Case Questions:

Where and how does AmorePacific make most of its money? How has it been able to dominate the
Korean market against local firms such as LG Household and Healthcare (HHC) and multinationals such
as L’Oreal?

AmorePacific’s revenue is in Cosmetics and toiletries which makes up 4/5 of their sales. They
hold a 30% Market share in Korea versus their competitor LG Household and Healthcare (HHC)
and L’Oreal.

There were several determinants in AmorePacifics success in Korea which helped them
dominate in the Korean Market whether it be local firms or multinationals.

1. Starting from a customer’s perspective, AmorePacific has established themselves as early as

1945 concentrating their research and development on products which are based on Korean
home remedies. This Korean market has only began opening its gates to foreign investors in
1997. The traditional view of Asian women of natural beauty is deeply rooted long before the
introduction of other westernized products. To add to this, there were initiatives from the
Korean Cosmetic Industry Association. The slogan was “Made in Korea products are good for
Koreans”. These campaigns compared Korean made products to foreign ones implying that
“overseas goods may be harsher on the skin”.
2. Next determinant are their internal business perspectives. AmorePacific constantly conducts
Research and Development as well as new products. They have created several brand
hierarchies to target different target markets. Amore Pacific also initiated door to door sales in
the mid 60’s. This gave AmorePacific a stronghold in the industry and have gained a
dominant position using this channel. The women who sold their products were known as
“Amore Ladies”. They provided beauty counseling, home treatments and massages
strengthening relationships within its customer base thus creating value for AmorePacific in
consumers mind.
3. Third determinant are their innovation and learning perspective. The company continues to
improve and create value through advertising platforms and different channels distribution for
each brand, gaining knowledge in their push and pull strategies, including creating new and
improved repositioning strategies in their Total quality management, outsourcing which
generated good labor relationships which was rare in Korea. Furthermore, Hiring and
Training was also made more extensive with screening, motivating and supporting their
Salesforce. Their efficiency was also ushered by technology as their sales system enabled
them to track inventory in real time through a company supplied PDA. Lastly, The company
continues to modernize their management, infrastructure and human resources which
included many award-winning efforts.

1. Assess the performance of MNCs: How do they compete against local competitors? What are
the reasons for local companies outperforming MNCs?

In the 19th Century, chemicals were used to replace natural substances, making cosmetics easier
to manufacture. Fragrances accounted for more than 30% of Western cosmetics which does not
fare well to Asian markets which would be in the single digits. Instead of skincare Regional
standardization was more remote in Asia then West Europe. Fragrances were short lived in Asia
than users of skin care products more importantly, there were other deterrents for the MNCs such
as income, openness to imports, temperature and ethnicity which have to be recognized. L’Oreal,
Revlon, Estee Lauder and other MNC whose are western based struggles for market share in
Korea. Foreign competitors offered extensive product lines from luxury to mass market to
 discount offerings. Also foreign competitors all followed similar strategies built around brand
extensions, new product launches, acquisitions, brand marketing and global expansions. MNCs
also spent heavily on advertising. R&D were conducted and they promised health or beauty
benefits beyond masking. Next, product improvements would trickle down into the mass market
which attracted the price sensitive customers as well as the luxury buyers. Third is, foreign
cosmetic companies targeted narrower segments such as baby boomers, minorities. Fourth is
that their distribution channel changed. Improvements increased on product availability and
raised consumer awareness regarding affordable cosmetics. The door to door channel such as
Avon would reach remote parts of the world.

