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Global Agriculture Information Network

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Global Agriculture Information Network

    USDA Foreign Agricultural Service

     GAIN Report

     Global Agriculture Information Network Template Version 2.09

    Required Report - public distribution

    Date: 4/19/2007

    GAIN Report Number: KS7024

    Korea, Republic of

    Retail Food Sector

    Biennial Market Brief

    2007

Approved by:

    Mr. Stan Phillips

    U.S. Embassy

    Prepared by:

    Mr. Sangyong Oh

Report Highlights:

    The retail food sector in Korea is undergoing a rapid change due to the development of modern mass retail businesses, changes in consumer tastes, and the increasing income levels. These developments translate into growing opportunities for imported consumer-ready food products. Total imports of consumer-ready foods from the United States increased by 13.3 percent from the previous year to reach $851 million in 2006 (Jan. through Nov., CIF value).

    Includes PSD Changes: No Includes Trade Matrix: No Unscheduled Report ATO Seoul [KS]

GAIN Report - KS7024 Page 2 of 24

    KOREA RETAIL FOOD SECTOR REPORT

    TABLE OF CONTENTS

I. Market Summary

     A. Korean Retail Industry Overview

     B. Consumer Trends

     C. Food Imports

II. Road Map for Market Entry

    A. Modern Mass Retail Businesses: Hypermarkets, Grocery Supermarkets,

    Convenience Stores, Department Stores, On-line Retailers

     A-1. Entry Strategy

     A-2. Market Structure and Product Flow

     A-3. Sub-sector Company Profiles

     A-3-1. Hypermarkets

     A-3-2. Grocery Supermarkets

     A-3-3. Convenience Stores

     A-3-4. Department Stores

     A-3-5. On-line Retailers

    B. Traditional Retail Businesses: Wet Markets, Mom-and-Pop Grocers

III. Competition

IV. Best Product Prospects

     A. Products Present in the Market Which Have Good Sales Potential

    B. Products Not Present in Significant Quantities but Which Have Good Sales

    Potential

     C. Products Not Present Because They Face Significant Barriers

V. Post Contact and Further Information

UNCLASSIFIED USDA Foreign Agricultural Service

GAIN Report - KS7024 Page 3 of 24

I. Market Summary

A. Korean Retail Industry Overview

     1The retail sector in Korea has undergone dramatic change ever since the opening of the first hypermarket store in 1993 (E-Mart store by Shinsegae Co.) and the liberalization of mass retail business to foreign ownership in 1996 (Macro, a Dutch retailer, was the first one to enter the market). Modern mass retail businesses such as hypermarkets, grocery supermarkets, convenience stores, and on-line retailers have grown rapidly at the expense of traditional retail outlets, including wet markets and family-oriented small grocers. Growth of these new retailers, coupled with the development of information technology and income levels, has significantly changed the way Korean consumers purchase daily necessities and has also changed consumers’ perception of the value and quality of food products.

     2As of 2005, the size of the overall retail market in Korea is estimated at Won (W) 157.1

    trillion (approximately $149 billion), a 5.2 percent increase from the previous year. The growth of overall retail market sales has slowed down in recent years due to the sluggish economy and stagnant performance of traditional retailers. However, modern mass retail businesses have continued to expand rapidly, and accounted for 40 percent, or W62.8 trillion, of the market in 2005. Although diminishing, traditional retailers still account for a significant part of the market especially in areas where modern mass retailers have yet to penetrate.

    Hypermarkets have become the single largest retail force in Korea, replacing department stores. Hypermarkets currently account for 15.0 percent of overall retail market sales, or W23.5 trillion in 2005. The share of hypermarkets is likely to increase further in the coming year, as there still remains room in the market for an additional 100-200 stores. In particular, expansion of metropolitan areas across the country fuels the growth momentum for hypermarket stores, which target densely populated urban markets.

    The growth of the on-line shopping segment has been most remarkable in recent years. The sales of on-line retailers, including Internet shopping, TV home shopping, and catalog shopping, has grown 188.7 percent during the last five years to take 9.7 percent, or W15.3 trillion, of total retail market sales in 2005. Convenience and better assortment have been the driving force behind this explosive growth of on-line shopping in Korea. Of course, dense population and high affinity towards information technology were also the key factors behind this success. It is expected that on-line shopping will become the second largest retail channel in Korea by 2008 provided that the current growth rate is maintained.

