Asia’s Vanity Capital

Abstract

The longevity dividend, massive wealth accumulation from the boom years, and fizzy capital markets from quantitative easing policies are psychologically fueling Asia’s “envy market.” This vanity capital market, especially the non-luxury and mid-market segments, is a high-growth, innovative niche market catering to people seeking new lifestyles and better quality of life. Industrialization, urbanization, and digitalization have given rise to Asia’s middle class and new riches and democratized the luxury market, but there are different preferences in rural vs urban areas and in pre-Lewis Turning Point vs post-LTP countries. Social media and online commerce make narcissism pervasive and easy to satisfy. Millennials in China, India, and ASEAN are trading up for luxury and experiential goods including beauty care and fashions. Business strategies to capitalize on this “upgrader” phenomenon, from branding to omni-channels to premium pricing, are discussed.

Appendices

Case Study 3.1: Amorepacific: South Korea’s Beauty Business Secret

By Pongsak Hoontrakul

The second-richest man in South Korea , Amorepacific Chairman Suh Kyung-bae, has recalled with a laugh that during his childhood, he played with cosmetics like toys. ¹ His grandmother learned to produce hair treatment 80 years ago. And his father biked long distances to collect bottles, labels, and fabricating creams together with her. Recognized as Asia’s Businessman of 2015 by Forbes, Suh, in his early 50s, says he wants to change the world through Asia’s beauty industry. ²

Product innovation has been one of the keys to the success of Amorepacific, South Korea’s top beauty firm. The company constantly launches a wide range of new products under the more than 30 diversified brands in its portfolio. Asian medical herb ingredients are the basis of Sulwhasoo, its luxury brand . Its Mamonde brand is based on the essence of camellia, lotus, and jasmine flowers. Ingredients from Leju Island are used for an eco-friendly brand , Innisfree. Amorepacific has long been known for embracing Asia’s secret ingredients. It started using ginseng for cosmetics in 1966 and invented the world’s first green tea skincare line in 1979. Its biggest innovation was launched in 2008: The company combined skincare, sunscreen, and liquid foundation in a compact cushion formula after conducting more than 3600 tests with 200 diverse sponges. Shortly afterward, the world’s largest cosmetics maker, L’Oreal, came up with its own version and Christian Dior paid Amorepacific to use its cushion technology . Indeed, Amorepacific was rated one of the world’s 25 most innovative companies in 2016. ³

In the early 2000s, Amorepacific spent over 30 percent of its sales receipts to market and to build up its brands in China. Despite good sales growth, the profit margin was thin. Sulwhasoo had limited success in 2013 due to high import taxes. Mamonde had good sales growth due to rapid store expansion; by 2015, it had close to 1400 sales counters mainly in China’s second- and third-tier cities . Apart from product innovation , Suh also attributes the company’s success to a localized production strategy and local talent. In 2014, Suh opened a new research center and factory in Shanghai to increase production in China tenfold.

Product marketing is also a key factor. South Korea’s popular music (“K-pop”) and TV soap operas (“K-dramas”) have created a “K-wave” across Asia, especially in China. This is a tidal wave that Amorepacific ingeniously rides. It officially sponsored the top South Korean drama “My Love from the Star” in 2014, allowing Amorepacific skincare and cosmetics products to be featured throughout the two and a half-month series. Sales of skincare and lipstick products rose 75 percent and 400 percent, respectively. Amorepacific is now selling not just beauty products, but also “the feeling of love” to the heart of the emerging middle class , especially in China.

Omni-channel distribution also contributes to success. The surge of Chinese outbound tourists has propelled explosive sale growth of Amorepacific products at duty-free shops. Sales in the first quarter of 2016 grew 50 percent at domestic duty-free shops and over 100 percent growth at overseas shops. ⁴ Door-to-door sales for luxury brands like Sulwhasoo are growing. E-commerce , particularly cross-border e-commerce via social media and personalized digital advertising, has the potential to be a game-changer. During China’s annual Single Day sale in November 2015, Amorepacific’s Laneige brand was the third-best seller on e-commerce giant Alibaba’s Tmall. ⁵

In 2015, Amorepacific sold roughly 35 percent via duty-free shops, 19 percent door-to-door, 14 percent online, and 15 percent via specialty shops and other channels for 4.767 trillion won ($4.3 billion) in revenue. ⁶ About 16 percent and 9 percent of the sales were from China and the rest of Asia, respectively, with an over 50 percent CAGR for Asia during 2010–2015. ⁷ Total revenue is forecast to reach 8.432 trillion won ($7.6 billion) with net profit of 1.086 trillion won ($980 million) in 2018. ⁸ Nevertheless, the European and US markets are still low, each accounting for only 1 percent of total sales. Asia’s third-largest beauty care firm definitely has more room to expand.

