In the cosmetics business, things can't always be taken at face value.
Reports Friday that China's consumption tax for luxury cosmetic products will be reduced to 15 percent from 30 percent effective Oct. 1 should be good news for South Korean skin-care companies, which have found a wide audience in Asia's largest economy.
Korea is the biggest exporter of cosmetics to China after France, having recently overtaken the U.S. and Japan. With the tax cut, a host of aspirational young women, and men, will be able to purchase brands that until now were just out of their reach.
Amorepacific, whose brands include Innisfree and Sulwhasoo, and LG Household, which owns The Face Shop, have seen a surge in Chinese buying over the past few years as lipstick shades made popular in Korean TV dramas fly off the shelves. Even Cosmax, which makes lower-end products, has been a beneficiary, with analysts at Daiwa forecasting the firm may generate as much as 38 percent of sales from China this year.
The problem is, many Chinese buyers of Korean cosmetics weren't actually shopping in China, rather hopping on a plane to Seoul.
No country, in fact, is likely to see a bigger influx during this year's week-long National Day holiday, with some 250,000 mainland tourists expected. According to local press reports, shops have gone on a hiring spree of Chinese-speaking employees in preparation.
Once in Korea, Chinese shoppers typically frequent duty-free stores, spending money on higher-margin products than they would at home. And for Korean companies, domestic sales are still hugely important. Despite its popularity offshore, Amorepacific makes about 72 percent of revenue locally.
Plus there's the money Chinese visitors spend on hotels, transport and other tourist activities, all of which flows more broadly into Korea's economy.
Now that cosmetics will be cheaper in Beijing and Shanghai, there's less reason to travel abroad, especially if the yuan, down almost 9 percent against the won this year, continues its slide.
What the tax decrease may do is further cement Korean brands' popularity in China. There is, after all, a hunger for goods viewed as premium, with sales of more middle-class products like make-up and yogurt, for instance, soaring despite a slowing economy, research from Bain shows.
Longer term, that will ultimately be a good thing for the likes of Amorepacific, just so long as hallyu, or the wave of Korean entertainment and popular culture sweeping the world, continues.
Until then, it would be wise to remember: Beauty can cut both ways.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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