeded 70%. In the first half of this year, small and medium-sized cosmetics exports amounted to $5.07 billion, accounting for more than 72% of the total. Although not all small and medium-sized businesses are indie brands, the growth of emerging brands is playing an important role in expanding K-beauty exports.
#### ODM orders increase due to the growth of indie brands... Distribution companies also benefit
The domestic original development manufacturing (ODM) industry is behind the rapid growth of indie brands overseas. Even if brands do not build their own factories, they can entrust product development and production to specialized companies, so the initial investment burden is small.
Domestic ODM companies implement the ingredients and formulations desired by the brand into products and are responsible for mass production. It also plays a significant role in the process of quickly launching new products or improving existing products in response to overseas consumers' reactions.
The increase in orders led to sales for manufacturing companies. In the second quarter of this year, Kolmar Korea domestic subsidiary sales increased by 31%, Cosmax consolidated sales increased by 27%, and Cosmecca Korea Korean subsidiary sales increased by 63% compared to the same period last year. Although the scope of the statistics is different, all three companies recorded high growth rates.
Kolmar Korea is increasing production volume, focusing on sun care and basic cosmetics. Cosmax's U.S. subsidiary recorded its first profit in the second quarter of this year, and also secured a production base in Europe through the acquisition of Italy's Cheminova. Manufacturers are also expanding their production base to respond to orders from brands that have grown overseas.
The role of distribution companies has also grown. It is not easy for a new brand to secure direct customers in the U.S. and Europe and manage customs clearance, logistics, and inventory. This is the background to the growth of Silicon Two, which brings together several Korean cosmetics brands and supplies them overseas.
Silicon Two recorded sales of 402.6 billion won in the second quarter of this year, growing 52% compared to the same period last year. Sales in North America also increased by 78% thanks to the expansion of supply through large local distribution channels.
As brands become more popular overseas, orders pile up for manufacturing companies and new customers emerge for distribution companies. Investors' interest has expanded beyond brands to include raw materials, manufacturing, packaging, and distribution. Last year, the size of K-beauty-related mergers and acquisitions reached an all-time high of 3.6 trillion won.
#### Despite the export boom, profits vary... Pay attention to 3rd quarter performance
Not all companies make the same level of profit as overseas sales increase. Brands incur costs in marketing and expanding sales networks, and manufacturing companies must secure production facilities and manpower. Distribution companies must manage local inventory and logistics costs.
APR and Silicon Two are maintaining high growth rates and profitability, but are sensitive to exchange rate changes due to the large proportion of overseas sales. Performance may be affected in the process of converting sales earned in dollars into Korean won, and costs associated with expanding the sales network may also be incurred.
In the second quarter of this year, AR and Silicon Two's operating profit margins were 24.8% and 20.6%, respectively. Sales secured in overseas markets are linked to high profit margins, but cost management has also become important as the growth rate has accelerated.
On the other hand, Kolmar Korea's profits are expected to increase significantly in the third quarter thanks to an increase in domestic production volume and an increase in the proportion of high value-added products.
On the 21st, Shinhan Investment & Securities estimated Kolmar Korea's third quarter consolidated sales at 849 billion won and operating profit at 90 billion won. This is an increase of 24.3% and 54.4%, respectively, compared to the same period last year. Domestic subsidiaries are driven by increased orders for sun care and basic cosmetics, but overseas subsidiaries, including those in the U.S., are expected to take more time to recover.
As the popularity of indie brands increases, the ability to produce products on time and reliably supply them to overseas consumers also becomes more important. Even if orders are overwhelming, if delivery is delayed, sales opportunities may be missed, and the brand also needs follow-up products to continue its popularity.
Starting at the end of this month, major cosmetics companies will announce their third quarter earnings. It will also be revealed in detail how much the overseas expansion of indie brands has contributed to the performance of manufacturing and distribution companies beyond the growth of the brands themselves.