     3Table 1. Breakdown of Korean Retail Market

    42001 2005 Growth Segment % Sales Share Sales Share

    Hypermarkets W10.6 trillion 8.1 % W23.5 trillion 15.0 % 121.7 %

    Department Stores W16.1 trillion 12.2 % W17.2 trillion 10.9 % 6.8 %

     1 Korea refers to the Republic of Korea (South Korea) in this report. 2 $1 = W950 as of January 1, 2007 3 Source: Food Distribution Yearbook 2006 (The Monthly Food Journal), The Yearbook of Retail Industry 2006 (Korea Superchain Association), Shinsegae Retail Industry Research Institute Data 4 Year 2005 data are the most up-to-date official statistics available currently. UNCLASSIFIED USDA Foreign Agricultural Service

GAIN Report - KS7024 Page 4 of 24

    5On-line shopping W5.3 trillion 4.0 % W15.3 trillion 9.7 % 188.7 %

    Convenience Stores W1.9 trillion 1.4 % W4.6 trillion 2.9 % 142.1 %

    6Chain Supermarkets W2.0 trillion 1.5 % W2.2 trillion 1.4 % 10.0 %

    Traditional Retailers W86.6 trillion 65.9 % W91.3 trillion 58.1 % 5.4 %

    Others W19.6 trillion 14.9 % W26.5 trillion 16.9 % 35.2 %

    Total W131.5 trillion 100% W157.1 trillion 100% 19.5%

     7Total food sales of the retail sector were estimated at W50.2 trillion for 2005, up 1.5 percent from the previous year. In other words, food sales accounted for about 32 percent of overall

    retail market sales. Hypermarkets have become the leading retail channel for food products,

    selling an estimated W12.7 trillion of food products in 2005. The average Korean household

    spent W292,300 (approximately $307.7) per month, or 14.4 percent of total monthly

    expenditures purchasing grocery foods in 2005.

     8Table 2. Estimated Food Sales by Retail Format

    Percent of Sales from Food Year 2005 Total Food Sales 9Products

    Hypermarkets 54.1 % W12.7 trillion

    Department Stores 14.2% W2.4 trillion

    Convenience Stores 41.5 % W1.9 trillion

    Chain Supermarkets 82.4 % W1.8 trillion

    On-line shopping 8.4% W1.3 trillion

Table 3. Breakdown of Monthly Expenditure on Grocery Foods by Average Korean 10Household

    2002 2005

    Items Spending Share Spending Share

    Grains & Cereals W48,356 19.9 % W45,652 15.6%

    Meat W38,601 15.9 % W41,596 14.2%

    Milk & Dairy products W19,229 7.9 % W22,102 7.6%

    Fishery products W29,138 12.0 % W32,632 11.2%

    Vegetables including W34,997 14.4 % W39,917 13.7% Seaweeds

    Fruits W22,266 9.2 % W33,505 11.5%

     5 On-line shopping includes Internet shopping, TV home shopping, and catalog shopping. 6 Large supermarket retailers that operate multiple number of stores. 7 Source: Monthly Household Spending, National Statistics Office 8 Traditional retailers are excluded in this table. 9 Source: The Yearbook of Retail Industry 2005 (Korea Superchain Association) 10 Source: Monthly Household Spending, National Statistics Office (Average size of a household in Korea was 3.3

    people as of year 2005)

    UNCLASSIFIED USDA Foreign Agricultural Service

GAIN Report - KS7024 Page 5 of 24

    Seasonings, Oils, Fats W16,157 6.6 % W17,919 6.1%

    Bakery and Snacks W15,817 6.5 % W22,634 7.7%

    Tea, Soft drinks, Alcoholic W15,578 5.7 % W22,381 7.7% Beverages

    Other foods W4,470 1.8 % W14,049 4.8%

    Total W243,103 100 % W292,384 100 %

    Rapid expansion of hypermarkets and on-line shopping retailers has heightened the competition in the industry in recent years, resulting in mergers and acquisitions (M&A) not only of small, regional retailers by large national retailers, but also consolidation among large retailers. In particular, acquisition of Carrefour Korea (a French -based hypermarket retailer) by E-Land Group and acquisition of Wal-Mart Korea by Shinsegae E-Mart in 2006 took the industry by surprise because these incidents were seen as 'unexpected' victories of local Korean retailers against multi-national competitors.

