The CIA World Factbook reports that throughout 2012 the South Korean economy experienced sluggish growth because of market slowdowns in the United States, China, and the Eurozone. The incoming administration in 2013 is likely to face the challenges of balancing heavy reliance on exports with developing domestic-oriented sectors, such as services. The South Korean economy's long term challenges include a rapidly aging population, inflexible labor market, and heavy reliance on exports - which comprise half of Gross Domestic Product, (GDP).
South Korea’s more than 48.8 million citizens reside in an area slightly larger than Indiana. It is the world’s 12th largest single state economy, with GDP of US$1.6 trillion on a Purchasing Power Parity (PPP) basis in 2012. Per capita GDP in South Korea is estimated at US$32,400 in 2012 on a PPP basis, with a real growth rate of 2.7%. The International Monetary Fund, (IMF) estimates the GDP of South Korea to increase to 3.2% in 2013, and settle around 4% for the next few years.
According to Euromonitor, Korean median age in 2012 was 39.1 years, up from 21.8 years in 1980. Perhaps the most important population shift which is occurring is a large increase in the number of those over 60 years of age. This group will account for nearly a quarter of total population by 2020. Long-run projections by the United Nations suggest that South Korea could have one of the oldest populations of any country in the world by 2050.
The fiscal impact of ageing will be great in South Korea given the rapid pace of demographic change. The share of the population over age 65 years is projected to rise from 9.2% to 11.6% between 2006 and 2015, a substantially faster pace than in other industrialized countries. If participation rates remain stable, the absolute size of the labor force will begin to decline by 2018. With its labor force contracting and its low-skilled manufacturing base being eroded, South Korea could face a fall in the potential growth rate without remedial action. Improvements in the working environment for females are essential in view of the rapidly aging population and looming labor shortages.
Post reports that South Korea’s imports of agricultural and food products from the world for 2012 were forecast to total US$30 billion, down 2.5% from the previous year. Imports from the United States were also forecast to see a decline mainly due to slow down of local processing industry. South Korea remains the fifth largest market for U.S. agricultural products. In 2012 U.S. exports of agricultural products declined 13% to US$6 billion. Of that amount over 46% or US$2.7 billion were of the consumer oriented variety, which represented an increase of 3% from the prior year. Top consumer ready exports to South Korea in 2012 included red meats, fresh fruit, dairy products, tree nuts, processed fruits and vegetables, poultry meat, pet foods and snack foods.
Current consumption trends in South Korea reflect important on-going socio-economic changes, which include retirement of baby boomers, more women in the workforce, downsizing of the family, well-traveled younger generation, urbanization, information technology, and inflation pressure. As a result, products and businesses that offer good value, high quality, health or nutritional benefits, new taste, and convenience are showing a strong growth in the market. The Korea-United States Free Trade Agreement (KORUS FTA), implemented in March 2012, coupled with anticipated recovery trend of the Korean economy should generate greater export opportunities for American suppliers in the coming year.
On-going trade liberalization is likely to heighten competition in the Korean market for American products in general. Since the establishment of the “FTA Roadmap” in 2003, the South Korea has actively engaged in FTA negotiations with over 50 countries. So far, FTA’s with Chile, Singapore, EFTA, ASEAN, India and Peru have entered into force and the Korea-EU FTA has been provisionally applied since July 1, 2011. South Korea is currently negotiating FTA’s with Gulf Cooperation Council, Australia, New Zealand, Colombia, Canada, Turkey, Russia, China, Japan and Mexico. Many of these countries compete directly with the U.S. in the Korean food and agricultural markets.
According to Euromonitor, retail sales in the packaged food market in South Korea had been estimated to reach US$22.5 billion in 2012. That represents a growth rate of 16% or US$3.1 billion since 2008. South Korea is the 5th largest packaged food market in the Asia Pacific region. By the year 2016, the retail sales in the packaged food market in Korea is expected to grow 4.5% to US$23.5 billion, or about US$1 billion. High growth items in the forecast include snack bars, meal replacement, pasta, dairy products, ready meals, soup, oils and fats and canned/preserved food.
Modern format, large-scale retail businesses such as hypermarket chains, grocery supermarket chains, convenience store chains, and on-line retailers have grown rapidly at the expense of traditional retail outlets of street markets and family-operated small retailers over the years. Expansion of these new retail channels, coupled with introduction of new information technologies, has significantly changed the way Korean consumers purchase daily necessities, including food.
Retail market sales in South Korea totaled approximately US$240 billion in 2010, up 9.7% from the previous year. Overall, the growth of the Korean retail sector has been limited by the global economic crisis since mid-2008. However, the economic slow-down took a bigger toll on traditional retailers, while providing an opportunity for modern format, large-scale players to further expand their market shares.
