K-Beauty's Next Test Is the Margin Line

In Brief

Korea's cosmetics exports hit a record $11.4 billion in 2025, and Q1 2026 results say the demand is still building — SME online cosmetics exports grew 74% year over year, and the United States passed China as Korea's largest cosmetics buyer. The headline is clean. The listed companies are messy. Amorepacific grew overseas revenue while overseas operating profit fell. LG H&H lifted North America sales 35% while group beauty operating profit dropped 43%. APR posted a 25.7% operating margin and 174% profit growth, and it is an outlier, not a sector template. The question worth asking now isn't whether K-beauty is popular abroad. It's which companies turn that popularity into operating leverage, and which are buying revenue they can't afford.

The Demand Story Is the Easy Part

The macro is clear. Per the Ministry of SMEs and Startups, Q1 2026 SME online exports reached roughly $300 million, up 38.2% year over year, with online cosmetics exports alone reaching about $200 million, up 74.2%. Total SME cosmetics exports came in at $2.18 billion, up 21.3%. Zoom out to 2025: Korea's cosmetics exports of $11.4 billion produced a trade surplus above $10 billion across 202 countries, with the U.S. at $2.2 billion now ahead of China at $2.0 billion.

That's real diversification, and the market already knows it. The scarce insight in 2024 was "K-beauty is going global." In 2026, the scarce insight is whether that going-global is being financed by the income statement. That's where the work is.

Why Export Growth Is Not Operating Leverage

When a category exports well, people tend to assume top-line and bottom-line move together. They often don't, especially when the growth comes from new geographies and new channels rather than deeper share in one market.

Selling into the U.S., Europe, and Southeast Asia at scale costs more than selling into Korea or duty-free China. Marketplace fees compress gross margin. Influencer-led customer acquisition cost is rising in the categories K-beauty most wants to win. Logistics, customs, product localization (FDA, EU CPNP, halal certifications), regional warehousing, returns, and promotional intensity during U.S. holiday windows all eat into the unit economics of an exported lipstick or serum. As brands chase share in mass-market overseas channels, average selling price often steps down even as volume steps up. Volume without pricing power is the classic recipe for revenue that doesn't convert.

The Q1 prints show this. Amorepacific's group revenue rose 5.0% to KRW 1.227 trillion, and group operating profit rose 6.9% to KRW 137.8 billion, a respectable set of numbers. Inside that, the Amorepacific subsidiary grew overseas revenue 6% but overseas operating profit fell 18%, while domestic operating profit rose 65%. The leverage was Korean, not global. LG H&H is louder in the same direction: consolidated revenue fell 7.1%, group operating profit fell 24.3%, the beauty division fell 12.3% on the top line and 43.2% on the bottom, even as North America beauty sales grew 35%. The U.S. is working as a market. It is not yet working as a margin engine for the legacy majors.

APR Is the Outlier, Not the Template

APR's Q1 was extraordinary: revenue of KRW 593.4 billion (+123% YoY), operating profit of KRW 152.3 billion (+173.7%), a 25.7% operating margin (+4.8pp YoY), with cosmetics/beauty revenue up 174.3% and overseas revenue up roughly 180% to 89% of the mix. This is what real operating leverage on global demand looks like when a brand catches a viral product cycle.

It's also one quarter at one company, driven by a specific brand and channel moment. Extrapolating APR's margin to the rest of the Korean beauty universe, or even to APR's next four quarters, is the mistake to avoid. APR is useful as evidence that K-beauty operating leverage is possible at scale. It is not a base rate.

The ODMs Are the Picks-and-Shovels Layer

If the brand layer is going to fragment, and the SME export data showing hundreds of small brands now selling online into the U.S. says it will, the better-supported structural beneficiary is the contract manufacturer.

Cosmax's Q1 revenue rose 16% to KRW 682 billion, with U.S. subsidiary revenue up 46%; operating profit rose only 3% to KRW 53 billion. Kolmar Korea did better on conversion: sales up 11.5% to KRW 728 billion, operating profit up 31.6% to KRW 78.9 billion, net income up 158.7% to KRW 60 billion. Cosmax disclosed it supplies roughly 4,000 customers across skincare, color, and mask sheets.

That customer count is the point. When 4,000 brands are fighting for the same overseas shelf, none of them individually has to be the winner for the ODM to keep growing. The ODM is long the category, not any single brand. The honest risk is that ODM operating profit growth can still lag revenue growth, as Cosmax shows this quarter, when capacity build-out, raw-material costs, and customer mix shift faster than pricing.

What Would Falsify This View

The thesis weakens or fails if any of these show up:

U.S. customer acquisition cost keeps rising and brands subsidize sell-through to defend share.
Amazon, Sephora, or other large platforms raise effective take rates or impose stricter promotional commitments.
The KRW strengthens materially against the USD, removing the translation tailwind that currently flatters export margins.
U.S. tariffs on Korean consumer goods expand, or FDA / state-level cosmetic safety requirements raise compliance costs faster than expected.
China relapses further and U.S. and European growth doesn't absorb the pressure.
The current K-beauty cultural moment fatigues, particularly in the under-25 cohort that drives viral product cycles.
Hero products from APR, Cosrx, Beauty of Joseon, Anua, and the next cohort fail to refresh, exposing how concentrated each brand's growth has been on one or two SKUs.

If three or more land in the same two quarters, K-beauty is back to a demand story, and names underwritten on margin expansion need a higher bar.

My View

Generic K-beauty exposure was the trade that worked from 2023 through most of 2025. It's the less interesting trade now. The export demand is widely known, the U.S. is already the number-one destination, and the brand layer is fragmenting in a way that makes any single name harder to underwrite without margin evidence.

The work now is sorting on margin quality. In the brand layer, the question is whether overseas growth is showing up in overseas operating profit, not just overseas revenue. Amorepacific and LG H&H have just shown that conversion is not automatic. In the ODM layer, the question is whether revenue growth from a fragmenting customer base is translating into operating leverage. Kolmar is doing this better than Cosmax right now. APR proves very high margins are achievable, but one quarter at one company isn't a sector base rate.

Source Notes

The Bottom Line

K-beauty's demand story is well understood. The next test is who turns U.S. and online growth into operating profit without paying it all back in marketing, fees, and logistics. Until that shows up in the income statement, the safer category exposure is the ODM layer, and the brand layer is a stock-by-stock margin sort. The export wave does not lift everyone equally.