    Competition and consolidation in the industry is expected to remain strong in the coming year as leading retail companies aggressively seek to establish 'horizontally integrated' businesses that encompass the whole spectrum of retail segments. For example, both Shinsegae Co. and Lotte Co., the top two retail conglomerates in Korea, have pursued an active M&A strategy over the years. This strategy includes raising capital from the public stock exchange to expand and operate full-spectrum retail businesses, including convenience stores, grocery supermarkets, department stores, hypermarkets, and on-line shopping (Internet, TV, and catalog). The leading Korean retail conglomerates are also making serious investments into developing Asian countries, including China and Vietnam, in an effort to find new growth opportunities. For example, Shinsegae Co. added two new stores in China in 2006.

    Currently, few of the modern mass retailers import food products directly. Rather, retailers tend to purchase from specialized importers. However, retailers of international origin, Costco in particular, do import directly using international sourcing networks. Mass retailers of local origin are seeking ways to increase the assortment of imported foods through direct importing, but any rapid move is unlikely in the near future as they lack experience and expertise on international sourcing. Mass retailers are also paying more attention to private label branded (PB) products, including processed food items, for higher profits and consumer loyalty. But again it will take some years for local mass retailers to catch up with the PB program of international retailers for imported foods.

    Growth of modern mass retail businesses has coincided with the rapid development of a modern, large-scale logistics and distribution sector in Korea. Most mass retailers are now equipped with a nationwide, temperature controlled distribution network of trucks and warehouses. However, small to medium size retailers generally rely on third party independent logistics services due to the high overhead cost. Many food importers have their own distribution force covering major metropolitan markets but use third party distributors when supplying stores in suburban regional markets.

B. Consumer Trends

    Like consumers everywhere, Korean consumers are looking for better value, convenience, new tastes, and safer and fresher products in their shopping trips.

UNCLASSIFIED USDA Foreign Agricultural Service

GAIN Report - KS7024 Page 6 of 24

    Due in part to the increasing health awareness of aging consumers, there is a heavy emphasis among the general public on healthy eating. Organic food and wine, among many others, are gaining popularity among health-conscious aging consumers and young mothers. 'Well-being' is another popular theme in the market behind the consumer trend of seeking healthier and more 'wholesome' products. For affluent consumer groups and young professionals, quality and image can be more important factors than price and value when making purchasing decisions.

    Korean's long-held strong belief in health-improving functionality of regular foods (as an old Korean proverb says "food and medicine are from the same source") still prevails and contributes to the ongoing trend of seeking functional effects in almost every food they encounter in the market. As a result, sales of functional foods (or regular foods targeting health concerns) with government approved efficacy claims and perceived efficacy based on word-of-mouth remain strong. Glucosamine, Chlorella, vitamins, anti-oxidants, lactic bacteria, antlers, pollen, green tea, fish oil, Ginseng and other Asian herbs are some of the functional ingredients that are popular in the market.

    Table 4. Aging Korean Population

    1995 2000 2005 Age Growth 11Group Number Share Number Share Number Share

    0-14 10,236 23.0 % 9,639 21.0 % 8,986 19.1 % -6.8 %

    15-64 31,678 71.1 % 32,973 71.7 % 33,690 71.6 % 2.2 %

    65 + 2,640 5.9 % 3,372 7.3 % 4,365 9.3 % 29.5 %

    Source: Korea Statistics Office

Consumer demand for products of higher quality and new taste are increasing along with the 12growth of income level of Korean consumers. Korean GDP reached $787.5 billion in 2005, 13up 15.7% from the previous year. Per capita GNI also grew by 14.8% to reach $16,291.

    Korean government estimates that the per capita GNI will reach $20,000 for the first time in history in 2008. If the $20,000 level is realized, Korea would become one of the most affluent countries in Asia following Japan, Singapore, and Taiwan. At the same time, broadening consumer tastes and buying power are creating demands for more diversified quality and price options. For example, while the strong demand for lower prices by the middle to low income consumer group has driven the rapid expansion of hypermarkets, sales of luxury goods of premium quality and price in department stores have also shown strong growth even under the economic slow down in recent years.