The Korean market has only began opening its gates to foreign investors in 1997. The traditional
view of Asian women of natural beauty is deeply rooted long before the introduction of other
westernized products. To add to this, there were initiatives from the Korean Cosmetic Industry
Association. The slogan was “Made in Korea products are good for Koreans”. These campaigns
compared Korean made products to foreign ones implying that “overseas goods may be harsher
on the skin”. Asian women have a more natural conception of beauty. Chemicals used by MNCs
are not in tuned with the concept of natural which the Korean market was looking for. Korean
women prefer pale white skin and lustrous back hair. Korea is one of the markets dominated by
skin care in the world. Korean women paid a great deal of attention to skin tone and focused
more on covering skin flaws than on making their skin look moisturized and transparent, hence,
Korean women applied more cosmetic products than western women. Korean women use an
average of 20 products in one day compared to 6 or 7 for French women. In Korea, toiletries for
example hair care and personal and oral hygiene were thought to offer less room for product
differentiation than cosmetics. Local companies have learned from their foreign competitors.
AmorePacific has repositioned its strategy to be able to remain competitive. Coupled with the
AmorePacific’s understanding the culture of the nation and the knowledge gained from MNCs,
they were able to outperform them.

AmorePacifics Repositioning Strategies to counter MNCs:

a) Operations

a. AmorePacific has employed several positioning and repositioning strategies. They hold
domestic selling rights and produced all its products with no outside help. They also
vertically integrated backwards with its chemicals which helped boost their capital. After
which, the company embared on “Total Cost Reduction” program in 1995. Then came the
“Total Creative Revolution” in 1998. These plans have earned then a growth in annual
sales by 2%. Also, they have streamlined their operations and consolidated important
affiliated suppliers. They overhauled their production processes and plants which
included digitization of important process, implemented an Enterprise Resources
Planning system for its purchasing, Six Sigma program for Total Quality Management
was also implemented as well as outsourcing with IBM. All these advancements
generated good labor relationships which was rare in Korea.

b) New/Products Research and Development

 AmorePacific

Sulwhasoo
Hera

Iope
Laneige
Mamonde

Innisfree etc

Their new Brand Hierarchy aimed to target different markets. From mass market, upper
to mid-priced prestige brands to the more super prestige higher price brand for older
women which were sold door to door as well as department stores. These new brand
architecture of different brands at different channels who served different target markets
accounted for 85% of domestic cosmetic sales

c) Marketing

The organization increased their presence through advertising. Because of their Brand
hierarchy strategy, their products were sold in specialty stores as well as discount stores.
Push strategies by television advertising, print and new media such as websites.
Sulwhasoo membership club which instilled the exclusivity of the product. This included
trips to Korean art exhibits, better customer relationship management which included
beauty counseling which was rare in Korean companies. Push and pull strategy non
television non celebrity advertising strategy were adopted for prestige and super prestige
such as Hera and Sulwhasoo for the aura of exclusivity.

d) Distribution

AmorePacitic also strengthened their long-standing distribution relationships.They

refocused their distribution from 200 stores, many small to mid-sized, to 60 high end
ones. Department stores were where multinationals tended to focus on so they emulated
on selling many brands from a single booth. This tactic resulted in a 16% of sles from
cosmetics which when fared 21% for Estee Lauder and 13% for L’Oreal which were
usually 60% of department store revenue and 5% for LG HHC. In its door to door
channel, they took advantage of their aggressive and knowledgeable sales women for
selling its prestige brands like Sulwhasoo. Hiring and Training was also made more
extensive with screening, motivating and supporting their Salesforce. Their efficiency was
also ushered by technology as their sales system enabled them to track inventory in real
time through a company supplied PDA.

e) Firm Infrastructure
 The company continues to modernize their management, infrastructure and human
resources which included many award-winning efforts such as discounted cash flow,
corporate transparency, women friendliness, recruit and retain right human resources,
incentive-based compensation and even practiced all employees to call each other by
name rather than title.

4. Which of AmorePacific’s three principal international targets—France/Europe, China, and the

United States—seems the most promising? Should a penetration strategy for the US/Europe
differ from that for China?

