Korea: A Marketplace in Flux

By Elaine Choi

2012 was a difficult year for the Korean retail industry. Economic recession and the rise of household debt weakened consumer confidence. The retail industry grew 3.8 percent, but considering that the rate of inflation was 3 percent, growth was actually relatively flat. Complicating matters further, deterioration of the traditional market environment is expected to accelerate when the revised Distribution Industry Development Act passes. A government effort to curb the operations of mega-stores in Korea (ostensibly to protect small businesses and traditional markets), the bill will require big box retailers to reduce business hours and close up shop at least three days a month.

Under these conditions, discount stores have grown at a sluggish 1.4 percent rate. In an effort to maintain growth, discount stores have implemented various strategies such as lowering prices, increasing direct sourcing to provide exclusive products, developing private brand products and strengthening online shopping. Despite these efforts, the worsening market environment and consequent reduction in profit have negatively impacted the brand values of discount stores.

As a result, many budget-conscious consumers have migrated to TV home shopping channels in search of better deals. At a time when goods with higher profit margins, such as clothing, saw a significant increase in demand, home shopping companies capitalized on the trend by launching sub-brands of famous brands, broadening their private brand lines, and introducing co-branded lines in collaboration with celebrities and designers. To sustain growth, home shopping companies have been expanding into e-commerce and mobile.

Despite weakened consumer confidence, department stores—typically frequented by more wealthy customers whose spending only continues to increase—are less affected by macro factors. Department stores have tried to mitigate the effects of economic fluctuation by emphasizing luxury brands and courting affluent shoppers through targeted marketing. In an effort to attract wealthy consumers, department stores are introducing more high-end brands and expanding their presence to online malls and outlets to meet the demands of department store customers.

Convenience stores have grown significantly with an estimated growth rate of almost 20 percent. This double-digit growth has been driven by an increase in people living on their own who make small purchases; a surge in spending in frozen foods and quick meals; the approval to sell over-the-counter drugs; as well as aggressive price promotions and the addition of delivery service. However, government regulations on the new store openings and growing competition from drug stores and online options might slow growth. To maintain momentum, convenience stores will try to differentiate themselves from small neighborhood supermarkets and drug stores with smartly devised new store formats targeting specific consumers and with designated drug corners in the store.

While retail sales were disappointing last year and obstacles to growth remain, Korean brands must focus on what they can control, such as customer experience, strategic marketing and brand building, as opposed to what they can’t—like government regulation. Until market conditions improve, Korean brands will have to be nimble, flexible and responsive. They will have to figure out what customers want and need—whether that’s greater access to goods online, home shopping deals or attentive in-store customer service—and adapt accordingly.