Overview of Korea Economy and Franchise Business

Franchise Glance

“We consider South Korea as a developed market, meaning it is no different to the UK or the US… Korean consumers are demanding and expect high-performing products.” Hari Nair: Managing Director, Kimberly-Clark’s.

Recently everything seems prefixed with a K: K-Pop, K-food, K-beauty, K-movies; why not go to your local K-culture festival, sure there must be one near you, or coming soon. Korean culture is on fire at the moment and has been warmly received. Domestic franchisors have, quite rightly, been riding this wave and rapidly expanding internationally-China being a Korea franchisors first choice. However for an overseas franchisor looking in, what is this market like?

GDP was US$1.2 trillion in 2013 and predicted to rise as consumer spending and confidence grows through 2014 and 2015. The Hyundai Research Institute latest report predicts Korea will expand by 3.5% in the first half of 2015 and 3.6% in the second half.

Considering Korea’s comparatively slower Asian growth, it remains a good target for franchisors owing to historical years of stable growth, an affluent consumer base and early advancement of the country. The average disposable income per household per month was US$3150 in the second quarter 2014, a rise of 2.8% from the second quarter 2013, with significant rises in bakery, confectioneries & snacks, coffee & tea, and juice & beverages sectors (Statistics Korea).

The demand for foreign brands spans a range 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 not the general trend of a new, emerging middle-class. Supported by media and a relatively high degree of travel experience, the Korean consumers are knowledgeable in a developed, globalised market.

Korean consumers have a strong purchase history of foreign brands so as well as valuing money, they have a high understanding of brand philosophy and marketing channels. They will readily try new products and are always seeking 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, nearly 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 over 65% higher than the USA. This combination means a high proportion of online spending and retail ecommerce is predicted to touch $25.3 billion by 2017 (Borderfree). Any marketing strategy has to be multi-channel and use aspects of social media to advertise brands and utilize the technology to offer more efficient shopping channels and delivery.

Korea’s population is ageing and urbanized. The median age in 2012 was 39.1 years and the over 60 group is predicted to account for nearly 25% of the population by 2020 (Statistics Korea). Some franchisors may already target this older market whereas others may be able to easily adapt or extend to target this group. However for the rest of us do not despair, as PwC reminds us, 70% of the population remain within most retailers target demographic of 15-64 years old.

With over 90% of the population living in urban areas, these conurbations are massively populated, wealth dense spaces and retail premises come at a premium. The 4 main population areas: Seoul metro-15 million, Busan metro-4 million, Daegu metro-3 million, and Daejeon metro-2 million.

Key retail players are set to open mega malls outside of the main cities over the coming years but presently Gyeonggi (the area directly surrounding Seoul) and Seoul account for 42% of the total shop space in all Korea (www.kintex.com). Supermarkets and hypermarkets lead retail channels and this lead will increase as it matches the 3 main purchase drivers of choice, convenience and price.

Despite economies of scale enabling big shopping complexes to effectively compete with smaller stores, operators are always seeking to differentiate themselves from each other. Enhancing shoppers experience by offering the latest trend brands are a main way they do this. They are not only looking for exciting overseas tenants, these operators are also willing to take on Master agreements and roll out concepts across their formats.

If this is an entry strategy of interest, bear in mind that these companies are looking for a brand that will drive traffic, so the product or service either has to an established name or have a strong unique factor attached to it. Quirky with long term viability can be good USP and malls, a very effective way to introduce your brand into Korea-mainly as the cost of educating the population will be borne by the mall operators and you can be assured it will be done with a high level of proficiency.

The franchise market in 2013 was estimated at US$89.8 billion with nearly 3,000 franchises. There were 283 retail franchises, 601 service franchises and 2,089 food service franchises (export.gov). Even with recent downgrades of GDP, the franchise industry has displayed respectable growth over recent years with on average 200 new franchises opening annually since 2010.

