Rising unemployment, a shrinking economy and a slump in consumer spending have taken some of the steam out of South Korea's growth engine. Confidence in one of Asia's major economies, however, remains as the country has not only proven its tenacity during the height of the 1997 Asian financial crisis, but retains its reputation as one of the region's most promising retail markets.
Elsevier Food International, Vol. 6, Number 4, November 2003
Joel H.Vega

People go to discount stores when the economy isn't good," said Lee Oal Soo, a spokesman for Shinsegae, owner of South Korea's biggest discount retail chain E-Mart. With the Korean economy still in the doldrums, Lee Oal Soo's comment is not only fitting but also sounds like a sombre mantra for many retailers. Indeed, it is not easy being a retailer in South Korea these days as consumers maintain a firm grip on their wallets. Yet, despite the gloomy economic skies, analysts remain upbeat regarding the ability of South Korea to nurse itself out of the lingering malaise.
Recent figures also speak for the country's tenacity. When the 1997 Asian Financial Crisis broke out, Korea was plunged into a deep recession as the liquidity problem exposed fundamental structural flaws in the Korean economy. With its GDP declining by 5.8 per cent in 1998 and unemployment surging to 9.3 per cent in February 1999, Korea launched both short-term and long-term oriented polices. It began a fundamental restructuring of its battered economy, emphasizing transparency  and market competition. By 1999, Korea was among the first of Asian economies to stage a comeback from the 1997 financial crisis, posting a remarkable 10.7 per cent economic growth with the unemployment rate down to 4.8 per cent in the last quarter of the same year. With an average GOP growth rate of nine per cent over the last 30 years, Korea's per capita income now stands at more than US$10,000 a figure that translates to a high purchasing power compared to its Asian neighbours.

Radical changes, rapid growth
Since 1996, the Korean retail industry, which lagged behind the sweeping progress that engulfed the country's manufacturing sector, has been undergoing radical changes due to the liberalisation of mass retail businesses to foreign ownership. The Asian economic crisis also helped trigger a reshaping of the retail sector, which saw the rapid growth of hypermarkets, chain supermarkets and convenience stores. Korean consumers traditionally buy at so-called 'mom-pop' stores and traditional wet markets, which account for a 72 per cent market share. Visitors to Korea would easily notice that retail shops are smaller than might be expected for the size of the Korean economy, which ranked among the world's top 20 biggest economies. Nine out of ten retail shops had fewer than two employees, with an average selling space of ten metres. The sales volume of the small stores accounted for around 80 per cent of the total market in 1995, while the share of modern retail formats such as department stores was only about 14 per cent.
From the late 1980s, the Korean government launched the first phase of its economic plan to improve the efficiency of its distribution industry. In 1989, the government relaxed its rules governing foreign direct investments and the establishment of foreign companies' subsidiaries. By 1993, rules were further eased, allowing foreign companies to open 20 stores, and three years later the Korean retail and wholesale market was almost completely liberalised.
Food sales accounted for 31 per cent of Korea's overall retail sales of US$128 billion in 2001. Large retail outlets captured a 13.3-percent share of gross retail sales in 2001 and a 26-per cent share of food sales. Today, traditional retail players face a serious challenge from new mass retail formats such as hypermarkets, convenience stores and large-size supermarkets. Only six years after the liberalisation, the Korean market has seen the entry of 200 hypermarkets, 3,000 convenience stores and ISO big-format supermarkets. Following the Seoul Olympics in 1988, sweeping changes, particularly with the entry of foreign discount stores, also engulfed the country's retail sector. Since E-Mart, the country's first mass discounter, opened its first store in 1993, the total number of discount stores surged to 71 in 1997, 112 in 1999 and around 220 in 2001. Also in 2001, hypermarkets, convenience stores and large supermarkets seized 13.3 per cent or around 20.4 trillion won (US$16.9 billion) worth of sales.

