Feature... Korea's new consumer movement

Foreign brands who adapt to these desires will have a foot firmly in the door.

At a glance, the South Korean market might seem an unappealing option for non-Korean companies looking to expand: the prospect of operating under the shadow of the chaebol (family-owned) giants; a stagnant consumer goods market that has seen no movement for four years; a looming recession; enigmatic, apparently nationalistic consumers; and tight controls on advertising.

But as the market shifts focus and shoppers change their habits - even as the clouds of recession gather overhead — new opportunities are opening up for domestic and foreign companies with a clear value proposition and a willingness to adapt to the often very specific requirements of the Korean consumer.

Consumer purchases in the country have already moved from FMCGs to IT and telecoms. Technological and industrial brands now make up 44 per cent of the country’s total advertising spend. In contrast, FMCG brands last year accounted for less than half of that figure at 20 per cent. In April, domestic cosmetics firm Amore Pacific was the only mainstream FMCG brand to feature among the top 10 advertisers. The ranking included the top three local mobile phone companies. Jae-hang Park, director of Cheil Worldwide’s Brand Marketing Institute, describes this transition as a natural progression.

Meanwhile, a growing interest in lifestyle trends among Koreans means that niches are opening up in the market, particularly within the areas of general and financial services, luxury goods and over-the-counter pharmaceuticals.

Les Edwards, vice-president and managing partner of Lee DDB, offers the explanation that Korea, as a country just emerging from a six-day working week, still lags behind in areas pertaining to lifestyle.

Korea is good at making things, he says, noting that it would be difficult for non-Korean manufacturers to compete with the innovation, precision and speed to market demonstrated by chaebol such as LG and Samsung. When it comes to manufacturing, the domestic brands will always be the strongest. But there are also things Korea is not good at.

This is certainly apparent in the service sector, which is currently enjoying double digit growth thanks to a maturing market. Similarly, the area of financial services is being boosted by a demand for increased sophistication, perpetuated by the downturn of the economy and the impact of technology on financial transactions.

Foreign financial institutions, such as Citibank, Standard Chartered Bank, HSBC, AIG and ING are bringing much-needed innovation to the sector, offering niche banking products to match a change in lifestyle that is leading Koreans to invest more time and money in personal enjoyment and comfort and in planning for the future.

Blair Currie, chief executive of Japan and Korea for Aegis Media, describes the change as a coming of age and the release of a pent-up demand from a public hungry for a better quality of life. There is lots of protection [of domestic brands] in Korea, Currie says, explaining that the rise of homegrown companies has strengthened Korea’s confidence in its global position. But people recognise innovation and want to have the best the world has to offer.

As T Kim, president and CEO of McCann Worldgroup Korea, notes, the demand for foreign fashion brands has already led local retailers to broaden their portfolio of imports from premium brands. Department store Shinsegae now stocks labels such as Gap and Banana republic, while Lotte has struck deals with moderately-priced chains Zara and Uniqlo. Local apparel companies, Kim says, are now paying the price for recklessly hiking their prices.

At the other end of the spectrum, the demand for premium and luxury products is expected to remain strong, regardless of fiscal problems. Indeed, according to a recent report in The Economist, the richest one per cent of Lotte Group’s department store customers last year accounted for 17 per cent of its sales, which totalled almost US$6 billion.

This demand, combined with a lack of domestic luxury products, means that high-end foreign brands stand a higher chance of success than those catering to the mass market. Even in the cosmetics field, where there are a sizeable number of local players, opportunities still exist in the luxury skincare sector, and overseas companies such as Estee Lauder, Clinique and Neutrogena have already made inroads.

David Richardson, regional director of North Asia and Greater China at market research firm TNS, makes the point that while the average Western woman is content with three Skincare products for daily use, her Korean counterpart uses between five and seven. Male spending on cosmetics is also increasing steadily.

The key to capitalising on such opportunities, according to Richardson, is localisation and adaptation combined with sufficient investment to build a credible presence.

International brands tend to underestimate the size and importance of the market and the competence of local companies, he observes. The Korean market is not dominated by global culture, and foreign products may not address local needs. They have to be brave enough and willing to adapt to local habits.

Among the companies to have done this and been well received by Korean consumers are Procter & Gamble and British supermarket chain Tesco. Paying heed to a struggling middle class and a saturated mass market, P&G has grown slowly and cautiously by focusing its energies on premium cosmetics since entering Korea in 1988.

Tesco, in contrast to rivals Wal-Mart and Carrefour, has successfully established itself as a serious contender to domestic operators such as Lotte under a joint venture with Samsung by tailoring its offering to suit local tastes: Korea is now the company’s most profitable market outside the UK, with an annual turnover of almost US$8 billion.

Statistics like this debunk the notion that the Korean consumer is inherently hostile towards foreign brands. But with increased fragmentation brought on - as Grey Korea’s strategic planning director Steve Yi notes — by greater interest in self-satisfaction rather than playing to the group, advertisers are now facing new challenges, as well as opportunities, in reaching out to their desired audience.

While some still advocate a two-pronged approach incorporating TV and online components to respectively drive awareness and stimulate word-of-mouth recommendations, Yi says increased mobility has weakened the impact of more traditional channels, with greater sensitivity needed in recognising the touch points that feature in a consumer’s path to purchase.

A recent report by Grey looking into the rise of hypermarkets - which, according to TNS, last year accounted for 31.2 per cent of the Korean market’s distribution channels - notes the importance of marketing to ‘shoppers’ rather than ‘consumers’.

According to the report, the average proportion of marketing spend allocated to in-store communications has increased from 40 to 64 per cent over the past decade.

Korea is also seeing the world’s most comprehensive adoption of online shopping, according to a recent global study by Nielsen Media Research, a development McCann’s Kim says in unsurprising in what is probably the most wired nation in the world. Over 80 per cent ofKorean households have internet connections while 10 per cent of the population maintain an individual blog.

We are analysing the emotional states [consumers] may be in when logged into a community site online to determine what messages will work, says Yi.

Effective touch points will vary by brand, but what is clear is that the messaging of the future has to be faster and shorter and spaced over a greater number of bursts, rather than a single burst with a long message.