If You Treated Korea's Entire Beauty Industry as One Company, How Did It Get So Successful? | 2016 Big-Company Digitalization ⑦

Taken as a whole, the Korean beauty industry is a perfect fit for "internet thinking": win on volume, test the market fast, and adjust the product mix fast.

Traditional big companies are still working to reach younger consumers, while digitalization is transforming the supply chain and the competitive landscape. QDaily is running a year-end series on digitalization in 2016 — over one month, ten articles will look at what big companies have gained and lost in going digital. This is the seventh.

Geoffrey Jones, a 64-year-old Harvard Business School professor of business administration who specializes in economic history, has written 41 books. One of them, Beauty Imagined, has circulated widely — a business history of cosmetics that traces the fragrance trade from its origins in France to the global map of beauty conglomerates in 2010. Jones feels the book left one thread unfinished, though: Korean cosmetics companies.

In its 302 pages, the word "Korea" appears in the main text just five times, and Amorepacific — now Korea's largest cosmetics company — only once. Back in 2010 he simply did not have much to write about. Today he uses a case study by his colleague Pankaj Ghemawat, Amorepacific: From Local to Global, as supplementary classroom reading. Korean cosmetics companies are no longer a subject he can get around.

Korean cosmetics have indeed become hard to overlook. By Euromonitor's figures, South Korea's cosmetics industry was worth USD 11.6 billion in 2015; by 2020 that should rise to USD 13.1 billion. Korean cosmetics have swept China to the point where Korea has overtaken Japan as China's second-largest source of cosmetics imports.

Over the past two years, Western cosmetics companies have also been making acquisitions that touch Korean beauty. In 2015 Estée Lauder bought Have & Be Co., the company that brought BB cream to the market. Then in July this year LVMH made its first investment in a Korean cosmetics brand, putting USD 50 million into Clio Cosmetics at a USD 700 million valuation. That same month, Goldman Sachs and Bain Capital Private Equity bought stakes in Carver Korea, a Korean cosmetics company with nearly 1,000 products.

Their business is not as simple as selling skincare and lipstick. Say the words "Korean beauty" and most women who know makeup can picture exactly what you mean — an aesthetic that has already coined a new word in English: K-beauty.

In his book, Jones cites Shiseido, Japan's largest beauty company, which named its premium skincare line in French — Clé de Peau Beauté — to tie itself to cities like Paris that carry the authority of beauty. You can see the same thing in China today: some Chinese cosmetics companies are working to link themselves to Korea (not just to Paris and New York), naming products things like "Hanshu" and "Hanhoo" and spending heavily on Korean celebrity endorsers.

The beauty industry is changing fast. Cosmetics used to be controlled by a handful of big companies and sold mainly in department stores or specialty chains like Sephora. To win consumers' attention, brands had to pour money into advertising — working with television, outdoor media, and the beauty pages of fashion magazines to announce new products and trends.

Today the channels that carry cosmetics information have been fully democratized. Rather than trust fashion-magazine picks that cycle through the same few brands, many people now learn from "key opinion leaders" on social networks. The clearest examples are lipstick swatch videos, makeup tutorials, and articles like "Cheap Finds That Actually Work" — content that spreads the moment it goes up.

Another mainstream channel is entertainment. In 2016, Song Hye-kyo in Descendants of the Sun made Laneige's two-tone lip bar a hit; the Mamonde lip tint and gradient highlighter endorsed by Doctors lead Park Shin-hye, along with Lee Sung-kyung's Laneige two-tone matte lip bar, became fresh online talking points; and W — Two Worlds star Han Hyo-joo put her endorsement brand, Sulwhasoo, in front of the public.

All these shifts in information channels push consumers to buy and try new products faster than ever. The department store's role as a promotional gateway has given way to e-commerce. Consumers have grown more playful — women want not just beauty but the thrill and pleasure that novelty brings.

"Every month Korean cosmetics brands offer something new. My job is to work out which new thing is a passing fad and which is a genuine new direction for the industry," said Joyce Kong, a beauty writer at the lifestyle site Refinery29.

No one works harder at manufacturing novelty than the Koreans. Since 2013, BB cream, CC cream, three-tone lip bars, seamless blush, spoolie brow pens, and cushion blush have steadily taken over fashionable women's vanity tables. Gradient lips, bitten lips, two-tone lips, the straight Korean brow, flawless Korean skin, juicy lips, the "2/3 look," Korean semi-permanent makeup, the hangover look, the aegyo-sal look — these fresh coinages keep coming, so that someone is always explaining one of them to someone else, whose face sometimes looks like a person hearing cutting-edge tech jargon or the Latin name of some obscure fossil.

Nearly all of these products are cheap, so a consumer loses little by buying one and not liking it. As a result, the Korean market has little brand loyalty. "It's different from Western markets, where we usually create a product to solve a problem. In Korea, consumers don't treat a product as the answer to a problem — just as one piece of a larger beauty collection," said Curt Altmann, marketing director at the cosmetics-packaging company Yonwoo International/PKG.

