Beauty has been a popular sector among investors who like high-quality companies. These brands were seen as relatively defensive: even in a recession, customers were likely to keep buying their favourite products as an affordable luxury. And there was good potential for growth since customers in emerging markets would buy more cosmetics and high-end skincare from desirable foreign brands as they became wealthier. So a slump last week in the shares of Japan’s Shiseido and South Korea’s Amorepacific is worth noting.
Shiseido is off almost 24% after disappointing results that showed continued weak demand in China. As a one-off, this might not be a complete shock: the company had also reported weak full-year results for 2023 driven by China and had already announced plans to cut costs and improve profitability. Its shares peaked in 2019 and have been looking weak since mid-2023. However, Amorepacific fell a similar amount after earnings missed expectations, with continued weak demand in China. Looking back further, US group Estée Lauder had a dire 2023 on the back of problems… yes, China. So all this is starting to look like a bit of a worrying pattern.
Is investing in the beauty sector worth it?
It seems clear that the market that once offered the greatest promise for global beauty – and provided much of the justification for why these firms should trade on elevated valuations – is becoming very challenging. There are two likely factors. First, underlying growth and consumer demand in China continue to be weak. Second, consumers may be turning more towards local brands for reasons that range from value for money to nationalism or domestic pride.
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Shiseido says that controversy over the release of treated water from the Fukushima nuclear power plant is affecting demand for Japanese products (misinformation about this is widespread in China). Such risks are not new. When South Korea agreed in 2016 to allow a US missile defence system to be deployed in the country, there were government-backed campaigns to boycott South Korean products. Amorepacific’s share price has never regained the bubbly peak it hit back then and, like, Shiseido has been on a wobbly downtrend for a while.
Earnings forecasts for the beauty sector imply a decent rebound even for the underperformers in 2025. Yet in China, competition from local brands is likely to get tougher. Rules that will force cosmetics firms to disclose the precise composition of their products to regulators have raised concerns about whether this could mean trade secrets get leaked. And the China risks put a lot of weight on the US and Europe to be steady and other emerging markets to show growth. Most firms now trade on price/earnings ratios in the 20-25 range based on estimates for 2025. There are some excellent stocks in this sector: I still hold L’Oréal in my multinationals portfolio, alongside diversified groups such as Procter & Gamble and Unilever. But as with other consumer stories that have recently disappointed, there is a risk that valuations come down across the board.
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