Korea: Retail Channels Korea: Retail Channels Page 1 of 14 Yu Jin Jo 09/2013 ID:PRPSLB5BA91E43 Summary For the past couple of years, Korea has experienced slow-growing economy coupled with demographic changes, and Korea’s retail ecosystem is beginning to diversify itself to correspond to that change. Consumers, unlike the past, eagerly seek out ‘value’ in their purchasing decision and the notion that a high priced items equals high quality has now turned into a newly emerged term called ‘value consumption’; • For instance, while a consumer may shop at department stores to buy luxurious items such as a purse and shoes, his or her next shopping destination would be cosmetic road shops in town that offer high quality products relative to price, and some of these brands aggressively market themselves as great substitutes for high-end brands with similar packaging and concepts. This tendency was further strengthened since 2008 when the world economy was severely hit by recession. • As the recent recession continues to trigger the notion toward ‘value consumption’, outlets and warehouse-type store chains are growing faster than department stores and regular discount store chains. Lotte Mart, one of the biggest discount store chain retailers, has launched the first membership-based wholesale chain ‘Vic’ (Value in Customer) in June 2012 with the aim of becoming a contender for ‘Costco’, the U.S. based membership operating nine stores nationwide. E-Mart has been also operating a non-membership based wholesale chain ‘Traders’ since 2010. Additionally, the rinsing consumer power of those who live by themselves has become a global trend and the number of single-person households in Korea is mushrooming as well; • According to Statistics Korea, there were 4.03 million single-person homes in Korea as of 2010, accounting for 23 percent of the total 17.33 million household. In 1980, single households accounted for only 4.8 percent, rising to 9 percent in 1990 and 15 percent in 2000. The ratio of single-person homes has grown five-fold over the last 30 years and doubled over the past two decades. • Retail players offer a variety of products tailored for one-member households, ranging from vegetables with small size wrappings to so-called single electronics. Increasing number of drug stores is one great example on how Korean retailers are responding to this new demographic change. • As part of Korea’s efforts to protect “mom-and-pop” stores, the Korean government imposed a rule closing big-box discount chains on Sunday. Since these large store chains are under such influence, convenient stores, on the contrary, continues to grow even faster than before and is adequately responding to the growing needs of single-person households. Let us help you export. export.gov The U.S. Commercial Service — Your global business partner. 800-USA-TRADE Korea: Retail Channels Page 2 of 14 Lastly, CS Korea would like to note that a growing number of Korean consumers began to purchase U.S. products directly from its website or other retail mediums (i.e. Bluefly, Neiman Marcus, Nordstrom, Bloomingdales and etc.) by utilizing delivery agency in the U.S.; • Consumers first compare the retail price point in Korea with that of the U.S., and if the combined price with its shipping cost and commission fee is still relatively lower than buying it domestically, consumers rather choose to endure 2-3 week shipping period to save cost. • This trend among so-called ‘the wired generations’ is ultimately reflecting on the new shift of Korean consumers’ perception toward ‘value consumption’. More and more, we are witnessing consumers surpassing our prediction and potentially posing some threats to traditional retail ecosystem that fails to adapt to such change. • For example, one U.S. fashion company recently decided to lower its retail price up to 40%. The company has been publicly criticized for its ‘high-pricing policy’ to upgrade its image in Korea from ‘casual’ to ‘high-end’. Korean consumers perceived such attempt as being overly manipulative and started to purchase parallel import items or directly buying from the U.S websites against this policy. In this report, we are going to examine how consumers’ change of perception and its demographic shift are affecting what we often refer to as Korea’s fast-changing retail ecosystem. Market Demand Showrooming – ‘Showrooming’ practice continues to gain momentum in Korea’s retail environment. The term ‘Showrooming’ refers to a free-riding behavior where customers evaluate product at brick-and-mortar stores to identify their best fit product, but end up buying this product not at the store but at a competing online retailer to take advantage of lower prices. The proliferation of mobile devices has made it so easy for consumers, mostly in their 20s and 30s, to purchase items that satisfies his or her expectation to achieve the another booming concept, ‘value consumption’. This of course