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The world of Asian beauty is losing its luster.
Shares of Asia's largest beauty groups, a normally robust sector, have been falling sharply this week. Japan's Shiseido Co. posted its biggest drop in nearly 37 years on Thursday. South Korea's Amorepacific Co. this week saw its worst share price drop since it listed 14 years ago. Global peers should take note of these moves, as they signal what the future holds for the beauty industry.
Shiseido's shares plunged 16 percent before trading was halted, a record-breaking drop. The company this week reported a first-half operating loss of 2.7 billion yen ($18.4 million), well below a profit of 13.6 billion yen in the same period last year. The company booked a 22 billion yen restructuring charge after sales slumped due to weak demand in China, its most important market outside Japan. Shiseido launched a sweeping cost-cutting plan and profitability-improvement efforts earlier this year, including offering early retirement to 1,500 employees. The market has apparently concluded that this isn't enough.
Shiseido's Chief Financial Officer Ayako Hiroto blamed sluggish sales on Chinese consumers being hesitant to buy Japanese products due to ongoing concerns over the release of treated water from the Fukushima nuclear power plant.
But that doesn't explain the simultaneous movement in shares of South Korea's largest cosmetics group, which fell 25% on Wednesday after reporting weaker-than-expected second-quarter profits.
Over the past decade, China's cosmetics market has become the world's second-largest after the U.S. Meanwhile, China's per capita disposable income rose 6.2% in nominal terms in the first quarter, up from 6.3% last year, according to official data. That would normally be good news for global cosmetics groups.
What is changing, though, is where that surplus money is going. Patriotic shopping habits are becoming mainstream, especially among young Chinese. As the quality of domestic beauty brands improves, consumers are no longer opting for domestic products solely because they are affordable — a trend that is likely to continue.
Another thing Shiseido and Amorepacific have in common is that they both have premium skincare and makeup brands in their portfolios. These premium lines have the highest margins and have benefited from growing demand in Asia as premiumization has increased over the past decade. L'Oreal is another global rival benefiting from this trend, with China being its second-largest market.
As consumer shifts toward luxury markets begin to reverse, sales and market share of global beauty groups, especially those with premium lines and a presence in China, may begin to follow a similar trajectory.
