CSIAugust Insights 2010 Flash June 2010

McKinsey Asia Consumer and Shopper Insights

South Korea: Living it up in luxury

Special Report: 2010 Luxury Survey McKinsey & Company South Korea Special Report: 2010 Survey McKinsey & Company South Korea

South Korea: Living it up in luxury

South Korea is different. those who understand the retail landscape luxur y market is driven by two important and strategically manage their and “soft” factors: a love of luxury and peer Overall, the economy is booming, and even businesses for the long-term. pressure. the financial crisis could not derail it. Korea weathered the 2008-09 global economic The stakes are high. With four percent of Koreans are “luxur y friendly” as few crisis surprisingly well, and although GDP global sales, South Korea has become a cultures are. For example, only 5 percent took a substantial hit for two quarters, pillar of the international luxury industry. of Koreans say they feel guilty about how the market quickly regained momentum Luxur y is a $4 billion industr y, accounting much they spend on high-end products, in mid-2009. Korea is now expected to for more than 15 percent of all fashion compared to 10-15 percent in other be among the first countries to exit the spending. It is also becoming part of the developed countries. Only five percent of recession, with a GDP growth rate forecast fabric of Korean life. respondents in Korea said that “I think at 5.8 percent for 2010, according to a buying luxury goods is a waste of money.” Korean Ministry of Strategy and Finance For example, at Shinsegae, one of the announcement in late June 2010. primary department-store groups, the The pressure to conform, in the sense of number of foreign luxury labels for sale has keeping up with the neighbors, may also be The luxury market also surpassed risen from fewer than 20 in the early 2000s more intense. Korean luxury consumers expectations. Unlike in Japan, Europe, or to almost 300 by 2009. Greater variety the US, where the sale of luxury goods has has increased competition among brands, stay on top of trends, and showing off their either stagnated or shrunk, the market for and driven changes in shopper behavior. latest luxury purchases seems to come high-end designer and accessories [Exhibit 1] naturally. While 45 percent of Japanese and is thriving in South Korea. Between 2008- 38 percent of Chinese believe that “showing 09, sales rose 16.7 percent in department Findings from our research suggest that off luxury goods is in bad taste,” only 22 stores, the main channel for the sale of the persistent strength in the South Korean percent of Koreans do. Korean luxury goods; after China, that was the fastest rate for any major market in the world. Exhibit 1 Korea is one of the few resilient luxury markets

Based on independent McKinsey research How has your spending on luxury changed over the past 12 months? Percentage of respondents recently conducted on Korean luxury goods 100% customers’ purchasing behaviors and 6 3 6 attitudes toward luxur y goods, we expect More than in the past 46 44 46 Koreans’ love for luxury to continue. And Similar to before 49 most lapsed customers (80-90 percent 70 depending on the category) indicated that 37 they intend to start buying luxur y products 48 51 again. With the economy showing signs Less than in the past 46 24 17 of recovery, we expect the return of these 8 buyers sooner rather than later. US EU Japan1 China Korea1

That is the opportunity. The difficulty is that South Korea presents companies with 1 Weighted average of three categories unique challenges and the winners will be SOURCE: McKinsey primary consumer research (Italy, , UK, China, US, March 2010; Japan, Korea, May 2010) Special Report: 2010 Luxury Goods Survey McKinsey & Company South Korea 3

