CSIAugust Insights 2010 Flash June 2010 McKinsey Asia Consumer and Shopper Insights South Korea: Living it up in luxury Special Report: 2010 Luxury Goods Survey McKinsey & Company South Korea Special Report: 2010 Luxury Goods 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 brands 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 clothing 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, France, 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). Watches 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 consumption 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 status symbol 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 shopping 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. Gucci 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 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.