David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Shares in South Korea's leading cosmetics company AmorePacific Corp. took a hammering Thursday, falling as much as 6.3 percent after fourth-quarter operating income came in at the weakest in two years. Relative to blended forward 12-month earnings estimates, the stock is close to its cheapest since early 2014.

Investors who hear the sound of a bubble bursting should take care, however: Korea's beauty juggernaut is just getting up to speed.

Not So Beautiful
AmorePacific is nearing its lowest valuation in blended forward 12-month price-earnings terms since 2014
Source: Bloomberg

Consider sales. Fourth-quarter revenue of 1.32 trillion won ($1.2 billion) was a deeply disappointing 5.8 percent below the 1.4 trillion won that analysts had expected -- but even then, the 18.4 percent pace of full-year growth is better than Estee Lauder Cos., L'Oreal SA, Shiseido Co. and Coty Inc. have achieved in any year since 1994, according to data compiled by Bloomberg.

That's been driven by a blistering overseas expansion to take advantage of the Asian vogue for all things Korean and escape from sluggish demographics at home. In the December quarter of 2010, 88 percent of AmorePacific's sales came from the domestic market. By the same quarter of 2016, that was down to 66 percent.

The comforting interpretation for Western brands is that AmorePacific and rival LG Household & Health Care Ltd. are strictly local stories. Asian consumers are favoring beauty products formulated with them in mind, rather than the one-size-fits-all products developed out of Paris and New York. AmorePacific plays up to that image by putting the tagline "Asian beauty creator" prominently atop its website.

That explanation underestimates both the achievements of the global cosmetics giants, and the threat they face.

The traditional beauty industry was hardly caught flat-footed in China. As Gadfly's Nisha Gopalan pointed out last year, Western cosmetics brands have been way ahead of their Korean rivals for many years. Procter & Gamble Co., maker of Olay face cream, counts China as its second-biggest market and has more ad spending there than any other company, according to Advertising Age.

The challenge from AmorePacific isn't to do with geography, but business models.

You can get an idea of what's going on by looking at inventory days -- broadly speaking, a measure of how long stock sits on retailers' and wholesalers' shelves before being purchased.

That's Amore
Inventory days are much fewer at Korean cosmetics brands, suggesting they're moving product faster than their rivals
Source: Bloomberg

Estee Lauder's products hang around for about six months and Shiseido's wait almost a year to be sold. AmorePacific's are cleared in three months.

How so? The company appears to be following the cue of Zara owner Inditex SA and Hennes & Mauritz AB, which upended the rag trade in the 2000s by pioneering "fast fashion." By getting versions of the latest catwalk styles into stores within weeks and clearing them out for new designs not many weeks later, they gave customers more variety and reasons to shop, while reducing the amount of capital tied up in unsold stock.

AmorePacific has been doing the same thing in the field of cosmetics. Using an array of more than 30 brands targeted from the high to the low end, it introduces and discontinues products at a dizzying pace -- and offers plenty of luxurious-seeming goods at prices well below what the competition is asking.

Making Up for Lost Time
AmorePacific is still a minnow of the global cosmetics industry by annual revenue
Source: Bloombeg
Note: Shows latest full-year numbers. Shiseido is for the 12 months through September 2016.

It still has a long way to go. Annual revenue is less than a fifth of L'Oreal's, and half that of Estee Lauder. For all that the company likes to tout innovations such as the air cushion foundation compact, it spends a smaller share of net sales on R&D than L'Oreal -- and those sales, of course, are already much smaller.

That shouldn't be much comfort to AmorePacific's competitors. The oldest success story in retail is the one where high-turnover, low-price chains beat more venerable stores at their own game. From F.W. Woolworth, through Zara and German grocer Aldi, retailers with AmorePacific's mix of energy and efficiency have proved themselves giant-killers again and again.

South Korea's cosmetics companies have hardly started to dip a toe in North American and European markets. When they do, established players had better watch out.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. LG Household & Health does even better, but it also sells products like laundry detergent and shampoo so might be better considered alongside the likes of Unilever NV and Procter & Gamble, which turn over their lower-priced stock much faster.

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