Hypermarkets, armed with aggressive pricing, one-stop shopping convenience, and efficient product assortment have stepped up to the largest retail force in South Korea in the last decade, department stores. Hypermarkets accounted for a 12.2% of overall retail sector sales, or US$31 billion in 2010. Hypermarkets are likely to maintain a strong performance in the coming years as ongoing renovation of old metropolitan areas as well as development of new residential areas across the country will provide space for a significant number of new stores.
On-line retailers, including internet shopping, TV home-shopping, and catalog shopping businesses, have stepped up to the second largest retail force in South Korea since 2007. Sales of on-line retailers grew 15.5% in 2010 to take 11.4% or US28.8 billion of retail sector sales. On-line retailers, internet shopping malls in particular, are expected to remain the fastest growing retail channel in Korea for years to come as more and more consumers are attracted to this innovative shopping tool for convenience and price. Korea has the right mix of socio-economic environment, in particular high population density and high affinity toward new information technology that fosters strong growth of on-line retail business.
Department stores and grocery supermarkets maintained a solid growth between 2007 and 2010. In particular, department stores were one of the most successful retail channels under the recent economic slow-down. Leading players in the segment have successfully realigned their market positions by up scaling store layouts and luxury product offerings, which reflected the evolving taste of their target consumers.
Grocery supermarkets have found a new growth momentum in recent years in ‘Super Supermarket (SSM)’ business. SSM is grocery supermarket that targets congested metropolitan residential areas where larger scale hypermarket stores cannot infiltrate. Despite the protest by independent small grocers, leading players are likely to open more SSM stores in the coming years.
Convenience stores also showed an outstanding growth between 2007 and 2010, reflecting busier lifestyle of Korean consumers. Although convenience stores offer very limited product assortment by nature, it is the most wide spread retail channel in South Korea today (the number of outlets under the top seven franchises were over 16,000 at the end of 2011). Although on a decline, traditional retailers such as street markets and family-operated small grocers still account for a significant retail force particularly in areas where modern format, large-scale retailers have yet to penetrate.
Rapid expansion of modern format, large-scale retailers has heightened the competition in the sector, resulting in mergers and acquisitions (M&A) not only of small, regional retailers by larger national retailers but also consolidations among large retailers. For example, Shinsegae E Mart, the leading player in the hypermarket segment, acquired 23 grocery supermarkets from NS Homeshopping in July 2012. Industry analysts forecast that consolidation trend will continue in the industry as leading players strive to achieve dominant control of the market.
Part of the force behind consolidation trend is leading players’ strategy to achieve a 'horizontally integrated' retail force that encompasses the whole spectrum of retail business. For example, both Shinsegae Group and Lotte Group, the top two retail conglomerates in Korea, now operate almost all available formats of retail business from convenience stores to grocery supermarkets, department stores, outlet malls, hypermarkets, and on-line shopping businesses. Expanding into foreign markets has been another area that leading South Korean retailers have also invested heavily in recent years in an effort to find new growth opportunity. For example, Lotte Mart, which currently operates 97 hypermarket stores in South Korea, has increased its stores in foreign markets to 132 as of September 2012, including 100 in China.
Korean retailers in general rely heavily on independent importers for imported food and agricultural products. Although leading players are currently seeking ways to increase direct importing for lower cost and improved product assortment, their attention is mainly targeted on a limited number of large volume products such as fresh oranges and walnuts because of lack of experience and expertise. On the other hand, retailers of international origin, Costco Wholesale Korea in particular, procure a larger part of the imported products that they sell directly through their international sourcing networks. Leading retailers maintain heavy efforts to expand private label brand (PB) business on both local and imported food and agricultural products for higher profit and customer loyalty.
Growth of modern retail business in South Korea has coincided with development of modern large-scale logistics service industry. Leading retailers are equipped with temperature controlled distribution network of trucks and warehouses that cover the entire market. On the other hand, small to medium size retailers in general rely on third party logistics service providers. The logistics service industry is likely to continue a rapid growth in the coming years particularly due to a rapid rise in demand for home delivery service, which is now widely offered not only by on-line retailers but also by conventional retail stores.
Food Service Sector:
Changes in lifestyle and dietary culture coupled with increased income level have stimulated a rapid growth of the food service industry in South Korea. Monthly per capita household spending on eating outside of the home has more than doubled in the last ten years, reaching nearly US$70 dollars in 2010, up 2.3% from the previous year. In other words, each household spent 48.1% of its food and beverage expenditure, or 12.4% of total consumption expenditure on eating outside the home. It is expected that spending on eating outside the home will remain strong in the coming years as Korean consumers face ever busier lifestyle with increased number of dual-income families and single-member households.
According to the South Korean government statistics, the restaurant and bar industry earned US$61.7 billion in cash register sales in 2010, down 4.5% from the previous year. This means that Korean consumer’s spending on eating outside the home is being diverted from conventional restaurant industry to alternative sources. In particular grocery supermarkets and convenience stores are increasing sales of take-out meals and Home Meal Replacement (HMR) products backed by strong consumer demand for affordable meal options under the sluggish economy.
