As Korea's two leading cosmetics original design manufacturers (ODM), COSMAX(192820) and Kolmar Korea(161890), both posted record results in the second quarter of this year, attention is focusing on why their U.S. subsidiaries diverged. COSMAX saw sales at its U.S. subsidiary climb by nearly 80%, turning an operating profit for the first time since the unit was established, while Kolmar Korea's U.S. subsidiary saw sales retreat and remained in the red.
Industry officials said the difference stems from the distinct product lines manufactured at local plants and differing customer mixes, as well as the timing gap in when reorders tied to stronger sales at existing clients began in earnest. In particular, Kolmar Korea has recently concentrated orders for sun care and skin care products—the segments driving its results—at domestic plants, while its U.S. plant has a higher proportion of makeup (color) products, leading to assessments that the benefits of K-beauty growth are not fully connecting to the local subsidiary's results.
On the 14th, the companies said COSMAX posted second-quarter sales of 794.9 billion won and operating profit of 73.7 billion won. Those were up 27.5% and 21.2%, respectively, from a year earlier. Kolmar Korea also reported sales of 861.3 billion won and operating profit of 110.3 billion won, up 17.8% and 50.2%, respectively. It was the first time Kolmar Korea's quarterly operating profit surpassed 100 billion won.
However, the U.S. subsidiaries' results diverged. Sales at COSMAX's U.S. subsidiary were 53.8 billion won, up 79.4% from 30 billion won a year earlier, marking a record high. Operating profit turned positive for the first time since the U.S. subsidiary was founded in 2013. In contrast, Kolmar Korea's U.S. subsidiary recorded sales of 17.8 billion won, down 2.9%, and an operating loss of 1.4 billion won.
Driving the improvement at COSMAX's U.S. subsidiary was simultaneous expansion in both clients and product categories. In the second quarter, its product mix was 46% base cosmetics and 54% color cosmetics. Orders broadened across multiple categories as demand increased not only for existing color products but also for OTC (over-the-counter) items and K-beauty's signature formulations.
The ramp-up in reorders from existing clients also aided the improvement. Beyond producing new products, a virtuous cycle began to emerge as sales of previously launched items increased and reorder volumes grew. Orin-a of LS Securities said, "COSMAX's U.S. subsidiary has entered a structural growth phase tied to client onboarding rather than one-off new orders."
Operating leverage from higher production volume is also cited as a driver of the turnaround. ODM firms bear fixed costs such as labor and depreciation, so profitability can improve quickly once production volume rises above a certain level. Sales at COSMAX's U.S. unit jumped from 30 billion won to 53.8 billion won in a year, an increase of nearly 80%.
Kolmar Korea's U.S. subsidiary is seen as being in a phase of reshaping its client and product portfolio. In the second quarter, makeup accounted for 88% of sales, while sun care and skin care were 4% and 3%, respectively. That contrasts with the domestic subsidiary, where sun care and skin care are 35% and 49%. This means the gains from sun care and skin care—now lifting Kolmar Korea's overall results—are being reflected only to a limited extent at the U.S. unit.
The impact from reduced orders by its former largest client was also significant. According to Kolmar Korea, the sales share of its largest client at the U.S. unit has recently fallen into the 50% range. As a result, the U.S. subsidiary's performance deteriorated sharply from the second half of last year, and in the second quarter of this year, sales continued to contract, down 3% from a year earlier. Due to lower production volume, the utilization rate at the U.S. subsidiary in the second quarter also remained at 9%.
However, observers said rapid diversification of clients is laying the groundwork for a rebound. As the weight of the former largest client declines, sales are rising sharply at color brands of global multinational corporations (MNCs) ordering BB and CC creams. In fact, losses at Kolmar Korea's U.S. subsidiary are narrowing. The second-quarter operating loss was 1.4 billion won, still in the red but reduced by 2.3 billion won from 3.7 billion won in the previous quarter.
Lee Gyo-seok of Shinyoung Securities said, "Along with client diversification and the lower base effect from last year starting in the third quarter, we expect Kolmar Korea's U.S. subsidiary sales to show triple-digit growth in the second half."