South Korea Country Profile

Market Overview:

Euromonitor reports that the South Korean (hereinafter referred to as Korea) economy continued to grow at a moderate pace in 2016. Faced with a number of constraints, the economy is performing sluggishly. Real Gross Domestic Product (real GDP) rose by 2.7% in 2016, after gains of 2.6% in 2015. The forecast is for growth of 2.4% in 2017. Modest gains in consumer spending and a fiscal stimulus unveiled in October 2016 will drive the economy. The latter, however, will not show results before later in 2017. Exports make up almost two-fifths of GDP but are performing poorly due to the slowdown in China. Rapid population ageing is another constraint. Annual rates of growth in real GDP should average about 2.6% during the remainder of this decade.

Concerned about external conditions, many firms are hesitant to boost investment. The slump in exports weighs on fixed investment. Business confidence has also been weak throughout most of 2016. Strikes at major carmakers, ongoing corporate restructurings and Samsung’s recent product recall are other problems. Private final consumption (in real terms) rose by 2.4% in 2015 and growth of 2.3% is expected in 2016. Consumer spending is underpinned by authorities’ fiscal and monetary stimulus measures. To boost consumption, the government also plans to offer tax breaks to those who scrap old diesel cars and buy new vehicles. A gradual recovery in trade should boost exports and investment.

In addition, all major Korean ship builders are in serious financial trouble and are pressured to lay off large numbers of workers. Shipbuilders are struggling with debt thanks to a deadly combination of a trade slowdown, a glut of vessels and low freight rates hitting the global shipping industry. Korea’s top ocean shipper Hanjin, the world’s 7th largest, was put under court receivership in September 2016 for heavy debts and is in the process of liquidation. Heavy household debts, which saw a steep increase of 113% between 2008 - 2016 and a record high level, also puts pressure on the Korean economy. On top of this, the leadership of the Korean government, which has lost much of its momentum after a recent corruption/influence-peddling scandal involving the president, is likely to remain weak until the new presidential election scheduled in late 2017.

Korea has concluded free-trade agreements (FTAs) with at least 45 countries and expects negotiations with China and Vietnam to be concluded soon. If all these agreements come into effect, Korea will be engaged in free trade with economies representing more than 70% of the global economy. However, the country has been excluded from becoming a founding member of the Trans-Pacific Partnership (TPP) and fears that the new trade pact will give rival exporters an advantage in key markets such as Japan.

An added problem is that Korea today has one of the lowest birth rates in the world. Based on present trends, the working age population could peak before 2020 and Korea will become one of the oldest countries in the OECD by 2050. Population ageing will cut the potential rate of growth to less than 3% per year.

USDA’s Agricultural Trade Office, ATO, in Seoul, hereinafter referred to as “Post” reports that imports of American food and agricultural products into Korea in 2016 through September totaled US$5.1 billion, down 11% from the previous year mainly due to reduced demand for basic commodities and intermediate products in the local processed food and feed industry under an extended slowdown of the Korean economy. A strong U.S. dollar and increased competition from export-oriented competitors have also eroded market share of American products in Korea.

However, despite the challenging market environment, imports of consumer-oriented American products are forecast to remain strong, which reflects Korean consumers’ increased demand for better value, quality and diversity. As a result, the United States should remain the leading agricultural exporter to Korea with over 21% market share and Korea should remain the fifth largest export market in the world for American agriculture in 2017. The Korea-United States Free Trade Agreement (KORUS), implemented in March 2012, coupled with the anticipated recovery of the Korean economy, is expected to generate greater opportunities for American products in Korea in the coming years.

Imports of American food and agricultural products into Korea in 2016 ended in a growth mode and totaled US$6.2 billion, an increase of 3% from the previous year.  U.S. exports of consumer-oriented American products into Korea amounted to US$3.4 billion in 2016, the 2nd highest total on record and one which reflects Korean consumers’ increased demand for better value, quality and diversified taste. That amount reflected 55% of the agricultural and total and is also the 5th highest from the U.S.  Korea is also a top market for U.S. processed food exports, which totaled nearly US$1.8 billion in 2016 and remained steady. Korea is the 4th largest market for U.S. processed foods. Top U.S. exports of processed foods in 2016 included food preparations, prepared/preserved seafood, processed/prepared dairy products, processed vegetables and pulses, non-alcoholic beverages, fats and oils and chocolate and confectionery. 

Korea by nature relies heavily on imports to fulfill its food and agricultural needs. Korea is about the size of the state of Indiana and over 70% of its area is mountainous terrain, unsuitable for commercial farming. Furthermore, a majority of the limited farm land is exclusively dedicated to rice production. Its population of 50 million makes Korea the third most densely populated country in the world among countries with over 20 million in population. What is even more striking is that over 90% of Koreans live in urban areas which account for 17% of the land space.  In addition, over 50% of the population lives within or in the direct vicinity of the capital city, Seoul. The agricultural sector, which accounts for only 2.3% of the Korean GDP as of 2015, is expected to remain a minor contributor to the Korean economy.