Notes

• 1. Song Jung-a (2015) “A South Korean billionaire who tests his own make-up”, 7 December 2015, https://www.ft.com/content/be5ba350-9507-11e5-ac15-0f7f7945adba

• 2. Michael Schuman (2015) “AmorePacific’s Suh Kyung-Bae Is Forbes Asia’s 2015 Businessman of the Year, http://www.forbes.com/sites/michaelschuman/2015/12/02/amorepacifics-suh-kyung-bae-is-forbes-asias-2015-businessman-of-the-year/#65683410732e

• 3. http://www.forbes.com/pictures/elem45igi/no-21-amorepacific/?ss=innovative-companies#34bfc8b71edf

• 4. Youna Kim, Sally Yoo and EbruSenerKurumlu (2016) “Amorepacific Corp: Strong 1Q16 results; on track for ongoing market share gain story in China”, JP Morgan, 2 May 2016, p. 8.

• 5. Schuman (2015).

• 6. Latika Chopra, Shen Li, Youna Kim and EbruSenerKurumlu (2016) “Global Beauty: #DigitalDisruption”, JP Morgan, 31 August 2016, pp. 52–53.

• 7. Ibid.

• 8. Ibid.

References

• Chopra, Latika, Shen Li, Youna Kim and Ebru Sener Kurumlu. 2016. Global Beauty: #Digital Disruption. JP Morgan, 31 August 2016, pp. 52–53.

• Jung-a, Song. 2015. A South Korean Billionaire Who Tests His Own Make-Up. 7 December 2015. https://www.ft.com/content/be5ba350-9507-11e5-ac15-0f7f7945adba

• Kim, Youna, Sally Yoo and EbruSenerKurumlu. 2016. Amorepacific Corp: Strong 1Q16 Results; On Track for Ongoing Market Share Gain Story in China. JP Morgan, 2 May 2016, 15 pages.

• Schuman, Michael. 2015. AmorePacific’s Suh Kyung-Bae Is Forbes Asia’s 2015 Businessman of the Year. http://www.forbes.com/sites/michaelschuman/2015/12/02/amorepacifics-suh-kyung-bae-is-forbes-asias-2015-businessman-of-the-year/#65683410732e

Case Study 3.2: The Halal Market: An Emerging Big Niche Opportunity for Asia

By Pongsak Hoontrakul

In September 2014, Indonesia , the world’s most populous Muslim nation, enacted the Halal Product Assurance Act, which requires food , toiletries, and medicines to be labeled “halal or not” by 2017, 2018, and 2019, respectively. It was the first law in the world to require official halal certification. The global business community was shaken up because other Muslim nations – a quarter of the world’s population – may soon follow. Some people questioned whether the act breached World Trade Organization rules. Others complained about the uncertainties and high costs of regulating the industry. ¹ However, others see this as a newly minted, lucrative niche market catering to the huge emerging middle-class , not just in Indonesia but throughout Asia and globally.

“Halal” means “permissible” or “lawful,” in accordance with Shariah, the law that governs every aspect in life for Muslim worshippers. Official halal certification gives consumer s the assurance that manufacturers or service providers processed their goods or services free of contamination risk – no pork, alcohol, blood, and so on. Halal certification is an industry by itself in Malaysia and in Indonesia , which are establishing themselves as global halal hubs and setting global standards. The largest halal food producer in the world is Switzerland-based Nestle operating in Malaysia . Japan’s largest logistics firm, Nippon Express, has obtained halal certification. Multinationals like Unilever and L’Oreal have already made their beauty and household product supply chains halal-compliant for the Indonesian market.

