* South Korea is now No.2 cosmetics exporter to China
* Non-brand manufacturers reduce product development time
* Recent foreign investment in companies, others plan IPOs
* Investing in Korean firms convenient way into China
By Joyce Lee
SEOUL, Aug 4 (Reuters) - At an Innisfree cosmetics store in Seoul’s popular Myeongdong shopping district, a saleswoman helps 21-year-old Chinese tourist Yang Hui carry her shopping baskets to the pay desk in front of a large display showing K-Pop star Yoona.
“There’s a lot to choose from,” said Yang, confessing to having bought more than she’d planned from the store’s range of around 900 products.
South Korea’s top cosmetics company Amorepacific Group launches some 400 new Innisfree branded products a year, about half of which are no longer available a year later.
It’s one of dozens of Korean mass cosmetics brands with a short product development cycle - a “fast beauty” approach that is increasingly popular among Chinese and other Asian millennials, gaining exposure in the United States and Europe, and attracting high-profile foreign investment.
South Korea has become a hot-bed for applying to cosmetics the “fast fashion” principles of shifting designs quickly from catwalk to Main Street to capitalise on new trends.
Thousands of small cosmetics firms compete to get their new products to market, with third-party manufacturers cutting the time on testing and recipe alignment and providing the capacity for swift market launch.
Korean brands have cut product development cycles to as little as four months, compared to over a year for global brands, industry experts say.
“When we received an eyeshadow order from a major global client in 2004, it took us two years to begin production. Now it takes us one year from the word go,” said Lim Dae-gyu, a director at Cosmax Inc, a cosmetics manufacturer with annual sales of close to $500 million.
“For South Korean mass brands, it takes less - just 4-6 months from planning to market launch is average,” Lim added.
South Korea last year overtook the United States and Japan to become the No. 2 cosmetics exporter to China after France. It shipped $1.1 billion worth of skincare creams, facial masks, compacts and other cosmetic products to the world’s second-largest economy, according to the Ministry of Food and Drug Safety.
South Korea’s total cosmetics exports were worth $2.59 billion, up 44 percent from 2014, with Hong Kong and the United States its second- and third-biggest markets, a long way behind China.
Sales are boosted by South Korea’s duty-free market - the world’s biggest - which caters especially to big-spending Chinese tourists. Cosmetics accounted for nearly half of the country’s record duty-free revenue of 5.8 trillion won ($5.1 billion) in the first half of this year, customs data showed.
The trade is not without its downside. To counter unofficial re-sales, Korea’s Customs Service is considering setting a 50 product limit for duty-free buyers, a customs official said. Analysts say this could dent sales by smaller firms, but note that bigger companies already limit duty-free purchases to control store inventory.
“New ingredients, new packaging, new formulas come on the market continuously, and when something does well Korean brands respond quickly,” said Jang Jun-kee, managing director of the Korea Cosmetics Foundation, an industry group.
Amorepacific’s 2008 hit product, the cushion compact - a multifunctional sponge applicator for anything from liquid facial cover and sun protection to make-up base and moisturiser - inspired follow-up products from global brands such as L’Oreal’s Lancome and Estee Lauder’s Clinique.
Innovative, often cute, packaging also helps.
The Face Shop, a mass brand from South Korea’s second-ranked cosmetics firm LG Household & Health Care, said last month it sold out of its initial 130,000 cushion compacts featuring Disney characters - costing 20,000 won ($17.82) - in just two days. It said it expects to launch about 600 new products this year.
Beyond popularising beauty trends such as facial cosmetic products “BB cream” and “CC cream”, South Korea has a reputation for innovation and for using natural and Oriental medicine ingredients from flowers and tea leaves to donkey milk, snail and seahorse to differentiate its so-called K-beauty products.
“Korean consumers are very sophisticated. Their interest in beauty and expectations of cosmetics are high and they are willing to try new concepts,” L’Oreal Korea said in emailed comments to Reuters. “It’s a market where new trends emerge before potentially going global.”
For foreign investors, buying into the Korean success story is a convenient way also into China, where locals can’t get enough of Korean TV dramas and K-Pop music.
“We find beauty and media-entertainment sectors to be the most exciting (in Korea),” said Ravi Thakran, the chairman and managing partner at L Capital Asia, a unit of LVMH, which last month became a major shareholder in South Korean colour cosmetics brand CLIO.
“The popularity of Korean culture such as K-Pop, dramas and celebrities boosted significant demand for Korean beauty products in China and other Southeast Asian countries,” he added.
Beyond China, Korean cosmetics have also moved into chains including LVMH’s Sephora, Target and Urban Outfitters , according to Korea’s state-run trade agency KOTRA.
The LVMH unit’s investment in CLIO came just weeks after Goldman Sachs and Bain Capital Private Equity said they were buying a majority stake in unlisted cosmetics maker Carver Korea Co Ltd.
$1 = 1,107.9000 won Reporting by Joyce Lee, with additional reporting by Nataly Pak; Editing by Ian Geoghegan