[Edaily Reporter KYUNG GYEYOUNG ] Securing profitability has emerged as a key challenge for K-Beauty companies that have expanded their operations onto the global stage. Although these companies continued to grow rapidly in the third quarter, fueled by the K-Beauty boom, profitability is under pressure from foreign exchange losses due to the strong won, as well as the burden of local marketing and logistics costs.

According to financial disclosures released by each company on the 10th, APR(278470)’s third-quarter operating profit margin stood at 20.8%, down 3.8 percentage points from 24.6% in the third quarter of last year. Although this remains one of the highest operating profit margins in the industry, it was disappointing that the record-high sales (682.3 billion won) from the cosmetics and beauty division did not translate into improved profitability. This was because the company, with a high proportion of overseas sales, took a direct hit from the strong won, and logistics costs increased significantly as it worked to meet overseas demand.

APR’s total overseas sales for the third quarter amounted to 773.1 billion won, accounting for 94% of total sales. As the won-dollar exchange rate fell from an average of 1,501.93 won in the second quarter to 1,423.38 won in the third quarter (a strengthening won), APR—whose business is predominantly overseas—saw its won-denominated earnings negatively impacted. Despite its popularity in Europe, the company was unable to secure sufficient local inventory, forcing it to opt for air freight instead of sea freight, which added to the burden of transportation costs. In effect, the growth momentum in overseas markets has increased the company’s sensitivity to external variables such as exchange rates and logistics.

AMOREPACIFIC CORPORATION(090430), a traditional powerhouse in K-Beauty, saw its operating profit margin for domestic operations improve from 10.7% in the third quarter of last year to 13.6% in the third quarter of this year, while its overseas operations rose only slightly from 9.7% to 9.8% over the same period. In addition to being affected by the strong won, the burden of advertising and promotional expenses increased as investments in global digital marketing expanded.

LG H&H(051900)The company’s beauty division posted an operating loss of 10.9 billion won in the third quarter. Although this represents a reduction from the 48.6 billion won operating loss recorded in the third quarter of last year, the division remained in the red as it reflected related costs—such as increased marketing investments—incurred while improving the fundamentals of its China operations and expanding its global business.

The three major K-Beauty companies, which are expanding their businesses globally—from North America and Europe to Latin America and the Middle East—plan to focus on securing profitability as much as on revenue growth. AMOREPACIFIC CORPORATION’s strategy is to maintain a double-digit operating profit margin by streamlining digital marketing while continuing to grow based on its multi-brand portfolio. The company believes that efficiency gains are achievable by focusing on more effective digital channels. In the third quarter, emerging brands such as Innisfree and Estra offset the underperformance of Laneige.

For APR, the key challenge is expected to be establishing a logistics and inventory system capable of reliably handling rapidly growing overseas demand. LG H&H, which is still in the midst of restructuring, plans to lay the groundwork for turning its beauty business profitable by diversifying its overseas operations and improving the profitability of its distribution structure.

Park Jong-dae, an analyst at Hana Securities, stated, “AMOREPACIFIC CORPORATION is maintaining its growth rate as other brands gain momentum, and APR is seeing stronger-than-expected sales growth in North America and Europe despite the strong won, so it should be able to adjust its operating profit by controlling costs to some extent.” He added, “The increase in exports worldwide, including to China, since October is also a positive sign.”