Set against K-beauty's dizzying repertoire, Western cosmetics can look a little stiff — often higher in quality, but far slower to innovate, and lacking the young, playful vocabulary that helps sell things.

The beauty industry has always run on novelty, and K-beauty seems to have pushed the technique to its limit. To borrow a worn phrase: treat the entire Korean beauty industry as a single company and it fits the definition of "internet thinking" perfectly — win on volume, test the market fast, and adjust the product mix fast. Its survival secret is to keep making new products, stay abreast of how consumers' tastes shift, and even get ahead of them.

The fruit-peel look that followed the bitten-lip trend

Korean celebrities recommending Western cosmetics — they recently made Armani's lipstick the next big thing

A Korean celebrity promoting a little yellow product on social media: the latest Clarins Lip Comfort Oil

The industry has borrowed a term from fast fashion for this model: "fast beauty."

"In Korea, a three-year product life cycle counts as long. Cosmetics makers are always carving up the market through innovation in ingredients, formulas, and applications," Curt Altmann said. He sees a brand's capacity to innovate as a key source of its vitality: the faster you refresh, the easier it is to draw attention, and with the right marketing, the sales follow.

Korean cosmetics makers have now cut their development cycles to as little as four months, while most beauty brands need more than a year.

Seo Kyung-bae, chairman of Amorepacific, has told the media that trends change very fast, and K-beauty's strength lies in its ability to keep adapting to that change.

Take Innisfree, one of the group's brands. To date it has launched more than 800 new products, about half of which will be dropped within a year. On average it puts out more than 200 new products a year — nearly one every two days — but half of those will be off the shelves the following year.

This is basically why you keep seeing Korean cosmetics brands roll out the next new thing. Their products do not need to last long in the market; the breakout hits you notice are the lucky one in a thousand.

"Korean cosmetics companies focus on creating trends — products launch fast, sell fast, and then they move on to the next trend," Sunny Um, a cosmetics and personal-care researcher at Euromonitor, told QDaily. "Today's consumers have already been educated; they know a lot about beauty products and understand that the differences between products on the market aren't that big. For them, the only stimulus is: what's new out there?"

What makes all this possible is the unified, highly capable contract-manufacturing system behind Korean cosmetics companies.

Contract manufacturing is not unique to cosmetics, and ODMs don't work only for Korean brands. When L'Oréal entered Korea in 1993, most of its products came in as imports, with only a small share made by local OEM factories — enough to take a 4 to 5 percent share of the Korean cosmetics market. But those OEM factories gradually became ODMs (original design manufacturers). Unlike the pure build-to-order model of OEMs, ODMs moved past white-label work: they began exporting technology to cosmetics companies and leading R&D in the Korean market.

In Korea, two companies — Cosmax and Kolmar Korea — split the contract-manufacturing market between them.

Cosmax, the largest manufacturer, makes the cushion foundation not only for brands like Carslan, Coson, and Yalget, but also takes on work for major international brands such as Lancôme and Shu Uemura at its Korean factories. As for Korea's two largest cosmetics companies, Amorepacific and LG Household & Health Care, they keep direct control over their premium lines but farm some of their mass-market brands out to Korean contract manufacturers.

Missha and The Face Shop, for instance, focus on marketing and sales and outsource production — most of their products are made by Kolmar and Cosmax. The Korean cosmetics company Todacosa launched the brand "Too Cool for School" in 2015, aimed at women aged 16 to 25; to cut costs, it built no factory of its own and outsourced all production, with 40 percent of its skincare products coming from Kolmar.

"ODM is a very quiet player in this industry. Companies like L'Oréal lean on ODM heavily. What that tells you is that the cosmetics industry isn't really about product R&D — it's about the ability to market a brand," Geoffrey Jones told QDaily.

That explains why the latest trends in the Korean beauty market move so quickly from one brand to the next. The brands are all distinct, each with its own packaging look, but the underlying products are always strikingly similar; at the same time, different marketing wrappers keep them from infringing on one another. Korea now has between 1,800 and 2,000 cosmetics brands at home — and that may already be what survives after fierce competition in a buoyant domestic market. In reality, most of those products come out of the same few factories.

OOZOO, a Korean cosmetics brand planning to enter China next year, is one newcomer that makes no effort to hide its contract-manufacturing roots. When it exhibited at a beauty trade show in Shanghai in May, it led with its star product: an injectable-ampoule sheet mask called the "OOZOO Face Mask," built around a "Two Touch" dual-chamber structure. The essence is stored separately and mixed into the mask only at the moment of use, which the company says "lets the active ingredients work at full strength." In plain terms, it is a sheet mask with a DIY, play-with-it quality — complete with "fun" props like a syringe — and it does look novel.

On OOZOO's Taobao daigou page, the copy reads: "The team behind this brand is the same team that made Leaders; the factory is the same contract manufacturer that makes Sulwhasoo."

