KT&G Expands into Cosmetics Biz

Tobacco monopoly takes over 60 pct stake in Somang Cosmetics to enter cosmetics and Oriental medicinal herb cosmetics biz

KT&G Corp. took over Somang Cosmetics Co. on June 24 by buying a 60 percent stake of the company launched in 1992 to enter the cosmetics business, the only tobacco company in Korea said recently.
The cosmetics firm, whose total sales came to 122 billion won last year and posted operating profit of 11.1 billion won markets such well-known brands as Man Holding Flower and Danahan, made with Oriental medicinal herb ingredients.
KT&G expects to create synergy from the mixture of its own facilities for raw material supply, and R&D in pharmaceutical areas, ginseng and other health foods that it produces with Somang's R&D, production know-how and distribution channels. The tobacco company plans to expand its Oriental medicinal herb cosmetics line by taking advantage of Somang's cosmetics production and marketing capacities.
KGC Life and Engine, an affiliate that produces and markets Oriental medicinal herb cosmetics will continue to do that, while Somang will continue to do what it has been doing to expand its share of the domestic cosmetics market.
KT&G and Somang, a non-listed firm, agreed not to disclose the amount of money involved in the transaction, but noted that the price was decided base on the prices of cosmetics companies listed on the Korea Exchange
KT&G has set its eyes on China, the world's largest market for ginseng and ginseng products. The former monopoly producer of ginseng and tobacco for Korea will take on this challenge by establishing a manufacturing plant there and developing ginseng products custom-tailored to local taste. In addition, it plans to grow ginseng locally while creating a new brand exclusively for Chinese customers.
Already the world's largest ginseng-producing country, China has made aggressive investments, with ample government support for farmers in improving the quality of its ginseng products to compete against the ginseng produced in Korea. As the Chinese increase their disposable income, the market for healthy foods including ginseng is forecast to reach up to US$16.5 billion in 2010, a 13% increase over the previous year.
On March 22, KT&G's President Min Young-jin visited China's Jilin Province and signed agreements with the provincial government and the government of the Yanbian Korean Autonomous Prefecture for the establishment of a local corporation and manufacturing plant.
According to the terms of the agreements, KT&G will receive a range of support from the governments including subsidies from the ginseng industry development fund, guarantees for farmland for ginseng cultivation, and an exemption or reduction in corporate taxes. In addition, the company was promised to be treated equally with other local competitors even in the case that laws are revised. As the first step toward the localization effort, KT&G will build a manufacturing plant in the City of Yanji located in Yanbian Prefecture. Ground breaking for the 107,000m2 plant will start in September 2011. Initially, the company will invest $16.5 million to build a plant with an annual capacity of 200 tons, and production will be expanded in stages until it reaches 2,000 tons. A KT&G official said, Our efforts to enter the Chinese market by establishing a local operation is meaningful in that the world's premier ginseng producer is finally moving into the world's biggest ginseng market. Given our red ginseng production technology is the best in the world, we are confident of reaching $275 million in revenues by 2016 in China alone, he added. KT&G considers the Chinese investment as part of its efforts to create new growth engines and become the world's leading healthy food purveyor. nw

President Min Young-jin of KT&G, right, shakes hands with President Kang Seok-chang of Somang Cosmetics Co. after signing a deal for KT&G to take over a 60 percent stake in the cosmetics firm on June 24 at the KT&G head office.

A view of the KT&G head office building in Seoul.

Photos on Courtesy of KT&G