K-beauty boom fuels ODM rush, but only giants thrive

Global demand for K-beauty products keeps surging, drawing more companies into the cosmetics original design manufacturing (ODM) business. Yet most orders are concentrated among a handful of dominant manufacturers, while many newcomers struggle to turn a profit.

The total revenue of Korea's cosmetics manufacturers reached 27.48 trillion won ($17.6 billion) last year, up 15.8 percent from 23.74 trillion won a year earlier, according to the Korea Health Industry Development Institute on June 30. The increase far outpaced the broader biohealth industry's 8.8 percent sales growth during the same period.

Much of that growth was driven by a small number of major K-beauty ODM companies.

Combined sales at Kolmar Korea, Cosmax, Cosmecca Korea and C&C International — the industry's four largest companies by revenue last year — totaled 6.05 trillion won on a consolidated basis.

With 4,158 cosmetics manufacturers operating in Korea as of last year, the four companies alone accounted for roughly one-quarter of the industry's total revenue.

The number of cosmetics manufacturers has also begun to decline. It rose from 4,548 in 2022 to 4,567 in 2023 before falling for two consecutive years, according to the Ministry of Food and Drug Safety.

At the same time, the number of companies obtaining new licenses to enter the K-beauty ODM business continued to increase over the past three years, rising from 325 to 327 and then to 367. That means far more cosmetics manufacturers have shut down than new ODM companies have been established.

New entrants continue to join the market because overseas demand for K-beauty products remains strong despite sluggish domestic consumption.

Korea's cosmetics exports reached a record $11.4 billion last year, up 12.3 percent from the previous year. During the first five months of this year, cumulative exports exceeded $5.6 billion, making cosmetics the country's top export among five major consumer goods categories, ahead of agricultural and fisheries products, fashion apparel, household goods and pharmaceuticals.

Securities analysts attribute much of that momentum to leading beauty ODM companies.

"Growth is being driven not by rising orders from a handful of customers but by broader export expansion across clients and an increase in stock-keeping units," said Han Yoo-jung, an analyst at Hanwha Investment & Securities, on Kolmar Korea. Stock-keeping units refer to a specific product or a particular size or variation of a product that a company offers for sale.

"We expect earnings growth to continue in the second quarter, supported by stronger exports from domestic clients."

The outlook, however, is far less favorable for companies outside the handful of dominant ODM manufacturers.

Monami, best known for its stationery business, established cosmetics subsidiary Monami Cosmetics in 2023 in an effort to tap into the K-beauty boom as its core business weakened. The company focuses on color cosmetics ODM but has remained in the red for three consecutive years. Last year, it posted revenue of 3.9 billion won and a net loss of 4.8 billion won, widening its losses from the previous year.

Sunjin Beauty Science, which entered the beauty ODM business last year, also saw its operating profit plunge about 42 percent year on year to roughly 6 billion won.

Industry experts say that while technology is important for new entrants, a broader understanding of the cosmetics business is equally critical.

"Even if a new beauty ODM company has excellent technology and manufacturing facilities, beauty brands tend to entrust their products to established large companies with proven track records," said Kim Joo-deok, chair professor of the beauty industry department at Seoul Cyber University.

"That makes the concentration of orders even more pronounced. Companies that fail to recognize the industry's high-value-added nature and develop differentiated strategies, including marketing, will find it difficult to compete with existing beauty ODM firms."

BY NOH YU-RIM [[email protected]]