Overview Of Korea Economy And Franchise Business

Franchise Glance

"We consider South Korea as a developed market, meaning it is no different to the UK or the US... Korean consumers are demanding and expect high-playacting products." Hari Nair: Managing Director, Kimberly-Clark's.

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Recently everything seems prefixed with a K: K-Pop, K-food, K-beauty, K-movies; why not attend your local K-culture festival, sure there must be one near you, or coming soon. Korean culture is flaming at the moment and has been warmly received. Domestic franchisors have, quite rightly, been riding this wave and quickly expanding internationally-China being a Korea franchisors first choice. However for an overseas franchisor looking in, what is this market like?

GDP was US$1.2 trillion in 2013 and expected to rise as consumer outlay and confidence grows through 2014 and 2019. The Hyundai Research Institute latest report predicts Korea will expand by 3.5% in the first half of 2019 and 3.6% in the second half.

Considering Korea's comparatively slower Asian growth, it corpse a good target for franchisors owing to historical years of stable growth, an affluent consumer base and early advancement of the country. The average disposable income per home per calendar month was US$3150 in the second quarter 2014, a rise of 2.8% from the second quarter 2013, with significant rises in bakery, confectioneries & snacks, coffee & tea, and juice & beverages spheres (Statistics Korea).

The demand for foreign brands spans a range of spheres and recently a broader range of channels. 65% of the universe is classified as middle-class (OECD) so unlike many other Asian countries there is not the general trend of a new, emerging middle-class. Supported by media and a comparatively high degree of travel experience, the Korean consumers are knowledgeable in a developed, globalised market.

Korean consumers have a strong purchase account of foreign brands so likewise as valuing money, they have a high understanding of brand ism and marketing channels. They will pronto try new products and are always quest new tastes and ways to improve their life-style and image.

For a franchisor, the marketing has to be more sophisticated to match the level of the consumer. For example, nearly 80% of the universe is online, making it the most connected country on the planet! and they love their charge plates. Annual charge plate proceedings are over 65% higher than the USA. This combination means a high proportion of online outlay and retail ecommerce is expected to touch $25.3 billion by 2019 (Borderfree). Any marketing scheme has to be multi-channel and use aspects of social media to advertise brands and employ the technology to offer more efficient shopping channels and delivery.

Korea's universe is ageing and urbanized. The median age in 2012 was 39.1 years and the over 60 group is expected to account for nearly 25% of the universe by 2020 (Statistics Korea). Some franchisors may already target this older market whereas others may be able to easily adapt or reach target this group. However for the rest of us do not despair, as PwC reminds us, 70% of the universe remain inside most retailers target demographic of 15-64 years old.

With over 90% of the universe living in urban areas, these conurbations are massively populated, wealth dense spaces and retail premises come at a premium. The 4 main universe areas: Seoul metro-15 million, Busan metro-4 million, Daegu metro-3 million, and Daejeon metro-2 million.

Key retail players are set to open mega malls outside of the main cities over the coming years but presently Gyeonggi (the area directly circumferent Seoul) and Seoul account for 42% of the total shop space all told Korea (www.kintex.com). Supermarkets and hypermarkets lead retail channels and this lead will increase as it matches the 3 main purchase drivers of choice, convenience and price.

Despite economies of scale sanctionative big shopping complexes to effectively contend with small stores, operators are always quest to differentiate themselves from each other. Enhancing shoppers experience by offering the latest trend brands are a main way they do this. They are not only looking exciting overseas tenants, these operators are also willing to take on Master agreements and roll out concepts across their formats.

If this is an entry scheme of interest, mind that these companies are looking a brand that will drive traffic, so the product or service either has to an established name or have a strong unique factor attached to it. Quirky with long term vipower can be good USP and malls, a very effective way to introduce your brand into Korea-mainly as the cost of educating the universe will be borne by the mall operators and you can be assured it will be finished a high level of proficiency.

The franchise market in 2013 was estimated at US$89.8 billion with nearly 3,000 franchises. There were 283 retail franchises, 601 service franchises and 2,089 food service franchises (export.gov). Even with recent downgrades of GDP, the franchise industry has displayed respectable growth over recent years with on average 200 new franchises opening annually since 2010.