    Korea's 50 million inhabitants occupy a country the size of the Indiana. About 70 percent of the land is mountainous terrain and over 90 percent of Korean population lives in metropolitan areas, which explains the high population density and land cost. Convenience remains a very important factor behind many consumer trends in Korea as everyday life gets busier. For example, an increased number of dual-income families and single parent households have led to a growing demands for HMR (Home Meal Replacement) products in retail stores.

    Mass retailers have actively responded by introducing in-store fast food and deli outlets, prepared food sections, and more microwavable (or ready-to-eat) processed foods. Delivery service is extremely well developed in Korea, as people do not want to waste time on the traffic-jammed roads. Rapid growth of on-line shopping is also rooted partly in the demand for convenience (of course, high land cost is another factor that drives stores to go 'virtual').

     11 Unit: 1,000 people 12 Gross Domestic Production Annual, GDP 13 Gross National Income Annual, GNI

    UNCLASSIFIED USDA Foreign Agricultural Service

GAIN Report - KS7024 Page 7 of 24

C. Food Imports

By nature, Korea depends heavily on imports as the local agriculture and fishery industry 14alone can only supply 45.7 percent of average caloric intake. Roughly 70 percent of all

    food in the market is imported. In particular, local production is not capable of meeting increasingly diversifying consumer tastes for international products and the demand for wider price and quality options.

    Table 5. Imports of Agricultural, Forestry, and Fishery Products into Korea 15(Year 2006, Jan. through Nov., CIF value)

    From the World Total From the U.S. Category Value Growth Value Growth

    Basic Commodity $2.9 Billion 0.7% $1.3 Billion 44.7%

    Intermediary $4.0 Billion 10.7% $740 Million 5.5%

    Consumer-Oriented $4.4 Billion 16.2% $851 Million 13.3%

    Forestry $1.9 Billion 13.6% $153 Million -2.2%

    Fishery $2.4 Billion 14.9% $124 Million -5.0%

    Total $15.6 Billion 11.2% $3.2 Billion 20.2%

    Growth of modern mass retailers and changes in consumer tastes are translated into growing opportunities for imported consumer-ready food products. According to official import statistics, total imports of consumer-oriented foods in 2006 (Jan. through Nov., CIF Value) increased 16.2 percent from the previous year to reach $4.4 billion, while imports from the United States also grew by 13.3 percent to reach $851 million. One-stop themed

    hypermarkets and large supermarkets have become the major retail channel for imported foods as they offer a shopping environment where imported products can better compete against locally manufactured or grown products. In addition, large retailers are seeking ways to increase their assortment of imported foods in an effort to differentiate their stores from competitors.

     16The outlook for U.S. exports to the Korean retail sector is excellent for beef, pork, poultry,

    seafood, processed vegetables, fruits, nuts, dairy products, juices, alcoholic beverages, condiments, sauces, cooking oils, organic foods, coffee, snacks, and confectioneries. In addition, on-going trade liberalization will create new opportunities for those products that are currently face restrictive import barriers in the form of tariffs, quotas and food safety regulations.

    Table 6. Advantages and Challenges Facing U.S. Products in Korea

    Advantages Challenges

    Korea is a market where new ideas and Consumers are generally biased toward

    trends are eagerly tried and accepted, locally produced products. Many consumers

    leading to greater opportunities for new-to-maintain a negative view on the quality and

    market products. Consumers are looking safety of imported foods. Imported foods

    for new and international tastes as the are often associated with contaminations

    income level continues to rise. and potential food-born diseases. In

    addition, food safety issues are increasingly

    becoming a means to restrict imports.

     14 Korean Government Annual Report containing 2005 official agricultural data issued on December 2006. 15 Source: Korea Trade Information Service (KOTIS), Korean Government 16 Current regulation allows imports of deboned skeletal muscle meat of cattle under 30 months old from pre-approved slaughter houses only.