Food consumption trends in Korea reflect on-going socio-economic shifts, which includes rise of affluent consumer group, retirement of baby boomers, more women in the workforce, downsizing of the family, well-traveled/educated young generation, urbanization, and adoption of new information technology. As a result, products and businesses that offer good value, high quality, health/nutritional benefits, new taste, and convenience are showing strong growth in the market. 

The Korean market is not without its specific challenges. These include a consumer preference for locally made products which are seen as superior in quality and safety over imports. The high cost of shipping, documentation, inspection and labeling deteriorates price competitiveness of imported products. The ongoing trend of a stronger U.S. dollar makes American products more expensive in Korea. American products face elevated competition in Korea from both old and new competitors who are deploying aggressive export promotions targeting Korea. Imported products are subject to complicated labeling and food safety standards in Korea, which change frequently with limited lead time.

Importation of many food and agricultural products into Korea still face barriers such as high import tariffs, import volume quota, and phytosanitary requirements, which intend to protect local farmers. On-going removal of the barriers should expand the market in Korea for imported food and agricultural products. Post notes there has been good progress made so far since the implementation of KORUS which will significantly reduce the tariffs on American food and agricultural products imported into Korea and create new opportunities for American suppliers.

Post advises that Korea has well established regulations and procedures on food imports, which often makes entry of new-to-market products into Korea a time and resource consuming process. Working with reputable importers is the approach that has proven most efficient to overcome these regulatory challenges. Established importers are the best source for up-to-date market demand/supply intelligence, local business laws and practices, distribution channels, and most of all government regulations on imported foods.

Retail Sector:

According to Euromonitor, retail sales in the packaged food market in Korea had been estimated to reach nearly US$21.4 billion in 2016. That represents a growth rate of 5% or over US$1 billion since 2012.  Korea remains the 5th largest packaged food market in the Asia Pacific region and is now the 17th largest market in the world. By the year 2021, the retail sales in the packaged food market in Korea is expected to increase 8.1% to US$23.4 billion, or over US$1.7 billion.  High growth items in the forecast include ready meals, soup, savory snacks, processed fruit and vegetables, breakfast cereals, processed meat and seafood, sauces dressings and condiments and rice pasta and noodles.  

Overall retail sector sales (inclusive of automobile and fuel) in Korea amounted to W367 trillion Korean won in 2015 (approximately US$332 billion, exchange rate: $1 = W1,104 as of Dec. 31, 2015), up 1.9% from the previous year. Total sales of food products in the retail sector amounted to W82.9 trillion in 2015, up 4.7% from the previous year. In other words, food products accounted for 22.6% of the overall retail sector sales. Overall retail sector sales in Korea, including food products, have shown a sluggish growth in recent years under the global economic downturn.

The grocery supermarket segment was the leading distribution channel for food products in the retail sector with an estimated W30.6 trillion of food sales in 2015, followed by hypermarket segment. However, in terms of growth, the on-line retailer segment showed the highest growth of food sales between 2012 and 2015, followed by the convenience store segment. Considering strong consumer demand for convenient and time saving shopping tools, on-line retailers and convenience stores are likely to lead the growth of food product sales in the retail sector in the coming years. On the other hand, hypermarkets and department stores are expected to see stagnant growth of food sales not only under the rising competition from other retail segments (on-line retailer in particular) but also because of limited room to add new stores in the market.      

Euromonitor reports that convenience continued to feature as a major driver shaping consumer shopping behavior in 2016. As consumers take to the internet to purchase products out of convenience, they are also showing a similar trend in store-based retailing by frequenting convenience stores. In Korea, the high convenience store density suggests that convenience stores are highly accessible and thus have become favored by consumers looking to quickly pick up some grocery items.

Convenience stores posted significant growth of 19% in value terms in 2016 because single-person households increased rapidly in number. Also, convenience stores aggressively developed creative products and services such as nutritious lunch boxes at very reasonable prices. They even provide delivery services for customers in collaboration with internet retailer companies.  Convenience stores in South Korea provide ATM machines and emergency medicines for customers, that shows they are also acting as a post office, a bank and a pharmacy; this has attracted consumers to these outlets more often.

As internet retailing becomes one of the strongest retailing channels in South Korea, grocery retailing companies have engaged in omni-channel strategies that cater to online shoppers. One such measure is click and collect, whereby consumers can pick up the items they ordered online via pick-up stations in the outlets.  Homeplus has made partnerships with online marketplaces G Market and Auction, to allow consumers to order items through G Market and Auction and collect them through Homeplus outlets on the same day.