The market is sizeable. In 2015, the world’s 1.7 billion Muslims spent about $2.3 trillion on food and lifestyle products (excluding Islamic Finance). ² One of the key market growth drivers is the Muslim world’s relatively young population. ³ Over 60 percent of the Muslim population resides in Asia, principally in Indonesia , India, and Pakistan . In 2013, Asia’s Muslims accounted for close to $600 billion in annual consumer spending, and that figure is growing at an increasingly high rate. ⁴ Multinational corporation are rushing into these vibrant halal consumer markets as the halal infrastructure is being developed.

In 2015, food accounted for 60 percent of all halal trade globally, followed by medicine at 26 percent and cosmetics at 11 percent. ⁵ Roughly 90 percent of Muslim consumer s said halal certification influenced which brands they buy. ⁶ Interestingly, over 70 percent of consumers seeking halal certification in Indonesia do so in deciding on non-food items. ⁷ Beyond basic merchandise, there is huge profit potential in creative design and modern lifestyle products and services . Ascia Farraj, a Kuwaiti-American Muslim woman, created a makeover for the hijab, the Muslim head scarf, becoming an instant hit on Instagram in 2014 with about 1 million followers. Trendy Muslim fashions have been displayed on model runways in Paris, New York, and elsewhere. It’s estimated that the Muslim clothing and footwear market will reach $322 billion by 2018. ⁸ Malaysia is competing fiercely with United Arab Emirates and Indonesia to be the capital of Muslim fashion . Upcoming market trends may include halal tourism, hotel, movies, entertainment, and digital services . The business world has just barely begun learning how to capture this faith-based market.

Notes

• 1. More discussion by Michelle Limenta et al. (2016) “Disabling Labeling: The WTO Consistency of the Indonesian Mandatory Halal Labeling Law”, “SECO/WTI Academic Cooperation Project” paper, the World Trade Institute of the University of Bern, Switzerland, May 2016.

• 2. Ibid., p. 1.

• 3. Deloitte & Touch (M.E.) (2015) “The Digital Islamic Services landscape: Uncovering the Digital Islamic Services Opportunity for the Middle East and the World”, Exhibit 4 on p. 13.

• 4. Ibid., Exhibit 4 on p. 13 and Exhibit 6 p. 16.

• 5. Jun Suzuki (2016) “Asia’s growing halal demand spurs innovation, profit”, Nikkei, Asian Review, 2 June 2016.

• 6. Martinne Geller and Randy Fabi (2016) “Consumer giants court Muslim with halal face creams, shampoos”, 1 September 2016, http://www.reuters.com/article/consumer-cosmetics-halal-idUSL1N1BC22M

• 7. Suzuki (2016).

• 8. Vanessa Friedman (2014) “Reading the Subtleties of Islamic Fashion”, 25 November 2014, NYTimes.com

References

• Deloitte & Touch (M.E.). 2015. The Digital Islamic Services landscape: Uncovering the Digital Islamic Services Opportunity for the Middle East and the World, 85 pages. http://www2.deloitte.com/content/dam/Deloitte/xe/Documents/financial-services/me_Islamic-Digital-Services.pdf

• Friedman, Vanessa. 2014. Reading the Subtleties of Islamic Fashion, 25 November 2014. http://www.nytimes.com/2014/11/27/fashion/reading-between-the-seams-at-the-islamic-fashion-festival-in-malaysia.html?_r=1

• Geller, Martinne, and Randy Fabi. 2016. Consumer Giants Court Muslim With Halal Face Creams, shampoos, 1 September 2016. http://www.reuters.com/article/consumer-cosmetics-halal-idUSL1N1BC22M

• Limenta, Michelle, Bayan Edis, and Oscar Fernando. 2016. Disabling Labeling: The WTO Consistency of the Indonesian Mandatory Halal Labeling Law. “SECO/WTI Academic Cooperation Project” Paper, the World Trade Institute of the University of Bern, Switzerland, May 2016, 17 pages. http://www.wti.org/media/filer_public/29/49/2949e42c-7193-47f8-86dd-f1b97dd5ed53/working_paper_no_8_2016_limenta_el_at.pdf

• Suzuki, Jun. 2016. Asia’s Growing Halal Demand Spurs Innovation, Profit. Nikkei, Asian Review, 2 June 2016. http://asia.nikkei.com/Business/Trends/Asia-s-growing-halal-demand-spurs-innovation-profit?page=2