LG H&H recorded an operating loss of 16.3 billion won in its cosmetics institutional sector in the second quarter of this year. This is the first time in nearly 20 years since 2004. It has also fallen out of its top position in the cosmetics sector. Not only has it given way to Amorepacific Corporation, which was considered a partner, but its market capitalization is now lower than that of the emerging beauty tech company APR. According to related industry sources on the 7th, based on the previous day's closing prices, the number one cosmetics company by market capitalization is APR (approximately 7.9 trillion won), and the second is Amorepacific Corporation (approximately 7.5 trillion won). This leaves a gap of about 3 trillion won compared to the market capitalization of LG H&H (approximately 4.6 trillion won).
The securities industry is lowering its target price for LG H&H. Daishin Securities has revised the target from 340,000 won to 290,000 won, while NH Investment & Securities has cut it from 340,000 won to 270,000 won. Considering that LG H&H's stock price nearly reached 1.78 million won in July 2021, it feels like a drastic change.
How did LG H&H, which captivated Chinese consumers with its premium cosmetics brand 'The Whoo' and enjoyed the reputation of being a royal brand, end up in such a poor situation? Many have pointed out that its high dependence on the Chinese market and focus solely on duty-free distribution have been problematic, but there are also voices suggesting that internal organizational issues should now be examined as well.
Recently, when discussions arise regarding the reasons for the poor performance of LG H&H's cosmetics institutional sector, the saying "Under a big tree, small trees cannot grow" is often quoted. This metaphorically describes small trees that fail to thrive because they are shaded by a large tree and do not receive adequate sunlight. This can also be applied to organizations. When there are individuals or groups with significant power or influence within an organization, it implies that others find it difficult to demonstrate their abilities due to being overshadowed.
There was a pivotal figure in LG H&H. Choi Seok-yong, the former CEO who led LG H&H from 2005 to 2022, is regarded as the hero behind its leap. He successfully led the company's expansion by acquiring Coca-Cola beverages, The Face Shop, Haitai Beverage, and Everlife in succession. LG H&H, which had sales of 1 trillion won in 2004, recorded sales of 8 trillion won and an operating profit of 1 trillion won in 2021.
The problem is that the LG H&H organization has not nurtured executives capable of making decisions. An industry source noted, "When following the former CEO's decisions, the capital market responded favorably. Consequently, they became fixated on confirming his intentions for everything from the cosmetic container to formulations and proceeding accordingly." Another source said, "Suddenly, those in crucial roles in the organization have forgotten how to make business decisions themselves."
The fact that LG H&H is currently in a worse situation than Amorepacific Corporation is also in the same context. While Amorepacific Corporation belatedly recognized market changes and made bold management decisions, LG H&H failed to do so.
Amorepacific Corporation intentionally reduced its duty-free sales, which worsened due to market conditions, by nearly half in 2023. Last year, it dropped to 380 billion won. In contrast, LG H&H maintained its duty-free sales at around 600 billion won until last year. Similar trends are seen in China. When Amorepacific Corporation's operations in China diminished, it significantly reduced the number of channels and brands within China by 2024. As a result, its projected sales in China for 2024 are expected to be about 510 billion won. Conversely, LG H&H is expected to maintain sales at around 690 billion won by 2024.
Park Jong-dae, a Meritz Securities analyst, stated, "LG H&H, being highly dependent on China, has failed to find growth momentum in other regions. It seems that in this situation, they have been trying hard to maintain market share and sales."
In fact, there is a growing perception within LG H&H that the failure to make bold investment decisions in a timely manner has become a problem. While attempts are being made to expand into the North American market, the brand's power remains weak, making it difficult to gain visibility. Although several attempts were made to acquire popular K-beauty indie brands, it signifies that they could not overcome the price differences.
An industry source remarked, "We have entered a time where bold decisions need to be made, but I think this has been hindered because of a long period of having an exceptional leader. It's a moment to reflect on whether we are stuck in a culture of waiting for someone excellent to make business decisions for us."