Post reports that rapid expansion of large-scale businesses over the years has heightened the competitive pressure in the Korean retail sector. As a result, leading players have actively pursued merger and acquisition (M&A) opportunities to achieve bigger control of the market. It is notable that leading retail companies in Korea today have become a “conglomerate” retail force that operates retail businesses in diverse retail industry segments. For example, the business umbrella of Lotte Shopping Co., a leading retail company in Korea, includes grocery supermarkets, hypermarkets, department stores, convenience stores, outlet shopping malls, duty free stores, TV home shopping, and Internet shopping malls. Expansion into foreign markets has been another area that leading Korea retailers have also invested heavily in recent years for new growth opportunities. For example, Lotte Mart, which currently operates 117 hypermarket stores in Korea, has increased its stores in foreign markets to 290 as of November 2016, including 116 in China and 44 in Indonesia.

Euromonitor reports that private label products are becoming a very important growth engine for convenience stores and hypermarkets. In convenience stores, operators are actively developing new private label products, focusing on lunch boxes or convenient foods. CU owns around 1,000 private label products while 7-Eleven has more than 1,100 products. As these products provide quality food at reasonable prices, consumers are highly attracted to them. In hypermarkets, E-Mart’s private label ranges No Brand and Peacock are very popular and have reasonable prices.  As Korea consumers have become sensitive to the price and quality of products, these private label lines from operators have become very popular.

Korean retailers in general rely heavily on independent importers for imported food and agricultural products. Although leading players particularly in the hypermarket segment are seeking ways to expand direct imports for lower cost and improved product assortment, direct importation is mainly targeted on a limited number of large volume products such as fresh fruits and meat.  

Growth of modern retail business in 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. Logistics service industry is likely to continue a strong growth in the coming year 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:

Evolvement of lifestyle and dietary culture coupled with increased income level of Korean consumers have promoted a rapid growth of the Hotel, Restaurant and Institutional (HRI) food service sector in Korea over the last three decades. Monthly per capita household spending on dining outside the home amounted to W104, 074 won (roughly US$94) in 2015, up 2.7% from the previous year. Each Korean household spent 47.4% of its food expenditure, or 12.9% of its total consumption expenditure on dining out. It is expected that spending on dining-out will continue a steady growth in the coming years as Korean consumers face ever busier lifestyle with increased number of dual-income families and single-member households.

Cash register sales for the HRI food service sector in Korea totaled W83.8 trillion won (US$79.6 billion at US$1 = W1,052 won as of Dec. 31, 2014) in 2014, up 5.4% from the previous year. Full-service Korean restaurants remained the leading segment of the sector by accounting for 43.6% of the sector sales. Bars were the second largest segment of the industry accounting for 13.3% of the sector sales. However, the bar segment recorded the least sales growth between 2012 and 2014 in the sector due to elevated consumer health concerns and reduced corporate entertainment spending. On the other hand, cafés and non-alcohol beverage shop, quick-service restaurant and institutional feeding restaurant segments led the sales growth of the sector during the period. Strong consumer interest in new tastes, busier lifestyle, and concerns for sluggish economy are likely to further boost the sales of these segments in the coming years.

It is notable that the Korean food service sector is still largely composed of small-scale, family-operated businesses as evidenced by the fact that over 90% of restaurants and bars in Korea were small businesses that hired less than five employees as of 2014. In addition, over 70% of the restaurants and bars in the sector earned less than W100 million (roughly US$90,000) of annual cash register sales. Marketers point out that there are too many restaurants in Korea for the population. Roughly speaking, there is one restaurant per every 90 Koreans. As a result, distribution of products in the food service industry still relies heavily on the traditional channel, which involves multiple layers of small scale middlemen distributors between the producer and the restaurant. However, restructuring of the sector, mainly fueled by entry of large-scale conglomerates into the sector, has led to a rapid growth of large-scale restaurants and bars, many of them under franchise operation, at the expense of small-scale, independent businesses. The industry restructuring has also coincided with a rapid development of large-scale, broad-line food service distributors that offer streamlined and consolidated product supply to the restaurant.             

Euromonitor reports that as the number of single-person households is increasing in South Korea, operators in consumer food service are developing menus, services and renewing the concept of outlets to target them. According to Statistics Korea, single-person households accounted for only 9% of total households in 1990, with this figure increasing rapidly to reach 31% in 2025. To target this consumer group, convenience stores actively developed lunch menus and saw a significant increase in terms of value and full-service restaurants developed menus for single people who visit outlets alone, with many consumer food service outlets renewing their interiors in order to allow people to sit alone and also starting to offer delivery and takeaway services. Indeed, new concept restaurants specifically for single people have started to appear, with groups not being allowed in such restaurants in order to allow single people to feel comfortable about being alone.

