Overview of the Korean economy and the franchise business

Franchise Gaze

“We view South Korea as a developed market, which means it’s no different than the UK or the US… Korean consumers are demanding and expect high-performance products.” Hari Nair: General Manager, Kimberly-Clark’s.

Recently, everything seems to have the prefix K: K-Pop, K-food, K-beauty, K-movies; Why don’t you go to your local Korean culture festival? Surely there will be one near you or soon. Korean culture is on fire right now and it has been very well received. Domestic franchisors have rightly jumped on this wave and rapidly expanded internationally: China is the first choice of Korean franchisors. However, for a foreign franchisor, how is this market?

GDP was US$1.2 trillion in 2013 and is projected to increase as consumer spending and confidence rise during 2014 and 2015. The latest report from the Hyundai Research Institute predicts that Korea will grow by 3 .5% in the first half of 2015 and 3.6% in the second half.

Considering Korea’s comparatively slower Asian growth, it remains a good target for franchisors due to historic years of steady growth, a thriving consumer base, and the country’s early breakthrough. Median household disposable income per month was $3,150 in the second quarter of 2014, an increase of 2.8% from the second quarter of 2013, with significant increases in the bakery, confectionery and snacks, coffee and tea, and juices and beverages (Statistics Korea). ).

The demand for foreign brands spans a variety of sectors and, recently, a broader range of channels. 65% of the population is classified as middle class (OECD), so unlike many other Asian countries, there is no general trend of a new emerging middle class. With the support of the media and a relatively high degree of travel experience, Korean consumers experience a developed and globalized market.

Korean consumers have a strong history of buying foreign brands, so in addition to value for money, they have a strong understanding of brand philosophy and marketing channels. They will easily try new products and are always looking for new tastes and ways to improve their lifestyle and image.

For a franchisor, marketing has to be more sophisticated to keep up with the consumer level. For example, almost 80% of the population is online, making it the most connected country on the planet! and they love their credit cards. Annual credit card transactions are 65% higher than in the US. This combination means that a high proportion of online retail spending and e-commerce is forecast to reach $25.3 billion by 2017 (Borderfree). Any marketing strategy must be multi-channel and use aspects of social media to advertise brands and use technology to offer more efficient purchasing and delivery channels.

Korea’s population is aging and urbanized. The median age in 2012 was 39.1 years, and the 60+ age group is projected to account for almost 25% of the population by 2020 (Statistics Korea). Some franchisors may already be targeting this older market, while others can easily adapt or expand to target this group. For the rest of us though, don’t despair, as PwC reminds us, 70% of the population remains within the target demographic of most retailers aged 15-64.

With more than 90% of the population living in urban areas, these conurbations are massively populated, spaces dense in wealth and commercial premises are very important. The 4 major population areas: Seoul Subway-15 million, Busan Subway-4 million, Daegu Subway-3 million and Daejeon Subway-2 million.

Key retail players are poised to open mega malls outside major cities in the coming years, but currently Gyeonggi (the area directly surrounding Seoul) and Seoul account for 42% of total store space in all of Korea (www. kintex.com). Supermarkets and hypermarkets lead the retail channels and this leadership will increase as you match the top 3 purchase drivers of choice, convenience and price.

Despite the economies of scale that allow large retail complexes to compete effectively with smaller stores, operators always seek to differentiate themselves from one another. Improving the shoppers’ experience by offering the latest trending brands is one of the main ways they do this. They are not only looking for interesting tenants abroad, but these operators are also willing to accept framework agreements and implement concepts in all their formats.

If this is an interest entry strategy, keep in mind that these companies are looking for a brand that will drive traffic, so the product or service has an established name or has a strong unique factor associated with it. Quirky with long-term viability can be a good USP and shopping malls a very effective way to introduce your brand in Korea, mainly because the cost of educating the population will be borne by the mall operators and you can be sure of it will be done with a high level of competition.