    UNCLASSIFIED USDA Foreign Agricultural Service

GAIN Report - KS7024 Page 8 of 24

Korea, by nature, depends heavily on Consumers hold negative perceptions about

    imports for its food and agricultural needs. GMO products. Retailers fear reprisal from

    anti-GMO activists and, consequently, refuse

    to stock any product that would have to be

    labeled "Contains GMO".

    Liberalizations of import barriers improve Imports of many products face restrictive

    market accessibility and price trade barriers, including high tariffs, volume

    competitiveness of imported U.S. products. quotas, safety documentation requirements,

    and Korean language labeling regulation.

    Certain food additives approved for use in

    the United States may not be approved in

    Korea.

    Growth of modern mass retail businesses Few large retailers import directly. Local

    offers new opportunities to imported retailers in general lack experience and

    consumer oriented products. Large retailers expertise for international sourcing. Markets

    seek a way to increase the assortment of outside metropolitan areas have low access

    imported products to differentiate from to imported foods. Most retailers require

    competitors. minimum two thirds of designated shelf life

    left for imported products upon delivery to

    the warehouse.

    Due to the long history of economic and High margins/markup on imported products

    political ties between Korea and the United coupled with import tariffs and taxes

    States, Korean consumers are familiar with deteriorate price competitiveness of many

    American products and food trends. English imported products against locally grown or

    is the most popular foreign language for manufactured products.

    Koreans.

II. Road Map for Market Entry

A. Modern Mass Retail Businesses - Hypermarkets, Grocery Supermarkets,

    Convenience Stores, Department Stores, On-line Retailers

A-1. Entry Strategy

Establishing Korean Partner:

    Thorough research about the market and related regulations is necessary for any U.S. exporter who seeks entry into the Korean retail market. Korea has well established regulations and procedures on food imports, as well as complex tariff and tax codes, which often make an entry of a new-to-market product a time consuming process. In addition, certain food additives approved for use in the United States may not be approved in Korea. U.S. exporters must be willing to conform exactly to the Korean labeling and documentation requirements. Working with established importers is the approach that has been proven most efficient in overcoming these challenges.

    ? Established importers are well aware of market intelligence, local business practices, distribution channels, and most of all are the best source for up-to-date information on government food import regulations.

    ? ATO Seoul maintains listings of established Korean importers by product or by industry, which are available at no cost to U.S. exporters. ATO Seoul also feeds trade lead information from Korean importers to State Regional Trade Groups (SRTGs), which are disseminated to U.S. exporters through the network of the state department of agriculture or trade promotion agency. ATO Seoul regularly organizes Korean buyer missions in cooperation with SRTGs and UNCLASSIFIED USDA Foreign Agricultural Service

GAIN Report - KS7024 Page 9 of 24

    agricultural cooperators to major food shows in the United States, such as the FMI Show and the NRA Show, for matchmaking with U.S. exporters.

? Exhibiting in a Korean food trade show can be a cost-efficient way to meet with a large 17number of key Korean importers/traders. Currently, the Seoul Food & Hotel (SFH) is the

    only show in Korea endorsed and supported by U.S. Department of Agriculture/Foreign Agricultural Service (FAS). Exporters who are considering exhibiting at any Korean show may contact ATO Seoul for guidance and information because most local shows are consumer-oriented and are not particularly efficient for promoting new-to-market products.

    ? The type of business relationship agreed between the U.S. exporter and the Korean importer may vary from joint investment partnership, to exclusive agent, to non-binding broker. The type of relationship mainly depends on how the exporter sees the role of the importer in market development. The most common practice is maintaining a non-binding seller-buyer relationship during the test-market period and then upgrading to a more binding option if the market shows bigger potential.

    ? There are many items that the U.S. exporter should follow closely with the importer during the initial stage of market entry. The Korean government maintains very strict regulations on food imports and requires various certificates/documents and product information before approving import of a new-to-market food product. Therefore, the exporter must provide the importer with the necessary documents and information to submit to the government authorities. More detailed up-to-date information on the Korean food safety and labeling regulations can be found in the FAS report #KS6080 (Korean Food and Import Regulations Standards Report Year 2006, www.fas.usda.gov).

    ? New-to-market U.S. exporters should pay attention to protecting the company/product trademark and patents, which can be easily handled by working with the Korean partner or through local attorneys. For more information, see the Korea Industrial Property Rights Information Service website at: http://eng.kipris.or.kr or the Korea Institute of Intellectual Property website at: http://www.kiip.re.kr/eng.

