The recent decision by the South Korean customs agency to impose a purchase limit at the country’s tax-free outlets is dampening the sales outlook for local cosmetics firms which generate a major part of their sales via duty-free channels.

On July 11, the Korea Customs Service notified all Korean duty-free operators -- including Lotte, Shilla and Shinsegae -- to limit the number of purchases made by each customer to 50 cosmetics and perfume products, and 10 bags and watches at each brand.

The news, which was publicized after trading hours last Friday, sent the stock prices of Korea’s leading cosmetics firms tumbling on Monday. AmorePacific dropped by 2.06 percent, LG Household & Health Care by 6.05 percent and Able C&C by 4.66 percent, among others.

Last year, duty-free channels took up around 25 percent of combined sales generated by Korean cosmetics companies, according to NH Investment & Securities. Duty-free sales also made high contributions to firms’ performance in 2015, making up an estimated 40 percent of AmorePacific’s profits and about 30 percent of LG H&H’s profits. 

“The recent event poses a negative influence on the Korean cosmetics sector,” NH Investment & Securities analyst Han Kook-hee said in a Monday report. “Though the impacts will vary by company depending on the details of the limitations, the publicizing of this issue is a risk itself.”

A KCS spokesperson told The Korea Herald that the agency is still in talks about the way in which the limitations will be imposed. The number of products sold to each customer may be limited by brand or by duty-free outlet, or other criteria.

The agency's policy is also geared at curbing the systematic exchange and reselling of duty-free items in the marketplace -- an illegal practice that is widening every year -- rather than at limiting the purchases made by individual travelers, the official stressed.

For example, items sold at tax-free prices would be purchased in large quantities by foreigners and passed onto third-party brokers to be resold through various channels at home and abroad.

“We plan to draw up a more detailed guideline after consulting the matter with local duty-free stores,” the KCS spokesperson said.

Nonetheless, the related industries remain concerned over the agency’s latest regulation, citing concerns over its potential to hamper domestic consumption and to hurt both local cosmetics manufacturers and retailers.

“Putting a cap on the sales of certain products (like cosmetics) can lead to a shrink in consumption as well as hurt Korean cosmetics makers of all sizes,” said an official from a major Korean duty-free operator who wished to remain anonymous.

“The sales limit is likely to negatively influence low-end cosmetics brands which sell smaller, low-cost products that can be purchased in bulk,” said an official from a Korean cosmetics company on condition of anonymity.

Despite the concerns, AmorePacific and LG H&H said they do not expect a drastic impact as their key brands already impose their own sales caps at duty-free stores that are even tighter than the current limitation being pushed by the KCS.

“We welcome the KCS’ recent policy as it is aimed at cutting down illegal cosmetics sales routes rather than blocking official sales channels,” said an AmorePacific spokesperson.

By Sohn Ji-young (jys@heraldcorp.com)