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Marketing Korean Cosmetics in Italy: a Feasibility Study of Market Entry

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Marketing Korean Cosmetics in Italy: a Feasibility Study of Market Entry UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS MASTER’S THESIS MARKETING KOREAN COSMETICS IN ITALY: A FEASIBILITY STUDY OF MARKET ENTRY Ljubljana, December 2015 COK MAJA AUTHORSHIP STATEMENT The undersigned Maja COK, a student at the University of Ljubljana, Faculty of Economics, (hereafter: FELU), declare that I am the author of the master’s thesis entitled Marketing Korean cosmetics: a feasibility study of market entry, written under supervision of assistant professor MatevžRašković , PhD. In accordance with the Copyright and Related Rights Act (Official Gazette of the Republic of Slovenia, Nr. 21/1995 with changes and amendments) I allow the text of my master’s thesis to be published on the FELU website. I further declare that: the text of my master’s thesis to be based on the results of my own research; the text of my master’s thesis to be language-edited and technically in adherence with the FELU’s Technical Guidelines for Written Works which means that I o cited and / or quoted works and opinions of other authors in my master’s thesis in accordance with the FELU’s Technical Guidelines for Written Works and o obtained (and referred to in my master’s thesis) all the necessary permits to use the works of other authors which are entirely (in written or graphical form) used in my text; to be aware of the fact that plagiarism (in written or graphical form) is a criminal offense and can be prosecuted in accordance with the Criminal Code (Official Gazette of the Republic of Slovenia, Nr. 55/2008 with changes and amendments); to be aware of the consequences of a proven plagiarism charge based on the submitted bachelor thesis / master’s thesis / doctoral dissertation could have for my status at the FELU in accordance with the relevant FELU Rules on Master’s Thesis. Ljubljana, __________________ Author’s signature: ________________________ ii TABLE OF CONTENTS INTRODUCTION 1 UNDERSTANDING THE CONSUMER DECISION-MAKING PROCESS………………………………………………………………………6 1.1.1 General consumer decision-making factors……………………………………....6 1.1.2 Consumer decision-making factors related to cosmetics…………………………9 1.2 Customer ethnocentrism and animosity……………………………………………11 1.3 The country of origin (coo) effect………………………………………………….16 2 RISE OF KOREA…………………………………………………………..20 2.2 The Korean economy today……………………………..……………………….....20 2.3 Hallyu: the Korean wave…………………………………………………………...22 2.3.1 Popular culture………………………………….………………………..….24 2.3.2 Tourism and exports……………………………………………..……..……25 2.3.3 Cosmetics…………………………………………………………….……..……26 3 THE COSMETICS MARKET IN SOUTH KOREA…………………….26 3.1 History of Korean cosmetics…….…….…….…….…….…….….…….………….27 3.2 Attitudes to plastic surgery…….…….…….…….…….…….…….…….…….…...28 3.3 Industry analysis with Porter’s 5 forces analysis……….…….…….…….…….….30 3.3.1 Rivalry among existing competitors…….…….…….…….…….…….…….30 3.3.2 Threat of new entry…….…….…….…….…….…….…….…….…….……31 3.3.3 Threat of substitutes…….…….…….…….…….…….…….…….…….…...31 3.3.4 Bargaining power of buyers…….…….…….…….…….…….…….……….31 3.3.5 Bargaining power of suppliers…….…….…….…….…….…….…….…….32 3.4 Cosmetic market trends…….…….…….…….…….…….…….…….…….………32 3.5 Marketing strategies…….…….…….…….…….…….…….…….…….…….……34 3.5.1 Market segmentation…….…….…….…….…….…….…….…….………...34 3.5.2 Positioning…….…….…….…….…….…….…….…….…….…….……….34 3.5.3 Marketing mix…….…….…….…….…….…….…….…….…….…….…...35 3.5.3.1 Price…….…….…….…….…….…….…….…….…….…….…….…35 3.5.3.2 Place…….…….…….…….…….…….…….…….…….…….………35 3.5.3.3 Product…….…….…….…….…….…….…….…….…….…….…….36 3.5.3.4 Promotion…….…….…….…….…….…….…….…….…….…….…38 3.6 Exports…….…….…….…….…….…….…….…….…….…….…….…….……...40 4 COSMETICS IN ITALY……..……..……..……..……..……..……..…….41 4.1 Market size and product trends…..…..…..…..…..…..…..…..…..…..…..…..……..41 4.2 Market breakdown and segmentation…..…..…..…..…..…..…..…..…..…..…..…..42 4.3 Industry analysis with Porter’s 5 forces analysis……..………….…..…..…..…….43 i 4.3.1 Rivalry among existing competitors…..…..…..…..…..…..…..…..…..……..44 4.3.2 Threat of new entry…..…..…..…..…..…..…..…..…..…..…..…..…..…..….44 4.3.3 Threat of substitutes…..…..…..…..…..…..…..…..…..…..…..…..…..……..45 4.3.4 Bargaining power of buyers…..…..…..…..…..…..…..…..…..…..…..……..45 4.3.5 Bargaining power of suppliers…..…..…..…..…..…..…..…..…..…..…..…..45 4.4 Marketing…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..46 4.4.1 Product…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..46 4.4.2 Price…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..……..46 4.4.3 Place…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..……..47 4.4.4 Promotion…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..…..