In our sur vey, 60 to 70 percent of depending on the label). and that “affordable brands are good enough.” respondents mention finding enjoyment jewelry sales more than doubled. Fashion [Exhibit 4] in “the functional or emotional value apparel, however, grew less than 5 percent. of wearing luxury items” as the leading Some luxury players’ apparel sales even reason for increasing purchases. The rising regressed from 2008 figures. New luxury consumer segments are awareness of products and the improved emerging convenience offered by distribution The general trend among shoppers in Wealthy women in their 40s to 60s have channels were the next most-cited reasons. South Korea is to trade up rather than been the traditional core market for [Exhibits 2, 3] down. For leather goods/accessories and luxury brands. But with fewer financial watches/jewelry, 18 and 19 percent of those responsibilities, increased openness to Our research identifies a number of surveyed said they had recently traded-up interesting category, consumer, and to pricier brands. Only 5 percent said they new ideas, and an eagerness to define channel trends that collectively point to a purchased cheaper brands. For fashion themselves through how they dress, continued surge in luxur y in apparel, by contrast, nearly as many had Koreans in their 20s and 30s have emerged South Korea. traded down as up. As one industry expert as an exciting new demographic for told us, “Fashion apparel functions less as a retailers. At Lotte’s Avenue L, a high-end than leather goods, watches, branch of the Lotte department store chain Not all categories behave the same or jewelry, so customers are more willing focused on luxury goods, 20- to 30-year- Sales of luxury bags and shoes grew to trade down.” Over half of consumers olds comprised 35 percent of shoppers significantly in 2009 (10 to 30 percent, who spent less on high-end apparel agreed in 2006, but 44 percent in 2009.1 This

Exhibit 2 Exhibit 3 Compared to other countries, Korean customers are happier about Korean customers feel less uncomfortable about showing off luxury how much they spend on luxury goods goods to others

“I feel guilty about how much I spent on luxury goods” “I feel that showing off luxury goods is in bad taste” Percentage of respondents who selected agree and strongly agree Percentage of respondents who selected agree and strongly agree (top 2 on scale of 6); 20101 (top 2 on scale of 6); 20101

45 38 27 27 22 15 14 11 10 5

US EU China Japan Korea US EU China Japan Korea

1 Current and lapsed customers (customers who have not purchased in past 24 months for Korea; customers who have not purchased in past 12 and 24 months for Japan)

SOURCE: McKinsey primary consumer research (Italy, France, UK, China, U.S., March 2010; Japan, Korea, May 2010)

Exhibit 4 Although current customers have purchased more often for all categories, they are less willing to trade up or to purchase at full price for fashion apparel How has your luxury activities changed in category X over the last 12 months? Percentage of customers who answered “yes”, “current" category luxury purchasers by category

I am purchasing luxury goods I have switched to I am buying more at

Less often More often Cheaper brands More expensive brands Sale price Full price

Fashion apparel 10 24 8 9 6 7 (N=300)

Leather goods 12 21 5 18 4 10 (N=300)

Watches/jewelry 5 22 5 19 4 8 (N=200)

SOURCE: 2010 Korea Luxury Survey Special Report: 2010 Luxury Goods Survey McKinsey & Company South Korea 4