Ma Xiu, who once worked as a product manager in the marketing department of L'Oréal China, knows the world of cosmetics contract manufacturing well. After leaving L'Oréal, he became what he calls a "structural-aesthetics skincare specialist." He runs a WeChat official account about cosmetics and, alongside it, develops new cosmetics brands.

A couple of years ago, when enzyme-based products were the rage, Ma Xiu got a tip from a Korean OEM factory, quickly put together a team, and developed a body-care line built around hand care. He describes the shift from multinational product manager to freelancer as "having a lot more power." "At a big cosmetics company, a lot of departments handle different parts of this work in their own silos. When you suddenly do it all yourself, your decisions have to get faster, and you need a lot of creativity and ideas," Ma Xiu told QDaily.

Over the past five years, Ma Xiu has built four successful brands, each time drawing on the supply-chain resources he has accumulated. To make a product, he handles sourcing the packaging, crafting the brand story, finding an OEM factory to manufacture it, choosing the final distributor, and delivering the whole package to a client. (For contractual reasons, Ma Xiu declined to name any clients.)

Developing a brand usually takes two to three years, and in Ma Xiu's experience the most time-consuming part is packaging. Say a brand needs a new eyeshadow compact — a five-shade palette. The steps that follow include settling on a rough shape, designing it, finding a factory to cut the mold and produce samples, and then scaling up to mass production. That packaging work alone usually eats up a full year.

From what he has seen, even with small new brands, "Chinese cosmetics packaging is still quite different from Korean." "I've personally sat in on meetings between several local brands and Cosmax. Chinese managers feel their brand should have its own look — even if cutting a new mold costs more, they want their products to be different," Ma Xiu said.

This way of thinking naturally speeds up a whole product line. What brands then have to do is quickly test whether the products meet consumers' needs — and, if not, how to adjust.

Innisfree and Etude House, for example, roll out new products in China and Korea on a fully synchronized schedule. Each month their sales teams gather information from floor staff at every store on what consumers are buying and how they browse, turn that data into analysis reports, and adjust products and in-store layouts accordingly — a process no different, in practice, from what Zara does in fast fashion.

In theory, beauty products take longer to make than apparel, but a wide enough range can offset some of the urgency of iteration. And precisely because a brand like Innisfree carries far more SKUs than an ordinary brand, it chooses to open dedicated standalone stores.

Innisfree first came to China in 2004, wedged like every other cosmetics brand into a department-store counter. Two years later it pulled out entirely. When it returned in 2012, Innisfree cut its prices and brought the single-brand store format — which had worked so well in Korea — to China.

A typical cosmetics brand carries at most about 300 SKUs, which fits neatly into the modest footprint of a department-store or supermarket counter. Innisfree, with its 800-plus SKUs, needs a dedicated street-level or mall store of around 100 square meters to show its full range.

Usually a life-size photo of Lee Min-ho — the long-legged heartthrob who became famous in China through The Heirs — stands at the entrance, to pull in consumers who respond to him and to Korean celebrities in general. Because there are always new products, you can also catch online updates at any time: Innisfree has launched a Christmas limited-edition series; Innisfree has launched a DIY cushion foundation with 100 compact designs to choose from; the beauty blogger Winnieee has written, "I bought the Innisfree Cream Tint Lipstick — it lasts forever. I mean insanely long. The staying power is truly unbelievable"; or YoonA of Girls' Generation, after her Innisfree cushion BB campaign, appeared in the Korean magazine Highcut, which the lifestyle site POPBEE then picked up for a tutorial: "Using the cover shoot as inspiration, learn how to use these 3 products to get a radiant, refined look just like YoonA's." Every product in that tutorial, naturally, comes from Innisfree.

Western brands are starting to chase this trend. On November 11, Dior opened its first cosmetics boutique in New York — selling only Dior makeup and fragrance, no ready-to-wear or leather goods. That same day, Estée Lauder opened its first standalone store in the British market, on Carnaby Street in London's Soho. The 700-square-foot space leads with the Estée Edit range, developed for selfie-loving millennials, while also carrying some of Estée Lauder's other products.

Both Dior and Estée Lauder have said their standalone beauty stores will feature various digital installations — letting shoppers snap a photo to try on a new look virtually, for instance — but the truth is they are unlikely to match Innisfree's pace of iteration. However well conceived, a cosmetics boutique cannot bring people back again and again on the sheer speed of new launches.

You could say K-beauty and the internet make each other: it is consumers' playful, entertainment-driven attitude toward beauty that has produced such a volatile mechanism, and that mechanism in turn pushes consumers to seek novelty ever faster, always chasing the next trend. As for whether the whole industry will be swept into a phase of breathless acceleration — on current trends, that seems very likely.

"I use this book to study globalization, and how companies shape the way we think about and understand beauty — for better or for worse," Geoffrey Jones said in an interview with QDaily. That line may fit today's Korean cosmetics industry better than anywhere else.

Cover image and in-article images from: popbee.com, lh3.googleusercontent.com, Wikimedia Commons