When high-tech meets emotion
Korean cosmetics market grows a lot faster than GDP, retail industry
By Kang Chan-koo
There is nothing that can stop the Korean cosmetics market. The size of the cosmetics market grew to 8.9 trillion won in 2011 from 5.6 trillion won in 2006, an annual average increase of 10.4 percent, easily outstripping annual average retail sales growth of 6.1 percent in the same period. Even when the economy came to a near standstill, with the GDP growing 0.3 percent in 2009 in the wake of the global financial crisis, the domestic cosmetics market grew 11.8 percent, proving itself to be recession-resistant.
The rapid growth derives from new dynamics in the cosmetic industry. Rising life expectancy and desire for a better quality of life have propelled a desire for wellness and anti-aging products. Also, there is general perception that a youthful and healthy appearance will be an advantage in Korea's highly competitive society. Now, youths and senior citizens, men and teenagers are making cosmetics part of their daily routine, not just women.
The skin care segment has been a particularly key growth contributor, with consumers gravitating away from simple glamour make-up. They are more youth and health conscious, recognizing that skin impacts aging, health and physical appearance. Skin care accounts for 48 percent of Korea's total cosmetics market and growing much faster than other segments like make-up and perfumes.
Furthermore, this personal care industry is going high-tech. As cosmetics technology development accelerates and converges with various high technologies, the paradigm governing the competitiveness of the cosmetics industry is focusing not only on changes in the market conditions and trends but also technology and effectiveness. Generally, high-tech industries face considerable market and technology uncertainties. Against this background, the cosmetics industry is expected to experience major changes going forward.
Three driving forces of the cosmetics industry
The cosmetics industry will undergo a paradigm shift in the overall product creation from basic research to development to marketing. This paper examined this shifting paradigm and how the cosmetics industry will use "product strategy," a staple of high technology companies.
In basic research, biotechnology will become increasingly more important due to advanced research in protecting skin from aging. In the development stage, electronics, information technology (IT), food and medical technologies will intersect, leading to the development of converged products and solutions. In marketing, as consumers' knowledge increases, advertising highlighting research and development (R&D) and stressing high-tech materials will be an appealing point rather than emphasis on image.
Deeper understanding of human biological phenomena, including the interpretation of human genetic maps, has facilitated the shift of cosmetics technology research from formula and texture to skin aging prevention and treatment. The number of research papers on skin aging has skyrocketed. At the same time, the focus of anti-aging studies has moved from removal of dead skin cell and collagen synthesis to comprehensive approaches, including cellular life span and metabolism.
Some global cosmetics companies already have become early developers of high-function cosmetics based on biotechnology. L'Oreal, the world's largest cosmetics company, devoted 10 years of research on 4,400 genes and 1,300 proteins that have the most relevance to skin aging. It resulted in gene-activating serum, Genifique, which became an instant global sensation. One Genifique product is sold every four seconds.
Korean cosmetics companies are also actively applying biotechnology in product development. AmorePacific, Korea's No. 1 cosmetics manufacturer, established a bioscience R&D center, while LG Household and Health Care, another leading Korean cosmetics company, formed a technology partnership with renowned women's hospital Cha Medical Center on stem cell research.
To deliver enhanced effect and quality, medical and other technology-based solutions are being added to cosmetics. One of the most promising products is cosmetic patches. Traditional skin patches are passive; they are moistened and applied with cosmetics. Newer patches will contain active ingredients with a high degree of skin permeation ability. Advanced patches will be developed, including ones that deliver a mild electric current or drug to the skin.
Cosmetics that converge with other industries such as electronics devices, smartphones and health foods will also gain popularity. Beauty devices using electronic controls and optical technologies are increasingly being rolled out as are skin cleansing devices.
Nutricosmetics, or combining cosmetics with food, is a segment that is already having a pronounced presence. Japanese cosmetics giant Shiseido launched "In & On" in 2010, formulated to maximize skin care effects by combining cosmetics with beauty drinks and supplements. New products are recently being added to the brand, including whitening, anti-wrinkle, neck care and body slimming.
Beauty consulting businesses that diagnose individuals' skin condition for recommendation of optimal products or sell customized products are also rising. One of the companies that attracted attention at this year's Consumer Electronics Show was Ahrong Eltech, a Korean small- and medium-sized facial beauty products manufacturer, which presented "DermaScan," a sensor skin assessment which can deliver the results to a smartphone and is linked to a guide to online shopping sites.
As beauty-related information proliferates the Internet and TV, knowledge about cosmetics is rapidly being accumulated among consumers. On "Powder Room," Korea's leading beauty community site, 230,000 members exchange beauty tips and product experiences daily. Korea's cable TV program "Get It Beauty" is becoming increasingly popular by broadcasting blind tests that compare only the quality of beauty products, rather than their brand or image.
Cosmetics experts and ordinary people participate to review products for various features including spreadability, stickiness and color. Products ranked No. 1 or 2 on the show become bestsellers. In this way, consumer-to-consumer word of mouth, expert reviews and product testimonials are becoming more influential, spotlighting the technology and effectiveness embedded in the product. Proctor & Gamble's leading brand, SK-II, has actively used the development story behind its "Pitera" ingredient based on yeast culture; it noticed that brewers had baby soft hands. By doing this, SK-II was able to simultaneously attract customer attention and increase consumer confidence in its brand.
The Korean government and companies need to expand investments and support for the cosmetics industry given its growth potential and value. Along with Hallyu including the K-pop boom, enhanced national brand competitiveness and upgraded cosmetics quality, Korea's cosmetics industry is transforming into a high value-added export industry from a domestic seller.
Korea's cosmetics exports climbed to $600 million in 2010 from $80 million in 2001. AmorePacific, Korea’s No. 1 cosmetics company, jumped to 16th in global ranking of cosmetics makers in 2011 from 25th in 2005.
However, Korea still lacks technologies to lead the future cosmetics markets such as dermatology, bio cosmetics and beauty convergence solutions. Domestic cosmetic firms are far behind their overseas peers in R&D. For example, L'Oreal's R&D investment is more than seven-fold that of the total Korean cosmetic industry.
Korea's cosmetic companies must rapidly cultivate their technological capabilities through a "choose and concentrate" strategy, focusing on specific areas such as the genetics of aging and stems cells. Conducting joint research with universities and medical institutions renowned for their basic research is also advisable.
The fate of the high-tech industry is largely determined by two factors; R&D and high-tech marketing. Companies must concentrate their resources and capabilities in R&D. In particular, they must actively take advantage of the technological innovations in fast developing fields such as the biotechonology, advanced materials, electronics and IT industries.
Product planning strategies should change from the current passive stance of only seeking to satisfy consumer tastes to more aggressive approaches ranging from discovering potential niche markets through technological innovations to influencing consumer preference.
For this to happen, interaction between R&D and marketing must be energized, and the fostering of high-quality talents who have "ambidextrous" skills in both technology and marketing must be made a priority.
The government must also strengthen R&D investment support in basic cosmetics research, including dermatology and functional materials, and create an environment where there is a dynamic integration and convergence of innovation with other industries, including food, electronics and services.
Kang Chan-koo is a research fellow at Samsung Economic Research Institute (SERI). This report was provided by the SERI.