The ODM Boom Now Shows Up in Ingredient Suppliers' Results

What is the signal?

On 28 September it was reported that as orders and production rise at Korea's leading cosmetic ODM companies, including Cosmax and Kolmar Korea, ingredient suppliers are growing alongside them. The structure is straightforward: as Korean indie and scale-up brands widen their overseas sales, ODM production volume increases, and demand for the raw materials that go into those products increases with it.

In numbers, it looked like this. Second-quarter cosmetic ODM revenue was 794.9 billion won at Cosmax and 606.4 billion won at Kolmar Korea's cosmetics division. For the same second quarter, the combined revenue of three Korean ingredient and material companies came to 66.1 billion won, up 40.9 percent year on year. At the level of a single company, Daebong LS reported consolidated first-half revenue of 62.7 billion won against 52.4 billion won a year earlier, a rise of 19.7 percent, with operating profit of 5.7 billion won and total exports up 52 percent year on year — reported as the best result since the company was founded.

The product groups where demand stood out were named as well. What sells in overseas markets is skin care, sun care and mask packs, and within skin care, orders for basics such as essences, serums and ampoules are said to be rising steadily. By region, Daebong LS's cosmetic material exports were reported up 128 percent in North America, 62 percent in Europe and 57 percent in Southeast Asia. Analysts have also suggested the benefit will widen from ODM companies to ingredient and material suppliers and on to cosmetic packaging companies.

It is worth separating what these numbers do and do not say, though. What appears here is not industry statistics but the results of a few companies. The 66.1 billion won combined revenue of three ingredient suppliers is an order of magnitude away from the quarterly revenue of two ODM companies, and a growth rate of 40.9 percent is the kind that looks large when the base is small. The regional export growth rates are likewise one company's material exports, not Korean cosmetics' performance by region. And second-quarter and first-half results are the outcome of past orders, so these figures cannot tell you whether the orders going in now point the same way. What can be read here is that the same direction has been confirmed at the ingredient level — not that the increase will continue at this rate.

1. Upstream numbers show something different from finished goods

The numbers a brand looks at when reading the market usually sit on the finished-goods side: export value, brand revenue, channel rankings. Because they show what has already sold, they are accurate, but they say little about the place where we are about to put a development project.

Raw materials and ingredients go in earlier in the process than finished goods. So when results move on the ingredient side, it is closer to saying that the products those ingredients go into are on a line now, or are about to be. If finished-goods sales data is 'what sold', ingredient demand is a little closer to 'what is being made'.

Where this distinction lands in practice is in how you see competition. If orders are rising in the same category as the product we are planning, that product will sit on the shelf alongside similar products from the day it launches. If you are only watching finished-goods rankings, you learn this after your product is out.

2. Orders concentrated in basics, sun care and mask packs

The categories named in the reporting are skin care, sun care and mask packs, and within skin care, essences, serums and ampoules. Looking at the list, there are no unfamiliar names. These are what K-beauty has done for a long time, and what sells best overseas right now.

So the list reads as a list of opportunities and as a list of congestion at the same time. It means demand has been confirmed in these categories, and it also means many brands have already reached the same judgement. Which way you read it depends on what distinguishes your product inside that group.

It is worth noting that in most cases distinguishing it is hard. When products in the same category, with similar concepts at similar prices, increase at once, the basis on which consumers compare moves from inside the product to outside it: price against volume, the container, the order in which the product page explains things. After settling the category at the planning stage, try adding one more line — what the reason would be to pick ours when five products in the same category sit side by side.

• Whether our product sits in a category where orders are concentrating
• Whether what distinguishes us in that category is the formula, the price or the container
• Whether that distinction is visible on the first screen of the product page
• Whether the price was set assuming the number of comparisons will grow

3. In a category with rising demand, check the schedule first

When developing in a category where orders are concentrating, the first thing to check is not the formula but the schedule. When products using the same raw material increase at once, the terms around material supply and production sequence may differ from your last project.

What matters here is not to guess. Actual lead times, minimum order quantities and material availability vary by item, timing and commercial terms, and cannot be known from results reported from the outside. So rather than building a schedule on 'it will probably take longer these days', it is safer to ask the manufacturer and the material supplier directly and get numbers back.

Fixing the shape of the question makes the answer easier to get: specify the timing, specify the quantity, and ask about alternatives at the same time. 'To receive this formulation in this quantity at this date, by when do we need to confirm?' and 'If this material is delayed, is there a usable substitute?' Even without a firm answer, simply knowing where the uncertainty is lets you decide where to put slack in the schedule.

• Whether you have the real lead time for this item as a number from the manufacturer
• Whether the key material has an alternative, and whether the spec changes if it does
• What the terms are for the opening quantity and for a reorder
• Which process slips first when the launch date moves

4. Capacity expansion aims at the next order, not this one

The successive capacity expansions among cosmetic ODM companies have been read as a move to secure production capacity ahead of future order growth, beyond current strong results. That sentence tells you the direction but not the timing.

From a brand's side, news of expansion does not automatically mean easier production terms. It helps only if the point at which capacity increases lines up with the point at which your product has to be made, and whether the newly secured capacity suits your formulation is a separate question. A basics line being added and a sun care line being added are different news for you.

So expansion news is better used as material for questions than as a negotiating card. Ask which formulations gain capacity and from when, and whether your product belongs on that line. If it does not, the expansion changes nothing in your schedule.

5. The next layer named was packaging

Analyst forecasts saw the benefit widening from ODM companies through ingredients and materials to cosmetic packaging companies. A forecast is a forecast, but it is worth reading because it points precisely at the item brands tend to handle last.

In development, packaging is usually decided late. You settle the formula, set the concept, then choose the container. There is nothing wrong with that order in itself, but when packaging becomes the bottleneck, every earlier decision waits. A launch slipping because of the container while the formula has already passed is not unusual.

So it is safer to narrow the direction of the packaging at the same time as the category is fixed. Not the exact specification, but whether you will use an existing mould or make a new one, pump or dropper, how many sizes you will carry — these are decisions that can be made early. The later they are made, the more it costs to change them.

This also overlaps with the Cosmetics Industry Promotion Act promulgated on 15 September, which widened the scope of support to include raw material and container manufacturing. Signals that the industry's attention is moving outside finished goods are coming from both regulation and the market.

• Whether to go with an existing mould or a new one
• Whether the dispensing method suits the formulation and the use occasion
• How many sizes to carry
• How far behind the formula sign-off the packaging decision sits

The first question for the brief

Rather than beginning with 'K-beauty is doing well, so we will look overseas too', try one sentence: is our product inside a category where orders are concentrating, and what distinguishes it there? Then add one more line beneath it. If we asked the manufacturer today for this product's lead time and minimum quantity, within how many days could we have it as numbers?