The Korean consumer
In Seoul's trendy downtown Myongdong shopping district, it is a common sight to see teenagers in hip clothes chatting on designer mobile phones or strolling around the chic stores. With high-rise glass towers that advertise top brands in giant plasma screens in many of its commercial districts, Seoul's bustling city life confirms South Korea's status among Asia's affluent countries. Market analysts are convinced that despite the current economic downturn and the tension arising from its nuclear sabre-rattling neighbour, South Korea's GDP is expected to grow by a total of 36 per cent over the next five years.
"This is a market with huge potential," said Peter Harvey, finance and IT director, in a report in Unilevers in-house magazine. "It not only has 48 million increasingly wealthy consumers, half under the age of 30, it is the second biggest HPC market in Asia, including the world's third-largest mass skin market, and one of the world's top five ice cream markets."
Moreover, 70 per cent of the country's population (48.3 million) is concentrated in urban centres (25 per cent in Seoul). South Korea is currently also one of the world's most advanced Internet communities, with nearly two-thirds of its population connected to the web, including ten million people plugged into broadband, more than in any other country. In 2001, the average Korean household spent 3.3 million won (US$2,750), or 15.5 per cent of total expenditure, shopping for groceries. In the same year, total food sales in Korea's retail market are estimated at 47.5 trillion won (US$39.6 billion), or around 31 per cent of the overall retail market sales in 2001.
Korean consumers are also becoming more diversified in their tastes and demand a wider range of products and prices. For instance, while the success of hypermarkets has been attributed to the strong demand for low-price options, sales of high-end products in department stores posted stable growth even during tough economic times. The growth in the number of dual-income families and single-parent households has also been seen as boosting the demand for Home Meal Replacement products in retail stores, which saw the introduction of in-store fast food, deli outlets, prepared food sections and more ready-to-eat (microwave) processed foods. Use of credit cards is also becoming more common as Koreans increasingly shy away from the use of hard currency. Recent figures showed that 67.4 per cent of department store sales and 54 per cent of hypermarket sales were made by credit card payment in 2001.

Trends and challenges
The behaviour of the Korean consumer as key to growth in the retail sector cannot be ignored since the 1997 Asian financial crisis hit the country. Four years after the crisis, the buying behaviour of the Korean consumer has shifted to one of caution as impulsive purchases and borrowing money for consumption dropped sharply. Consumer surveys point to an increase in coupon redemption, underlining the trend that Koreans are becoming more concerned about low prices. Market observers, however, say that sensitivity to price does not always mean that consumers unconditionally prefer low-priced goods. "They (Korean consumers) carefully compare prices with the quality and shopping environments. This 'value-oriented' consumption behaviour is increasing as the demand for durable goods goes up. In addition, demands for private brands and used/recycled goods are also increasing," said the Korea Chamber of Commerce & Industry (KCCI) in a recent report.
The KCCI also noted the erosion in the buying power of middle-class consumers. "The buying power of middle class households became far weakened. The Korean economy, after the crisis, intensifies 'the rich get richer, the poor get poorer situation'. As this bi-polar consumption intensifies, sales of super-high quality and low-priced goods are increasing, with the sales of mid-priced goods dwindling," the KCCI said.
However, the gloomy outlook in consumption is tempered by optimism coming from Korean consumers themselves. In the most recent phone survey conducted in August and released in early September this year, the KCCI said 63.4 per cent of consumers reported spending less this year compared to 2002. On the other hand, 30 per cent of the 1,000 households surveyed in Seoul said they maintained a similar consumption level. Only 6.6 per cent of the respondents said they spent more this year. Forty-four per cent pointed to their falling income as the reason for buying less. Other factors cited were 'unstable economic outlook 'and rising household debt.
A clear majority, however, expressed optimism with 56.8 per cent saying that they expect their finances to improve by 2005. About 23.5 per cent and 13 per cent predicted economic recovery by late next year and early next year, respectively.

Growth of modern retail formats
With the entry of modern format mass retailers, Korean consumers are increasingly patronising hypermarkets or large supermarkets for lower prices and the convenience of one-stop shopping. The rapid growth of hypermarkets continued in 2001 to reach 13.8 trillion won of sales, or a 29 per cent growth from 2000 with the entry of 39 new hypermarkets, nationwide. In 2001, hypermarkets overtook supermarket chains and clinched 15.8 per cent of retail sales compared to the 8.2 per cent market share posted by the supermarket sector.
Growth in the hypermarket segment is largely driven by a few leading retailers, with the top three chains accounting for 29 out of the 39 new stores openings in 2001. The top four leading hypermarket chains, namely, E-Mart (owned by Shinsegae), Lotte Mart (Lotte Shopping), Home Plus (Samsung-Tesco) and French retailer Carrefour, account for about 67 per cent of sales in the hypermarket sector in 2001. Analysts believed the sector could still accommodate new hypermarkets in the years ahead. However, growth in the hypermarket sector will take the form of mergers and acquisitions and consolidation as the market approaches saturation.
With traditional independent supermarkets losing ground to hypermarkets and convenience stores, large-size supermarket chains managed to clinch stable growth rates in the last few years. Recent data showed that in Korean lawns with a market or population of less than 150,000, and where the buying power is not enough to sustain the entry of a hypermarket, the large-size grocery supermarket format has taken the lead among modern retailers. Major supermarket chains responded to the demand for bigger formats and filled the niche by restructuring their business and replacing their old stores with new ones. Among the retailers that took this approach was market leader LG Mart, which shut down 22 stores in the last three years while opening 24 new stores. Rival Haitai, owner of Hailai Supermarket, also closed 31 stores and replaced then with nine new outlets. Lotte Shopping, owner of Lotte Lemon, the fourth biggest supermarket operator, and rival Shinsegae also entered the supermarket branch as the hypermarket and department store sectors mature.
Meanwhile, convenience stores, although trailing the growth rates posted by hypermarkets and big supermarkets, registered notable growth in recent years. Introduced in 1988, convenience stores posted robust growth rates to reach over 2,000 in 1998. By the end of 2001, the total number of convenience stores in Korea reached 3,753. Leading players in the sector are LG 25, Family Mart (owned by the Bokwang group) and 7-Eleven Korea. Although growth slowed down due to the economic malaise, Korea's convenience stores are expected to widen its reach and replace the traditional mom-and-pop stores.