is posing a major threat to U.S. companies whose distribution channels in Korea are highly dependent on off-line retailers. Therefore, it is imperative that companies maintain consistent pricing across all channels, but in case of U.S. companies, the better term should be ‘all channels across all countries’. Recently, a lot of Korean consumers are starting to buy U.S. products directly from its U.S. website through buying/or delivery service providers operating warehouses across the states. If the U.S. retail price is too much lower than that of Korea, consumers would rather order online and wait 2 weeks for the product to be delivered at great inconvenience. Some U.S. companies often try to leverage its brand image up to an upper level in international markets but Korean consumers will be counting on U.S. companies to offer them a fair deal as they are always ready to find someone else who will. Rental Service – Traditionally, Korean consumers have been long known for its strong obsessiveness towards the concept of ‘having’. But the conventional idea of possessing is now being redefined as more and more consumers are now inclined to enjoy more by not necessarily having or buying. According to Korea’s Rental Association, the number of rental service providers in Korea is about 25,000 (as of December 2012) and the size of market excluding rental cars has grown rapidly from 2.8 billion (2006) to 9.5 billion (2011). As rental businesses begin to boom, the range of products/or services have become gradually diversified, ranging from home appliances including TVs, refrigerators and laundry washing machines to laptops, PCs, mattresses, massaging chairs and cars. The scope of rental services are being expanded to other categories as well, such as luxury items such as high-priced imported cars and leisure lifestyle products such as camping equipment and high-end golf clubs. This significant surge in demand for rental services seemed to have been boosted by Korean consumers’ change of perception towards the ownership as well as the continuing world economy downturn. But the short product life cycle with the recent technological development is also attributable to this change, as consumers nowadays easily become impatient with long-term ownership of a product. Let us help you export. export.gov The U.S. Commercial Service — Your global business partner. 800-USA-TRADE Korea: Retail Channels Page 3 of 14 Do It Yourself (DIY) – In 2012, the size of products/furnishings purchased for the interior of homes in Korea was USD 2 billion. The DIY market was about USD 95 million (of that USD 2billion), which was a 25% increase from 2011. The number of DIY woodcraft stores grew at an extremely fast rate. According to a report by LG Research Institute (LGRI) there was an astounding increase of some 1,500 DIY woodcraft stores nationwide. LGRI noted that 20 percent of people in their 20s and 30s are now beginning to make their own small-sized DIY furniture. When the DIY market first emerged in early 2000, it was primarily targeted for men as it was thought to require a certain degree of physical strength. However, 21% percent of women in this LGRI survey showed interest in DIY products whereas only 14% of males demonstrated interest. This recent LGRI survey shows that the ‘trend setters’ for the DIY market in Korea are housewives who spend more time at home than their spouses. According to the OECD, Koreans work 2,193 hours a year. Average hours worked among other OECD countries is 1,750. However, it is anticipated that the number of hours worked will steadily go down as Korean consumers focus and shift more on leisure, spiritual and hobby-oriented aspects of their lives. Market Data Sales figure on different retail channels are listed below. Department Stores Over the last three years, department stores have steadily grown at a consistent double-digit growth rates, but in 2012, it significantly decreased to 4.9% even with four additional locations being newly launched that same year. Traditionally, department stores in Korea have never stopped expanding the number of its stores even when the world recession severely damaged domestic economy in 2008. This year, however, department stores are not planning to open any additional location but instead will be solely geared towards its outlet store expansion. Experts said that slow-growing world economy is the major factor that contributes to an overall decrease of consumer spending and in fact the sales of luxury items is significantly going down among other product categories. The Total Sales and Number of Department Stores in Korea by Year Unit: US$ Billion Year 2006 2007 2008 2009 2010 2011 Number of Stores 83 84 82 83 93 93 Sales 16.0 16.5 17.2 19.0 21.1 23.6 (US$1=KW1,150) Source: Statistics Korea Key Department Stores in Korea Unit: US$ Million, % Number of Sales Market Ownership Company Stores (as of in Share in Website 2013) 2011 2011 Lotte Dept.