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

Koreans are very open to partnering with overseas franchisors, especially those that have an existing reputation in Korea or core values ​​that reflect their country of origin. Koreans aged 55 and over have recently proven to be good franchisees, as they have more capital and knowledge, and being a family-oriented culture, they will pass the business on to their children. Franchise industry regulations ensure that businesses generally run smoothly and Korea is considered an easy place to franchise.

The normal investment range is between US$4,300 and US$8,700 with a contract period of 2 years. Such a low average franchise fee can make it difficult for a foreign franchisor to recruit a larger or multi-unit partner. There will also be a lot of negotiation around royalties as they are typically lower for Korean domestic franchises.

Brief breakdown by sectors:

• Korea’s food market is expected to reach US$53.5 billion in 2013, accounting for 25% of total retail sales; a growth of 5.5% since 2012 (JLL).
• The organic food market is anticipated to grow to US$6 billion by 2020 (Organic Trade Association).
• The online channel is forecast to grow at a CAGR of 11.38%, 2013-2018 (Research and Markets).
• South Koreans spent $17.9 billion on private lessons in 2012.
• The beauty and personal care retail market posted year-over-year growth of 5.8% through 2013.
• The cosmetics sector was the best performing sector in 2012.
• Korea is the eighth largest luxury market with a value of nearly $4.5 billion.
• Households spent 12.4% of total consumption spending on eating away from home (GAIN).
• In 2012, imports of chocolate-based confectionery from the United States increased by 12% from the previous year (GAIN).
• Korea has become the world’s largest men’s cosmetics market. Spending of US$635 million in 2013 was almost a fifth of the global figure (Euromonitor).

korean consumer

Koreans are educated, sophisticated, relatively well-off, and well-informed. With advanced consumers comes a chosen and more demanding buyer. The strategy and approach must be parallel to that of other advanced countries. Consumers are not just looking for a global brand, they are looking for a brand that has a distinctive USP and they will pay more for this. That USP can be in reputation, quality, ingredients, or innovation, but it needs to stand out from the crowd in a specific way.

This does not mean that all markets are saturated and that there is no opportunity for new sectors. As mentioned, there is an aging population and the wealthy 50+ baby boomer generation is far from complete. Other notable changes that are opening markets:

• Increase in dual-income families.
• Increase in single-parent households.
• Increase in single-person households.

Korean consumers are very used to receiving information through a variety of channels about a product before purchasing it. A 2012 survey by Embrain Trend Monitor found that 79% of customers check user reviews before purchasing and 74% have written ratings and reviews. So the more information you can provide through a variety of channels, that’s only a good thing. Tea surprise Prayed curiosity the advertising strategy will either have to be carefully shaped or have a very solid budget behind it.

Koreans are image conscious in all aspects and have the experience to understand what lifestyle or status a brand represents. They closely follow and are influenced by the media and celebrity styles and trends. Although these fads may be short-lived, it’s good advice to have the ability to quickly adapt and run campaigns or introduce outreach products that connect with the latest trends.

Overview of where demand is and where future demand could be:

• Due to the wealth of recognized foods, they will attract innovative and premium foods.
• Franchises that provide efficiency in purchasing and delivery will meet consumers’ needs for convenience.
• Koreans are educated and understand the need for their children to be. Within this market there is a high demand for language and vocational services.
• An older and fairly affluent demographic presents a growing market for specific products and services.
• Think of Koreans as demanding consumers. They look for organic, natural, fresh, high quality products.
• Foods and companies that improve health and fight aging will be in high demand.
• Herbs beneficial to health will be trendy ingredients.
• Koreans prefer foods with brighter, more saturated colors (the origin of the human preference for food color).
• Specialty stores stocking a variety of niche, higher-priced, and related quality items are spreading across Korea, covering a variety of sectors from beauty to bakeries to grocery stores.

The bottom line:

A strong market target with competition and business ownership can be costly. This has to be balanced against the sophistication and richness of the market. It cannot be denied that there is currently more of a tendency to go out than to Korea, however, with a developed market that has a proven globalized vision, it is an easy country to enter.

To conclude: Although the potential may not be as great as that of its Asian neighbors, the reduction of time and costs by having educated consumers and well-versed franchisees are key points.

The franchise meets the calculations: 7/10.