……48 5 MALE COSMETICS……………………………………………………….49 6 BRAND COMPARISONS…………………………………………………………………50 6.1 The AmorePacific company….….….….….….….….….….….….….….….….…..51 6.1.1 Company background….….….….….….….….….….….….….….….….…..51 6.1.2 Popular brands….….….….….….….….….….….….….….….….….….…...53 6.2 Brand comparison….….….….….….….….….….….….….….….….….….….…...53 6.2.1 Low price segment….….….….….….….….….….….….….….….….……..53 6.2.2 Middle price segment….….….….….….….….….….….….….….….….…..54 6.2.3 High price segment….….….….….….….….….….….….….….….….….….55 7 EMPIRICAL STUDY….….….….….….….….….….….….….….….….…57 7.1 Data and methodology….….….….….….….…….….….….….….….……………57 7.1.1 Data collection and sampling….….….….….….….….…….….….…….…..57 7.1.2 Pre-test of the questionnaire….….….….….….….….….…………..….……57 7.1.3 Data analysis….….….….….….….….….….….….….…….….….….….…..58 7.1.3.1 Sample characteristics….….….….….….….….….….….….….….………58 7.2 Identification of key research questions….….….….….….….….….…..….............59 7.3 Formulation of research hypotheses….….….….….….….….….….………..….….59 7.4 Hypotheses testing….….….….….….….….….….…..….….………..….….….…..61 7.4.1 Reliability analysis and variable reduction….….….…...…..….….….….….61 7.4.2 Testing results….….….….….….….….….….….….….…..….….….….…...61 7.5 Interpretation of the results….….….….….….….….….…..….….….….…...……..62 7.5.1 Limitations of the study….….….….….….….….….…..….….….….….…...64 7.5.2 Theoretical implications and contributions….….….….….….….….….……65 7.5.3 Managerial implications and future research….….….….….….….….….….65 7.5.3.1 Suggested mode of entry….….….….….….….….….….….….….…..65 7.5.3.2 Market segmentation….….….….….….….….….….….….….….…...66 7.5.3.3 Marketing mix….….….….….….….….….….….….….….….….…...66 CONCLUSION….….….….….….….….….….….….….….….….….….….….….….…69 ii REFERENCE LIST….….….….….….….….….….….….….….….….….….….….….70 LIST OF FIGURES Figure 1. Steps in the consumer decision-making process….….….….….….….….….………5 Figure 2. Porter's five forces assessment for South Korean cosmetics market………………30 Figure 3. Structure of sales of cosmetics by distribution channels in South Korea…………..36 Figure 4. Product segmentation of the cosmetic industry in South Korea……………………37 Figure 5. Structure of exports of South Korean cosmetics by destination country..................40 Figure 6. Product segmentation of the Italian cosmetic market….….….….….….….….……43 Figure 7. Summary of Porter's 5 forces for Italy….….….….….….….….….….….….….….44 Figure 8. Sales structure of cosmetics by distribution channel in the Italian market….….….47 Figure 9. Results from questionnaire on important aspects when purchasing cosmetics (5-point ordinal scale).….….….….….….….….….….….….….….….….….….….….….….64 LIST OF TABLES Table 1. Brief economic comparison of South Korea and Italy……………………………..20 Table 2. Low-priced brand comparison of Korean and Italian brands………………………54 Table 3. Middle-priced brand comparison of Korean and Italian brands……………………55 Table 4. High-priced brand comparison of Korean and Italian brands………………………56 Table 5. Sample characteristics overview……………………………………………………59 Table 6. Hypotheses testing results…………………………………………………………..62 iii iv INTRODUCTION Korea is among the world’s most innovative and successful countries in the cosmetic industry since the so-called Hallyu (Korean wave) phenomenon took off and Korea quickly became a global player in the skincare industry (Kim, 2014). Korean cosmetics are indeed widely known and appreciated worldwide with exports to 129 countries reaching $1.45 billion in 2014, according to the Korean Customs Service (Koreanet, 2014). Today, famous international giants, such as Target, Urban Outfitter and Sephora are introducing them in their stores as hit products (Shin, 2014). Despite the growth of Korean skincare products already being substantial in the last 15 years, with a growth of 1500 per cent (Kim, 2014), their popularity is expected to grow further over the next years (Kim, 2014). Korean cosmetics do not only possess the advantage of being highly innovative, thanks to the extensive R&D investments (Kang, 2012), but also because of the high amount of natural and refined ingredients, appealing not only to locals but also for international customers. Europe though has little to no knowledge about Korean cosmetic excellence, with internet stores being one of the few sources offering them to European consumers. AmorePacific, the biggest and strongest company in the Korean cosmetic industry, has already tried to penetrate the European market once in 1990, but very unsuccessfully (Ernst & Young, n.d.). The reason for their failure was attributed mainly to the negative country of origin (hereinafter COO) effect European consumers had towards South Korea at that time. Korean cosmetic companies have since then been very careful about extending their exports to Europe. In fact, no Korean company attempted to open a physical store in Europe before 2015. In this
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