Koreans are very open to partnering with overseas franchisors, especially with those that have an existing reputation in Korea or core values which reflect their origin country. Koreans aged 55 and over have recently proved themselves to be good franchisees as they have more capital and knowledge, and being a family orientated culture, will pass the business down to their children. The franchise industry regulations ensure business generally runs smoothly and Korea is regarded as a straightforward place to franchise into.

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 an overseas franchisor to recruit a multi-unit or bigger partner. There will also be a good deal of negotiation around royalties as they are usually lower for domestic Korean franchises.

Brief breakdown of sectors:

  • The Korean food market is expected to be US$53.5 billion in 2013 and account for 25% of total retail sales; a growth of 5.5% from 2012 (JLL).
  • The organic food market is anticipated to grow to US$6 billion by 2020 (Organic Trade Association).
  • The online channel is forecast to grow at CAGR 11.38%, 2013-2018 (Research and Markets).
  • South Koreans spent US$17.9 billion on private tuition in 2012.
  • The beauty and personal care retail market posted 5.8% growth year on year to 2013.
  • The cosmetic sector was the best performing sector in 2012.
  • Korea is the 8th biggest luxury market worth almost US$4.5 billion.
  • Households spent 12.4% of total consumption expenditure on eating outside the home (GAIN).
  • In 2012, imports of chocolate based confectionary products from the United States were up 12% from the previous year (GAIN).
  • Korea has become the largest men’s cosmetics market in the world. The US$635m spend in 2013 was nearly a fifth of the global figure (Euromonitor).

Korean consumer

Koreans are educated, sophisticated, relatively well-off and well informed. With advanced consumers comes a choosy, higher demanding buyer. Strategy and approach should parallel other advanced countries. The consumers are not looking for just a global brand, they are seeking a brand that has a distinct USP and they will pay more for this. That USP can be in reputation, quality, ingredients or innovativeness, but it must stand apart from the crowd in a specific way.

This does not mean all markets are saturated and there is no opportunity for new sectors. As mentioned, there is an ageing population and the affluent 50+ baby boomer generation is far from complete. Other noticeable changes that are opening markets:

  • Increase of dual income families.
  • Rise in single parent households.
  • Increase in single member households.

Korean consumers are very used to being informed across a variety of channels about a product before they purchase it. A 2012 survey by Embrain Trend Monitor found that 79% of customers check user reviews before purchasing and 74% have written evaluations and reviews. Therefore, the more information you can provide across a variety of channels will only be a good thing. The surprise or curiosity advertising strategy will either have to be carefully moulded or have a very solid budget behind it.

Koreans are image conscious in all aspects and they have the experience to understand what lifestyle or status a brand portrays. They closely follow and are influenced by the media and celebrity styles and trends. Although these fads can be short lived, it is good advice to have the ability to quickly adapt and run campaigns or introduce extension products that connect with the latest trends.

Overview of where demand lies and where future demand could lie:

  • Due to the wealth of recognised foods, innovative and premium foods will appeal.
  • Franchises providing efficiency in shopping and delivery will match consumers convenience needs.
  • Koreans are educated and understand the need for their children to be. Within this market exists high demand for vocational and language services.
  • An older, fairly affluent demographic presents a growing market for targeted services and products.
  • Think of Koreans as discerning consumers. They seek organic, natural, fresh, high quality products.
  • Health improving and anti ageing foods and businesses will show high demand.
  • Health benefitting herbs will be trend ingredients.
  • Koreans prefer food with brighter, more saturated colors (Origin of human colour preference for food).
  • Specialty stores stocking a range of niche, higher priced, quality items that tie in with the above are spreading across Korea and cover a range of sectors from beauty to bakeries to grocers.

The bottom line:

A solid market but with competition, and commercial estate can be expensive. This has to be balanced with the sophistication and affluence of the market. It can not be denied that at present there is more of a trend of coming out than into Korea, however, with a developed market that has a proven globalised view, it is an easy country to enter.

To conclude: Although potential may not be as great as their Asian neighbours, reduced time and costs from having educated consumers and well versed franchisees are key points.

Franchise Meets reckons: 7/10.

