Overview of Korea’s Franchise Business and Economy

Glance Franchise

“We view South Korea as a developed market, which means that it is no different from the United Kingdom or the United States … Korean consumers are demanding and expect high-performance products.” Hari Nair: managing director of Kimberly-Clark’s.

Recently, everything seems to have the prefix K: K-Pop, K-food, K-beauty, K-movies; Why not go to your local K culture festival? There must be one near you, or soon. Korean culture is on fire right now and it has been well received. Domestic franchisors have rightly been riding this wave and have expanded rapidly internationally, with China being the first choice of Korean franchisors. However, for a foreign franchisor looking, what is this market like?

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

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

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 are well acquainted with a developed and globalized market.

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

For a franchisor, the marketing has to be more sophisticated to match the level of the consumer. 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 more than 65% higher than in the US This combination means a high proportion of online spending and retail e-commerce is projected to reach $ 25.3 billion in 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 purchase 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 nearly 25% of the population in 2020 (Korea Statistics). Some franchisors may already target this older market, while others can easily adapt or expand to target this group. However, for the rest of us don’t despair, as PwC reminds us, 70% of the population remains within most retailers with a demographic between 15 and 64 years old.

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

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

Despite the economies of scale that allow large shopping complexes to compete effectively with smaller stores, operators are always looking to differentiate themselves. Improving the shopper experience by offering the hottest brands is one of the main ways they do this. Not only are they looking for exciting tenants abroad, these operators are also willing to accept framework agreements and implement concepts in all their formats.

If this is an entry strategy of interest, keep in mind that these companies are looking for a brand that will generate traffic, so the product or service must have an established name or have a strong unique factor attached to it. The peculiar with long-term viability can be a good PVU and shopping centers, a very effective way to introduce your brand in Korea, mainly because the cost of educating the population will be borne by the operators of the shopping center and you can be sure of to be done with a high level of competence.

The franchise market in 2013 was estimated at $ 89.8 billion with about 3,000 franchises. There were 283 retail franchises, 601 service franchises, and 2,089 foodservice franchises (export.gov). Even with recent GDP declines, 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 franchisors abroad, especially those who have an existing reputation in Korea or core values ​​that reflect their home country. Koreans 55 and older have recently shown that they are good franchisees as they have more capital and knowledge, and being a family oriented culture, they will pass the business on to their children. The regulations of the franchise industry ensure that business in general runs smoothly and that Korea is considered an easy place to franchise.

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 a foreign franchisor to recruit a larger or multi-unit partner. There will also be a good negotiation around royalties, as they are usually lower for Korean domestic franchises.

Brief breakdown of sectors:

• Korea’s food market is expected to be US $ 53.5 billion in 2013 and account for 25% of total retail sales; 5.5% growth since 2012 (JLL).

• The organic food market is anticipated to grow to $ 6 billion by 2020 (Organic Trade Association).

• The online channel is expected to grow at a CAGR of 11.38%, 2013-2018 (Research and Markets).

• South Koreans spent $ 17.9 billion on private tuition in 2012.

• The beauty and personal care retail market posted 5.8% year-on-year growth through 2013.

• The cosmetic sector was the best performing sector in 2012.

• Korea is the eighth largest luxury market with a value of nearly US $ 4.5 billion.

• Households spent 12.4% of total consumer spending on eating outside the home (GAIN).

• In 2012, imports of chocolate-based confectionery products from the United States increased 12% over 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 wealthy, and well-informed. With advanced consumers comes a demanding and demanding buyer. The strategy and approach must be parallel to other advanced countries. Consumers are not just looking for a global brand, they are looking for a brand that has a distinct USP and will pay more for this. That USP may 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 there is no opportunity for new sectors. As mentioned, there is an aging population and the wealthy generation of 50+ baby boomers is far from complete. Other notable changes that are opening markets:

• Increase in double-income families.

• Increase in single parent households.

• Increase in single-person households.

Korean consumers are very used to being informed through a variety of channels about a product before buying it. A 2012 survey by Embrain Trend Monitor found that 79% of customers check user reviews before buying 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 gold curiosity The advertising strategy will need to be carefully designed or have a very solid budget.

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 the styles and trends of celebrities. Although these fads may be short-lived, having the ability to quickly adapt and run campaigns or introduce extension products that connect with the latest trends is good advice.

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

• Due to the large number of recognized foods, innovative and premium foods will be attractive.

• Franchises that provide efficient purchasing and delivery will match the convenience needs of consumers.

• Koreans are educated and understand the need for their children to be. Within this market there is a great demand for vocational and linguistic services.

• A fairly affluent, older demographic presents a growing market for specific products and services.

• Think of Koreans as demanding consumers. They look for organic, natural, fresh and high quality products.

• Health-enhancing and aging-fighting foods and businesses will be in high demand.

• Herbs that benefit health will be trending ingredients.

• Koreans prefer foods with brighter, more saturated colors (origin of human preference for food color).

• Specialty stores that have a variety of quality, higher-priced, and niche items that tie in with the above are spreading across Korea, covering a variety of sectors, from beauty to bakeries to supermarkets.

The bottom line:

A strong but competitive market and commercial real estate can be expensive. This must be balanced with the sophistication and wealth of the market. It cannot be denied that at present there is more tendency to go out than to Korea, however, with a developed market and with a proven global 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 of having educated consumers and well-informed franchisees are key points.

Meets franchise estimates: 7/10.