During my initial assessment, I have dealt with Bounded Rationality. My natural inclination was to propose
China as the most promising target. Above is the Hofstede Cultural Analysis. Below is a table signifying
the closest dimension to the host country

Power Distance France

Individualism United States
Masculinity France
Uncertainty Avoidance France
Long Term Orientation China
Indulgence France

However, the figure does not signify the informal institutions that might assure China as Korea’s superior
target. Culturally, China is similar to Korea as discussed in the case, their affinities include the Confucian
tradition, colonial ties and the fact that Korean herbal medicine system was based in China. Furthermore,
Northeast China is geographically accessible from Korea. Northeast China also shares much history and
with Korea. Targeting the chilly dry climate of Northern part of China will help AmorePacific extend and
understand the Chinese market. Furthermore, launching a full scale expansion in China will be too
overwhelming for the organization because of its limited expertise and manpower. However, Among
AmorePacific’s principal international targets, China is the most promising besides the culture and values
similarities, their penetration strategy in China are now taking shape because of the popularity of South
Korean Culture the Korean wave, it is reshaping consumer tastes in China. AmorePacific has also
discovered that a significant number of Chinese customers prefer made-in-Korea products.
Should a penetration strategy for US/Europe should differ from that of China? Yes a penetration strategy
for US/Europe should differ from that of China. Each country which a company enters have their own,
values and traditions whether formal and informal institutions which define a countries culture. Companies
who fail to do the necessary research to learn about the local’s culture and buying patterns might fail in
their quest to go international to gain more market share. Companies who are looking to expand globally
should try to enter countries which are culturally and institutionally close markets first, spend enough time
that to gain experience and gradually move to other markets.

4.What other recommendations would you make to Suh Kyung-Bae about AmorePacific’s
internationalization? Would it make sense to accelerate expansion via inorganic growth?

AmorePacific VS L’Oreal:

During the Asian financial crisis, the number of smaller local competitors dwindled. What was left were
larger local players and multinationals. L’Oreal was one of the few multinational competitors, however,
they have imported all their beauty products except for a small amount sources from local OEM. This
made their items more expensive than the average price of cosmetics offered in Korea. Their rebuttal was
to launch their low priced brand Maybeline, this move proved to be futile because the prices were still
relatively high. AmorePacific established themselves as early as 1945 concentrating their research and
development on products which are based on Korean home remedies. Korean market has only began
opening its gates to foreign investors in 1997. The traditional view of Asian women of natural beauty is
deeply rooted long before the introduction of other westernized products. To add to this, there were
initiatives from the Korean Cosmetic Industry Association. The slogan was “Made in Korea products are
good for Koreans”. These campaigns compared Korean made products to foreign ones implying that
“overseas goods may be harsher on the skin”.

LG Household & Health Care (HHC)

HHC is part of a group of Korea’s chaebols. They cater to the more premium and super premium market,
Selling their products in department stores and other high end channels. They do not focus their
operation on mass market channels and their door to door sales remained slow.

Amore Pacific has established themselves as early as 1945 concentrating their research and
development on products which are based on Korean home remedies. Amore Pacific also initiated door
to door sales in the mid 60’s. This gave AmorePacific a stronghold in the industry and have gained a
dominant position using this channel. The women who sold their products were known as “Amore
Ladies”. They provided beauty counseling, home treatments and massages creating relationships within
its customer base thus engraving AmorePacific in consumers mind.
Background
Established in 1945, AmorePacific Corporation is South Korea’s largest beauty & health company with 27
brands of skin care, makeup, fragrance, hair care, oral care and body care products. The brand portfolio
also includes green tea. It started out as a small family business selling hair oil made from camellia seeds
in 1932.

AmorePacific dominates half the market in South Korea and although it has been the first South Korean
company to be 7th in the top 10 beauty companies in the world by Women’s Wear Daily (WWD), its
forays in to global markets are rather recent. While its premium Laneige brand, for example, debuted in
1993, it only became available outside of Korea in 2002. With the world’s population expected to reach
7.6 billion by 2020, and much of the world’s new consumers coming from Asia, AmorePacific knows that
its future success depends on becoming a more regional and global brand.

AmorePacific aims to become Asia’s number one beauty company and one of the world’s top five
beauty companies by 2020. The company aims to generate USD 12 billion in sales by 2020 with 51
percent coming from global markets compared to 30 percent at present.