Overview of the Franchise Business in Myanmar

Franchise businesses are growing at a rate faster than any other sector of the economy. And they’re creating jobs at a faster pace too.

In America for the fifth consecutive year, 2015 is expected to see another big expansion – 5.1% according to projections from the International Franchise Association.

In the UK growth from 2003 to 2013, when the most recent comparable data is available, shows that franchising expanded by 42% in terms of its turnover, well ahead of the 11.5% growth in real GDP.

And in Myanmar????? Yes Myanmar – the new lucrative Asian franchise market.

New to the franchise industry it naturally lags behind its Asian neighbours: Indonesia has 486 franchise brands and 39,000 outlets; Malaysia has 666 brands and 5066 outlets; Philippines has 1500 brands and 140,000 outlets; and Singapore has 500 brands and 3000 outlets (PFA). The industry in these countries, as in USA and UK, creates jobs and contributes to GDP. Myanmar aims to follow this and has recently set up their own Franchise Association.

At present the Association has many hurdles to overcome especially as it has limited legal powers and the Government does not fully support the group, but it is early days. For franchisors, Myanmar has been seen as the remaining Asian frontier and is attracting interest from overseas countries, Japanese and Korean food franchises are especially popular. These chains will often keep some of their domestic food taste items to differentiate and attract consumers seeking traditional flavours. Bigger name companies such as KFC and Starbucks are actively researching Myanmar as the low overheads and lack of competition are key drivers of entry.

Myanmar has a population of over 50 million consumers and the SME business thrives, accounting for 97% of all companies. For these smaller companies a more organized franchise system would give them the opportunity to explore franchising as a route for growth. At present there are currently about 50 main franchise brands in the country but as the franchise regulations improve and franchise knowledge becomes more widespread we hope to start a sharp upturn in this number.

Presidential economic adviser, U Aung Tun Thet, stated that the main hurdle is not a lack of specific laws or associations, but just a lack of knowledge of how franchises operate.

There are concrete steps that can be taken to support development of franchises, Myanmar’s franchise association should be recognised and supported by the government an. Hopefully the Government will listen and franchising will be a strong contributor to GDP and an economic driver over the coming years.

Why Choose Food Franchising As a Business?

Venturing out the traditional business will be risky. People may be hesitant of trying something they are not familiar with. But with our new generation of entrepreneurs will show you that there is nothing wrong in trying the new way of having a business. Getting a food franchise will not bring you down. Here are some reasons why more people are choosing food franchising as their business:

1. Food franchising already have their brand recognition. These already established food recognition and their name reputation. This is really important due to the fact that they already have their customers. It is an advantage if customers are familiar with your business brand; it only gives you a sure success. Customers trusts the brand, and these franchise businesses already done that for you, no need for you to do this because it will take a long time to earn trust from your customers.

2. Food business has a high rate of success compared to traditional business- there is 95% of success rate in a food franchising business, compared to traditional businesses only 20% of them survives in the first year of their business, almost 80% looses their business on its first year.

3. High profitability will be an assurance- in a food franchising business you can see how you earn usually within 2-3 months. Food franchising businesses already developed the right system in running and maintaining their business, they had formulated this system after so many trials and errors (you don’t need to take the risk of doing that anymore). Our new entrepreneurs that have been joining this hall of great businessmen had gone through trainings and seminar; learning from pool of great entrepreneurs.

4. Food enterprises has a strong company as its backbone, having a food venture is like leaning on a wall, you’re are sure that you are partnered with a company that is strong and capable of maintaining a good business. In this time, recession made a big impact to businesses all over the world, only strong companies remained, this is one good reason why people choose to have food franchise business; the assurance that their business will go towards the right directions.

This industry is continuously growing and it is showing a great numbers in terms of their success and revenues. High rates of success, convenience in running your business, partnership with great and experienced companies will really be an advantage of getting food franchising as your business. But you also have to be aware that there will be some companies that will take advantage of this great success. Just be vigilant in picking a food franchise business to protect yourself from illegal franchising operations.