Koreans are very open to partnering with overseas franchisors, especially with those that have an existing reputation in Korea or core values which reflect their origin country. Koreans aged 55 and over have recently established themselves to be good franchisees as they have more capital and knowledge, and being a family homeward culture, will pass the business down to their children. The franchise industry regulations ensure business generally runs smoothly and Korea is regarded as a straightforward place to franchise into.

The normal investment range is between US$4,300 and US$8,700 with a 2 year contract period. Such a low average franchise fee can make it more difficult for an overseas franchisor to recruit a multi-unit or bigger partner. There will also be a batch of dialogue around royalties as they are normally lower for domestic Korean franchises.

Brief breakdown of spheres:

• The Korean market is expected to be US$53.5 billion in 2013 and account for 25% of total retail sales; a growth of 5.5% from 2012 (JLL).
• The organic market is anticipated to grow to US$6 billion by 2020 (Organic Trade Association).
• The online channel is forecast to grow at CAGR 11.38%, 2013-2019 (Research and Markets).
• South Koreans spent US$17.9 billion on private tuition in 2012.
• The beauty and personal care retail market posted 5.8% growth year on year to 2013.
• The cosmetic sphere was the best playacting sphere in 2012.
• Korea is the 8th biggest luxury market worth nearly US$4.5 billion.
• Households spent 12.4% of total consumption expenditure on feeding outside the home (GAIN).
• In 2012, imports of chocolate based confectionery products from the United States were up 12% from the previous year (GAIN).
• Korea has become the largest men's cosmetics market in the world. The US$635m spend in 2013 was nearly a fifth of the global figure (Euromonitor).

Korean consumer

Koreans are educated, sophisticated, comparatively well-off and well well-read. With advanced consumers comes a choosy, higher demanding buyer. Strategy and approach should parallel other advanced countries. The consumers are not looking just a global brand, they are quest a brand that has a distinct USP and they will pay more for this. That USP can be in reputation, quality, ingredients or innovativeness, but it must stand apart from the crowd in a specific way.

This does not mean all markets are saturated and there is no chance for new spheres. As mentioned, there is an ageing universe and the affluent 50+ baby boomer generation is far from complete. Other noticeable changes that are opening markets:

• Increase of dual income families.
• Rise in single raise homes.
• Increase in single member homes.

Korean consumers are very accustomed being well-read across a variety of channels about a product before they purchase it. A 2012 survey by Embrain Trend Monitor found that 79% of customers check user reviews before buying and 74% have written evaluations and reviews. Therefore, the more information you can provide across a variety of channels will only be a good thing. The surprise or curiosity advertising scheme will either have to be carefully moulded or have a very solid budget behind it.

Koreans are image conscious all told aspects and they have the experience to understand what life-style or status a brand portrays. They closely follow and are influenced by the media and celebrity styles and trends. Although these fads can be short lived, it is good advice to have the power to quickly adapt and run campaigns or introduce extension products that connect with the latest trends.

Overview of where demand lies and where future demand could lie:

• Due to the wealth of recognised foods, innovative and premium foods will appeal.
• Franchises providing efficiency in shopping and delivery will match consumers convenience needs.
• Koreans are educated and understand the need for their children to be. Within this market exists high demand for business and language services.
• An older, fairly affluent demographic presents a growing market for targeted services and products.
• Think of Koreans as discerning consumers. They seek organic, natural, fresh, superiority products.
• Health up and anti ageing foods and businesses will show high demand.
• Health benefitting herbs will be trend ingredients.
• Koreans prefer food with brighter, more saturated colors (Origin of human colour preference for food).
• Specialty stores stocking a range of niche, higher priced, quality items that link up with the above are spreading across Korea and cover a range of spheres from beauty to bakeries to grocers.

The bottom line:

A solid market but with competition, and commercial estate can be expensive. This has to be balanced with the sophistication and richness of the market. It can not be denied that now there is more of a trend of coming out than into Korea, however, with a developed market that has a evidenced globalised view, it is an easy country to enter.

To conclude: Although potential may not be as great as their Asian neighbours, reduced time and costs from having educated consumers and well versed franchisees are key points.

Franchise Meets reckons: 7/10.