should be a particularly encouraging sign for retailers since, compared to older shoppers, younger ones tend to spend greater portions of their disposable income on high-end clothing and accessories. Our survey suggests that consumers aged 18-to-24 and 24-to-29 are the most enthusiastic about luxury goods, with 34 percent and 29 percent respectively declaring that “buying luxury goods is exhilarating,” compared to 12 percent among women. Savvy Korea, new channels, such as premium to 20 percent or less for older consumers. department stores have designated special outlets and online shops, are generating Our research also reveals that awareness- enclaves to cater to the growing legions of traffic. Perhaps not surprisingly, it is building is important for both age groups. men keen on shopping. Lotte department South Korea’s major department store “I have a better understanding of luxur y store, for example, expanded the space of its chains—Lotte, Shinsegae, and Hyundai, products” was a predominant reason for “Choix d’Adam” section, which is decorated which together account for three quarters of purchasing among this group, in addition to evoke masculinity and exclusivity, all luxury sales—that are helping to develop to “I have come to enjoy the value of wearing and stocked with goods for men. In fact, these newer channels and thus extending luxur y items.” Brands such as LV MH and according to our research, men identified their influence through diversification. have succeeded in capitalizing on the “better channel accessibility” as a key driver rise of this consuming class by introducing behind increased luxury purchases. In ƒƒ Department stores remain the entry-level items such as $1,000 dollar fashion apparel, for instance, 73 percent of premier sales channel, thanks to strong bags. More accessible brands like Coach men selected the statement: “It has become relationships with shoppers, discounts benefited from the trend, too. [Exhibit 5] more convenient to purchase luxury goods” and special offers, and non-monetar y incentives provided through loyalty- Men are another emerging market. as the biggest reason for purchasing, compared with 43 percent for women. club memberships. These programs Shopping has become more common and offer benefits ranging from cash rebates accepted among Korean males, reinforced and special gifts to free parking and VIP by pervasive messages on television, over New luxury channels are coming lounge access. In 2009, more than 70 the Internet, and in print media. While of age percent of respondents bought luxur y women remain the primary luxury market, goods at department stores, which are a fashion industry magazine reported a 29 While department stores remain by far omnipresent, with strategically located, percent jump in male buyers, compared the most important channel for luxur y in self-contained structures. Luxury players recognize their importance. For Exhibit 5 instance, 60 percent of Bulgari More excitement in purchasing luxury goods expressed among young customers sales were through department stores in “Buying luxury goods is exhilarating” 20092 Percentage of respondents who selected agree and strongly agree (top 2 on scale of 1 to 6) by age group; 20101 ƒƒ boutiques are a staple of many 34 luxury brands. While offering visibility, 29 our data suggests that visits, purchases, and conversion rates tend to be three- 20 19 to-seven percent lower, depending on 17 16 the categor y, than for department stores “Our brand shops do not actually make money due to the large retail space and high labor costs; it is there more for symbolic reasons,” according to one 18-24 25-29 30-34 35-39 40-49 50 and above luxur y company executive. That said, 1 Current and lapsed customers (customers who have not purchased in past 24 months our research suggests that, done right, SOURCE: 2010 Korea Luxury Survey a small number of brand boutiques can Special Report: 2010 Luxury Goods Survey McKinsey & Company South Korea 5

ser ve as powerful communications and ƒƒ E-commerce is emerging as a useful Compared to China or Japan, South Korea’s marketing tools. Maison , which marketing, communications, and luxury goods market looks small. But its opened in 2006 at ’s Dosan Park, is e-commerce platform. Online shopping growth and diversification should give a 10-stor y building with just two f loors is hardly new in South Korea, which is luxury-goods makers pause. Investing an of retail, and the remainder occupied one of the most wired countries on the appropriate amount of management time by restaurants, an atelier, and an art planet. In fact, more than 40 percent on the following considerations could prove gallery, all intended to provide a unique of our online survey respondents have highly profitable: Hermès experience visited an online channel at least once for a luxury goods purchase. Also, 35-45 Exert tighter control of the brand image: ƒƒ Premium outlets are another, relatively percent of current customers mentioned Given the need to target emerging luxur y new, sales channel. These are shops they were purchasing more online than consumer segments with “entr y level” located away from city centers that in the past. At the moment, however, it is product lines, the most effective luxur y specialize in bargain-priced, off-season primarily the less expensive items that narratives in South Korea will need to goods. Department stores, which also are moving, with an average purchase of emphasize the brand story and protect the own the outlets, have succeeded in about $50 per item, compared with over prestige associated with it. “Affordable launching the format by encouraging the $100 per item, off line. Many Koreans luxur y” items have become an important brands that they act as agents or partners resist making big purchases online strategic element in the product-mix for for. Though only about 10 percent of because of concerns about authenticity, capturing a wider consumer market, but Korean consumers in our survey said sizes, after-sales ser vice, and the need a brand needs to guard against making they had visited premium outlets for to see and touch the product before the label feel too accessible or common. a luxury goods purchase in the past buying [Exhibit 6] Koreans, remember, are more often 12 months, revenue growth has been looking to trade up than down. There impressive. Kimhae Outlet, opened by multiple approaches for addressing this Lotte in 2008, last year declared a 155 issue. , one of the most popular percent increase in sales. Shinsegae will luxur y apparel brands in Korea, captures open its second location, in Paju this customers in its most accessible tier and year, and a third planned for Busan preserves their loyalty as they move up from Emporio Armani to Armani Collezioni, and finally to Giorgio Armani Black Label. Exhibit 6 Hermès has enjoyed much success with While department store and duty-free outlets remain the two major channels for luxury goods, online is also emerging as format visited often under-$500 bracelets, which are accessible Sales channel visited by current customers in the past 12 months to younger customers with thinner wallets Percentage of category respondents yet allow the company to maintain its price Fashion apparel Leather goods Watches/jewelry Channels (n=300) (n=300) (n=200) point and brand prestige. Department stores remain the Department store 79 77 71 biggest channel for luxury goods Invest in CRM: Duty-free store (airport) 43 37 43 Duty-free is the 2nd-largest channel for luxury goods Given the dominant position of Korean Duty-free store (in town) 18 19 23 Online channels are quite department stores, most customer Online fashion retailer 16 12 9 prevalent, but not new transactions—and in many cases the Premium outlets are the most Premium outlet 12 8 7 commonly visited format among transaction data—are owned by retailers. non-traditional offline channels Store abroad 12 13 13 Over the long-term, luxur y brands will Online exclusive 13 12 9 General retailer (Gmarket) Online channels are quite need to build and maintain relationships prevalent, but not new Online duty free 12 10 13 directly with their consumers to learn Discounter (Costco) 9 5 6 from them. An important start is to gather