The sector had been largely composed of small-scale, family-operated businesses, as evidenced by the fact that 90% of restaurants and bars in South Korea were small businesses that hired less than five employees as of 2010. In addition, 41% of restaurants and bars made less than US$50,000 of annual cash-register sales. However, market analysts point out that the sector has finally reached a saturation point in terms of the total number of restaurants and bars, as indicated by the stagnant growth of the number for nearly a decade and the fact there is now 1 restaurant for every 100 Koreans.
Restructuring of the sector, mainly fueled by the entry of large corporations into the food service business, has led to a rapid growth of restaurants and bars under the umbrella of large-scale management at the expense of small-scale, independent establishments over the last ten years. Streamlining of the supply chain is another area in which the sector has made a significant progress over the years along with the growth of the large-scale restaurant business. Large-scale broad line distributors, which offer lower cost and more efficient service, should show a strong growth in the future.
Recently, the social initiative of protecting small businesses from large corporations has gathered many supporting voices. The policy makers are under pressure to consider introducing regulations that restrict expansion of large corporations in the food service industry once again. However, despite the anti-corporation sentiment, restructuring force in the sector that favors large-scale business is likely to remain strong in years to come because economy-of-scale is a vital tool for the sector to meet the taste of today’s Korean consumers at an affordable price.
Marketers point out that changes in consumption trends in South Korea are becoming more frequent and shorter-spanned. It is not surprising to observe that many of the newly open restaurants in Korea take totally different approaches from existing stores next door in terms of recipes, services, and interior design. Consequently, food service business today requires heavier input of cash investment and management skills, and bigger part of the sector is expected to join the large-scale operation to remain competitive and efficient.
The evolvement of the food service sector is generating new opportunities for imported products that offer new tastes, healthy recipes, added-value, stable supply, and specifications catered to the food service industry use. These are all characteristics where U.S. products are competitive. The outlook for U.S. exports to the Korean food service sector is excellent for beef, pork, chicken meat, processed turkey meat, ham and sausage, premium seafood, frozen vegetables, fresh and processed fruits, tree nuts, cheese and processed dairy products, fruit juices and other non-alcohol beverages, wine and other alcohol beverages, sauces and condiments, coffee, bakery flour and fillings. In addition, on-going trade liberalization, including the Korea-United States Free Trade Agreement (KORUS FTA) which entered into force on March 15, 2012 in particular, will help expand the market for various American products in South Korea.
South Korea maintains a strong processing industry that manufactures a wide variety of processed agricultural and food products. There were over 4,000 agriculture/food processing businesses in South Korea, which generated an estimate of nearly US$60 billion revenue in 2011, up 5.5% from the previous year. It is notable that the local processing industry is led by a small number of large-scale players, as indicated by the fact that only 1% of the 4,169 processors had over 300 employees, while 81% have less than 50.
Many of the South Korean conglomerate business groups have agriculture/food processing business arms, and more of the Korean processors are trying to expand their sales to foreign markets. The South Korean government has also been providing the industry with a financial and promotional support under “globalization of Korean cuisine” campaign. South Korea is not self-sufficient in producing a number of key major grains however. The local processing industry relies heavily on imported products for raw materials, intermediate ingredients, and additives because of limited local resources.
As a result, South Korea is an outstanding buyer for almost all types of agricultural products for processing use from basic commodities such as corn, soybeans, wheat to intermediate ingredients such as hides, oils, whey powder, and fruit juice concentrate to food additives such as flavors, coloring agents, and preservatives. Industrial output is led by manufacture of processed meat, fish and seafood, processed fruits and vegetables, fats and oils, dairy and ice cream, grain processing and starch, and both alcoholic and non-alcoholic beverages.
Some Korean food processors like Nong Shim, CJ, Lotte Confectionery, Daelim Corp. and Sam Yang Corp. have investments in China, USA, Russia, Vietnam and Chile, etc. Some of these companies sell their final products in the foreign countries and also export them to other countries as well as to Korea. Some U.S. companies like Baskin Robbins Korea, Agribrands Purina, Coca Cola, and Kellogg have invested in South Korea to produce food, feed, ice cream and soda products in Korea as sole investors and/or joint ventures.
Best Product Prospects:
The outlook for U.S. exports is excellent for prepared and preserved red meats, processed poultry products, processed vegetables, fresh fruits, nuts, eggs and products, juices and non-alcoholic beverages, alcoholic beverages, sauces and condiments, cooking oils, organic foods, coffee, frozen desserts, bakery ingredients, and frozen prepared products. In addition the KORUS, which will create new opportunities for those products which are currently under restrictive import barriers in the form of tariffs, volume quotas and unscientific food safety regulations.