    U.S. brokers or export middlemen may get involved in the entry of a new-to-market product into Korea especially when the original U.S. supplier (manufacturer or producer) is not interested in export business or when the volume of business is small. Although Korean importers in general prefer to work directly with the original supplier, using experienced brokers or middlemen can be a more efficient way to find established Korean importers. For those large retailers who import directly, Costco Korea in particular, working directly with the purchasing network of the retailer in the United States can be a way to gain entry into Korea.

Understanding Local Tastes:

    All foods sold in retail stores in Korea, whether traditional or imported, reflect the contemporary dietary culture of Koreans. Even those new-to-market imported foods that recently appeared on the shelf mirror the on-going trends and tastes of local consumers. Accordingly, a good understanding of trends and local tastes is the key to make a successful entry into the Korean market. At the same time, considering the rapid evolution of the sector, it is very important to be kept informed of the changes in the tastes of Korean consumers to stay ahead of the competition. A rule of thumb is that new food trends in Korea are two to five years behind Japan, a reference market that Korea has followed for the last 50 years when accepting western culture and products, although the time gap between the two countries seems to be narrowing.

     17 April 24-27, 2007 (www.seoulfood.or.kr)

    UNCLASSIFIED USDA Foreign Agricultural Service

GAIN Report - KS7024 Page 10 of 24

    Meeting the Korean consumer's tastes could mean anything from modifying packaging material and design, to reducing unit size, to adding or reducing ingredients. Package design, in particular, is a very important factor in Korea and exporters should consider developing a new design that can better attract Korean consumers. Although most Koreans read English, adding Korean on the package design can improve the level of exposure on the shelf. The current trends in package design include freshness, new tastes, fun, and

    environmentally friendly themes.

    Another noteworthy issue in packaging is the separate Korean language label required on imported products. This added stick-on label can detract from the appearance of the product. Exporters should discuss the design of the Korean language label with the importer. Korean language labels are in general designed and printed by the importer and hand-attached to the products in the duty free warehouse before the customs inspection.

A-2. Market Structure and Product Flow

    Few mass retailers currently import food products directly. Instead, purchasing managers of the retail company in general rely on independent importers for imported products. These purchasing managers tend to be risk averse and many are not familiar with foreign products or brands. Furthermore, many retailers maintain the policy of rotating purchasing managers among different product categories every two to three years to prevent corruption or job abuse. Consequently, few local purchasing managers have the expertise and experience necessary for direct international sourcing. This limits the entry of new-to-market products to the Korean retail sector. The independent importers are required to bear a great amount of the risk when placing a new product on the shelf. As a result, importers tend to add high markups to new-to-market products to cover potential losses.

    In contrast, mass retailers who do direct importing, Costco Korea in particular, take aggressive positions in introducing new-to-market imported products by adding much lower markups. Korean agents of foreign food exporters are another force that handles a significant amount of imported food traffic in the sector. Independent importers and agents may supply mass retailers directly, but may use wholesalers or brokers when supplying small retail stores or traditional retail outlets in suburban markets.

    It takes at least two weeks for a container ship from a western U.S. port, and four weeks from an eastern port, to arrive in a port in Korea. In general, most imported consumer ready products enter the country through the port of Busan. In rare occasions, small-volume-high-value products, such as premium wine and beef, are brought via air cargos through Incheon International Airport (ICN).

    The amount of time that the product sits in the port of entry for food safety inspection and customs clearance process varies from one day to a few weeks largely depending on the type of product. The detailed laboratory inspection that all new-to-market products and 18randomly selected returning products are subject to may take as long as ten working days. In case of live animals, the quarantine sanitary inspection can take more than a couple of months. The documentary inspection allowed for products that have previously cleared inspection may be completed within a couple of hours.

    Once the products are cleared from the customs office, they are transported to the importer’s warehouse for storage. Importers may have warehouses in more than one

    location (in the case of alcoholic beverages, up to two warehouses are allowed). From the

     18 'Same Product from Same Origin' rule allows quick "documentary inspection" on imported products that have been imported regularly in the past.

    UNCLASSIFIED USDA Foreign Agricultural Service

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