Brand shops in shopping mall 8 7 4 (Timesquare) Brand shops on the street or proprietary customer data. As membership at shopping malls are not so Brand shops on the street 7 5 3 popular programs proliferate, however, customers

Brand website 6 5 6 are less inclined to undertake the often

Multi brand store 5 1 2 cumbersome enrollment process. (e.g. Boon the Shop) Home shopping is less popular Overcoming the barrier will require TV home shopping 4 5 8 than online channels creativity and persistence. For example, SOURCE: 2010 Korea Luxury Survey luxury cosmetics brands such as Estée Special Report: 2010 Luxury Goods Survey McKinsey & Company South Korea 6

Lauder and Fresh have succeeded in or f lagship stores must go into the digital and promote products with site visitors, making the process easier for customers channel. Elle Atzine, an online community whose numbers had already hit 0.3 million by affixing small stickers to the backs of site launched last November by fashion subscribers by month five after launch. credit cards with membership bar codes. magazine Elle Korea, is emerging as the Elle Atzine has also launched ”Atzine Some high-end fashion brands, such as “go-to” place for consumers to check mobile,” an application for Android-based DKNY in Korea, have made membership out luxury products before visiting smartphones, such as Samsung’s Galaxy. more appealing by holding invitation-only land-based stores. Elle Atzine provides functions, such as parties and limited- a shopping environment for potential Korea’s robust economy provides a edition sales events. customers that approximates the in-store different set of challenges than luxury experience by offering a 3D showroom. players are accustomed to in many Ensure consistent multichannel Leading luxury brands such as Gucci, advanced markets. By addressing the management: , and —26 as of this needs of Korea’s new luxury consumers Following the lead of department stores, writing—have opened virtual stores within and adapting to the new channel realities, luxury labels also need the capability to Elle Atzine, and over 100 fashion and the potential rewards awaiting astute coordinate a variety of sales channels, cosmetics brands are planning to enter luxur y players are rich, indeed. from operating proprietary boutiques (including new premium outlet locations) to selling online. For the latter, investing in a good Korean language-friendly website is imperative, but not sufficient. Especially in the luxury sector, looks and details matter—photos must be of excellent quality and the product descriptions need to be well-written. The website is increasingly becoming the first place shoppers look to get more information about products and brands, so the same degree of thought and precision that goes into developing magazine advertisements

Brian Salsberg is a partner in McKinsey’s office and leads the Japan Consumer & Retail and Consumer & Shopper Insights Practices. Mar tine Jae-Eun Shin is a consultant in the Seoul office. Acknowledgements: the authors would like to thank Jihye Lee for her contributions to this article. “South Korea: Living it up in luxury” is a publication of McKinsey & Company’s Consumer and Shopper Insights Practice. Please visit us at http://csia.mckinsey.com. For more information, please contact us at [email protected].

1 “Women in their 20s and 30s are the main contributors for growth in the luxury market.” Hankyung Economy, Oct. 23, 2009. 2 Industry executive interview.