Emerging formats
The direct sales sector is emerging as one of the fastest growing retail formats. The Internet, TV home shopping, catalogue and network retailing are posting consistent gains with the demand for convenience from housewives. The growth in direct sales enabled the sector to seize about 3.5 per cent of the overall retail market sales in 2001. Following the economic crisis, cable TV shopping posted a 32 per cent growth in 1999 and a hefty 85 per cent in 2000. Currently, two major shopping channels, LG Shopping and CJ 39 Shopping, dominate the Korean market. However, the sector is expected to grow further with the entry of newcomers.
Internet shopping malls are attracting more customers with Internet users expected to reach 20 million this year. In 1999, there were around 1,200 B2B websites, which increased to 1,500 in the following year. Although Internet retail sales are low compared to direct mail and TV shopping, the growth rate has been phenomenal. According to the Korea Institute for Electronic Commerce, Internet shopping has been growing by 100 per cent every year since 1999. Total sales of Internet shopping websites reached 20 billion won in 1999 and surged to around 45 billion won in 2000. The Korean Cyber Shopping Mall Research said about 50 per cent of Net shopping malls periodically upgrade their contents within a week, while 20.3 per cent upgrade on a daily basis.

Tougher environment
The toughest competition in Korea's food retail industry in the coming years is expected to come from hypermarkets and convenience stores. With almost half the South Korean population residing within a 25-mile radius of Seoul, the newer urban communities encircling the capital form a huge retail market. Growth in the number of large retail formats in suburban areas is also significant. However, with the distribution problems common for large stores in Seoul, the smaller deliveries for convenience stores allow easier and faster access, an advantage that industry insiders say has contributed to the high growth in the convenience store sector.
As previously mentioned, consolidation among local players is predicted in the coming years as they face aggressive strategies from foreign retail chains. Shinsegae-owned E-Mart is sticking to its numbers strategy and plans to add another ten E-Marts this year to the 54-store chain. Analysts said E-Mart has stayed aggressive and has expanded by converting parent Shinsegae's department stores into discount outlets that offer value-far-money bargains. "Sales at E-Mart are the main pillar while department store sales are sluggish during an economic slowdown," said spokesman Lee Oal Sao. Although foreign rivals such as Tesco and Carrefour are challenging E-Mart's lead, Shinsegae does not consider foreign chains as serious threats.
Shinsegae's president Koo Hak-su was quoted as saying in a Reuters report that he expects one or two foreign discounters which are suffering low profit margins as targets for mergers or be forced to exit the market. "Foreign discounters have not gotten over cultural differences in Korea and I see that as our competitive advantage over them," said Koo. He also expects consumers going to traditional markets to turn to discounters, especially during a downturn in economic growth.
Analysts say that although the operating environment will be tougher with profits declining in the next few years, the market is getting bigger. The Korean government predicts the economy to expand at about 3.5 per cent this year, behind last year's 6.3 per cent. The government has also allocated some 4.5 trillion won in extra spending on job programmes and other public works in efforts to stimulate consumer spending. As one analyst said South Korea's retail landscape faces uncertain times, but with the country's capability to turnaround its fortunes in times of crisis, retail prospects remain favourable in the longer term.

Sources: Korea Chamber of Commerce and Industry, USDA/Economic Research Service, Korea National Statistic Office, Euromonitor, ACNielsen, PriceWaterhouseCoopers, International Herald Tribune