Convenience store fast food led the way with regard to this trend during the review period.  As single-person households do not have other family members living together, they often struggle to eat well. Furthermore, many single people are younger in their 20-30s and have low disposable incomes. Therefore, major operators in chained convenience food stores are aggressively developing cheaper nutritious lunch boxes. These lunch boxes consist of 8-10 side dishes full of proteins and minerals while steamed rice provide carbohydrates. GS25 started the competition between lunch boxes, launching its lunch boxes in 2010 and gaining popularity during the review period, with unit sales reaching 15 million in 2015. There are eight kinds of lunch boxes offered by GS25.

Food-Processing Sector:

The U.S. was the largest supplier of agricultural, food, fishery and forestry products to Korea, with a 20% market share in 2015. About 70% of food products in Korea are imported. Korea maintains a strong processing industry that manufactures a wide variety of processed agricultural and food products, which generated an estimated US$41 billion of cash register sales in 2014, down 0.8% from the previous year. The Korean food and beverage manufacturing and processing industry are major users of imported agricultural products. The Korean economy currently faces another tide of challenges as the recovery of its major export markets has slowed under the extended global economic downturn and increased competition. The U.S. market share should continue to increase under the KORUS, which is expected to generate more export opportunities for U.S. food processing ingredients.

The Korean processing industry relies heavily on imports for raw materials, intermediate ingredients and additives because of limited local supply. As a result, Korean food processing industry is an outstanding buyer for almost all types of agricultural products for processing use from basic commodities such as corn and wheat to intermediate ingredients such as whey powder and fruit juice concentrate to food additives such as flavors and coloring agents. 

The top 10 food processing industry products with production value over US$1 million in 2014, included beverages, snacks, breads and rice cakes, noodles, seasonings, food additives and edible fat/oils. Korea maintains a strong processing industry that manufactures a wide variety of processed agricultural and food products. There were over 4,675 agriculture/food processing businesses (based on over 10 employees companies) and about 180,000 workers in Korea. Although there are many small- and medium-sized businesses in the food processing industry, about 20 companies dominate the industry accounting for nearly 70% of total sales. Many of the Korean conglomerate business groups have agriculture/food processing business arms, and more Korean processors are trying to expand their sales to foreign markets. About 7% of overall production by the Korean food processing industry is currently exported to foreign markets.

Large food processing companies often prefer to purchase from local importers, agents or distributors when the quantities they require are small. These large companies generally tend to buy food ingredients directly from overseas suppliers when their supply quantities become large.

Some Korean food processors like Nong Shim, CJ, Lotte Confectionery, Daelim Corp. and Sam Yang Corp. have investments in China, U.S., 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, Agri Purina, Coca Cola, and Kellogg have invested in Korea to produce food, feed, ice cream and soda products in Korea as sole investors and/or joint ventures.

Many 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 Korean government has also been providing the industry with financial and promotional support under the “globalization of Korean cuisine” campaign.

Locally grown or manufactured products present a significant competition to many American products. Although limited in volume, Korean agriculture produces a considerable variety of raw agricultural products, including rice, fresh vegetables (cabbage, radish, cucumber, pumpkin, onion, potato, sweet potato, green onion, mushroom, garlic, etc.), fruits (apple, pear, tangerine orange, grape, persimmon, water melon, strawberry, kiwi, etc.), seafood, beef, pork, chicken, eggs, and fluid milk. In addition, Korea has a strong food processing industry that manufactures a wide variety of processed products, including processed meat, seafood, vegetables, fruits, noodles, sauces, oils, grain flour, beverages, snacks, confectionery and dairy products. Domestically produced products reflect the tastes and consumption trends of local consumers. Furthermore, Korean consumers are generally biased toward locally grown and manufactured products and willingly pay a premium for domestic products.

Korea relies heavily on imports for input ingredients for the local processing industry as well as for consumer oriented products for the retail industry. Many U.S. products face rising competition in the Korean market from export oriented countries, including China, European Union (EU), Australia, Chile, and South Asian countries. Many of the products from competitor countries offer lower prices or higher quality than U.S. products and have built up significant market shares in Korea. China, for example, has become the leading supplier of fresh and processed vegetables, seafood, and spices to Korea based on price. The EU has become the leading supplier of premium whiskies, wine, specialty cheeses, chocolate confectioneries, pasta, and olive oil to Korea based on quality. Increased consumer demand for more diversified tastes will further generate competitive pressure on American products in Korea.

Best Product Prospects:

Post reports that products present in the market which have good sales potential in this sector include beef, pork meat, processed meats (pork and poultry origin only) poultry meat, seafood, processed fruits and nuts, tree nuts, fresh fruit, vegetables (fresh, frozen, dried etc.), cheese and processed dairy products, alcoholic beverages, coffee, sauces, bread pastry cake and soybean oil.

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