In 2013, AmorePacific ranked as the world’s 17th biggest cosmetics company in terms of global
sales. L’Oréal was number one, followed by Unilever and Procter & Gamble. AmorePacific is the
third-largest cosmetics company in Asia behind Japanese companies Shiseido and Kao. Its
gradual expansion in Asia is highlighted by an increase in its skincare market share in China from
1.2 percent in 2007 to 2.6 percent in 2012, putting it above Unilever and Johnson & Johnson,
according to global research firm Euromonitor.

AmorePacific brand strategy

Within its home country, AmorePacific has a broad distribution strategy. Korea still accounts for more than
70 percent of company sales. By channel, door-to-door sales represent almost 22 percent of total sales,
department stores account for 12 percent and home-shopping/online account for more than 10 percent.
The fastest growing distribution channels are digital and duty free.

AmorePacific’s supply chain and distribution strategy

Compared to other firms in the cosmetics industry, inventory days are much fewer at AmorePacific. For
example, Estee Lauder’s inventory turnover is six months while Shiseido’s inventory turnover is almost a
year. In stark contrast, AmorePacific’s inventory is cleared in three months, showing that it has
capabilities to move product faster than its competitors.

In terms of supply chain and distribution strategy, AmorePacific appears to be following the cue of fast
fashion giants Zara and H&M. By shortening the time that products go from runway to stores to merely
weeks, and clearing them for new designs just a few weeks later, the company provides customers with
more product variety, pulls them back to stores, and reduces the amount of inventory lying around in-
store. Across its 27 brands, AmorePacific introduces and discontinues products at a bewildering pace and
offers plenty of high quality cosmetic products at very competitive prices.
Maintain the edge in China
China, the world’s second largest economy, is the ideal market for AmorePacific’s most differentiated
product – the super-premium Sulwhasoo brand. The nation has been described as a market of paradoxes
– one of the oldest and most traditional societies in the world, yet catching up to the 21st century at
breath-taking speed. China’s share of the global beauty market may seem small compared to the U.S.
and Japan, but with a population of 1.3 billion, the growth potential is staggering. China now represents
20 percent of AmorePacific’s total sales and 42 percent of its overseas sales, followed by France (29
percent), the rest of Asia (25 percent) and the United States (3 percent).

Since entering China in 1992, AmorePacific has operated over 2,900 stores of the five brands:
Sulwhasoo, Laneige, Mamonde, Innisfree and Etude House. A strong success factor for its successful
penetration of the Chinese market involved paying attention to the tastes of Chinese consumers.
AmorePacific has managed to understand the problems that Chinese consumers have with their skin
conditions, their colour preferences and beauty routines, and has formulated tailored solutions to them.
For example, Chinese consumers are concerned about skin dryness so AmorePacific responded with a
sleeping mask that targeted skin dryness. It has also responded to the busy working lifestyles of young
Chinese consumers by developing cosmetics that allow consumers to put them on in the quickest and
most convenient ways.

Geographical diversity in China should drive AmorePacific to open more local R&D facilities to better
respond to diverse consumer needs. AmorePacific’s success or failure as a premium luxury brand in
China may make or break the brand on the global stage.

Another important aspect that AmorePacific would need to consider to ensure success in China is the
Chinese women’s perception towards beauty products and their country of origin. Though the company is
slowly making gains in the country, especially in the skincare segment, it needs to account for the
stronghold of Asian competitor Shiseido over China. It is a long established fact that the Chinese believe
that Japanese technology is the best and that Japanese skin is closest to Chinese skin in terms of
makeup and beauty regime requirements. These are important cultural aspects that AmorePacific will
need to consider as it implements its China strategy.

Conclusion:
AmorePacific has tremendous potential for global growth
Overall, AmorePacific is well poised for growth as it expands into markets outside China and Korea. To
sustain this growth and to remain competitive in the segments it operates in, the company needs to
combine an aggressive innovation driven marketing model with a global mindset and deep consumer
understanding. Going beyond the shores of its home country will be challenging for AmorePacific, but
with its credentials and past successes in foreign markets, it can be reasonably assumed that the
company has the right compass to map a course through new, uncharted waters.