South Korea has previously enjoyed a reputation as as one of the fastest growing markets in the world for luxury goods – but is it still on an upward trajectory? Fflur Roberts, head of luxury goods at Euromonitor investigates.
South Korea has been one of the fastest growing markets in the world for luxury goods over the last five years, fuelled by Seoul’s sophisticated shopping culture and its competitive prices for prestigious international brands. The department stores Lotte, Shinsegae and Hyundai are renowned for their aggressive discount activity, for example.
Valued at KRW 11 trillion (US$10.6 billion) in 2015, the luxury goods market in South Korea ranked 8th out of the 32 markets covered by Euromonitor International’s luxury goods research and accounts for 3.5% of the global market. However, with constant value growth of 56% in the five years to 2015, South Korea was the fourth fastest growing luxury goods market in the world behind India, Mainland China and Hong Kong.
Asia Pacific’s most equal income distribution – also one of the most equal in the world – has shaped a fairly balanced luxury market as incomes continued to grow on the back of a resilient economy. At the same time one of the rich world’s most rapidly ageing populations is creating expanding cohorts of affluent elderly consumers.
“ South Korea was Asia Pacific’s fourth largest economy in US$ terms ”
With a total GDP of KRW1,485 trillion (US$1.4 trillion), South Korea was Asia Pacific’s fourth largest economy in US$ terms in 2014. However, its economy expanded at a slower rate, at an average annual 3.7% in real terms, than the Asia Pacific annual average growth of 6.4% (in constant terms) in the 2009-2014 period, given that the region is home to many emerging markets, which have been growing more quickly than advanced economies such as South Korea.
The markets heavy reliance on global trade has exposed the country to global economic turbulence since 2011, including a gradual slowdown in China and the eurozone sovereign debt crisis. Although annual real GDP grew more strongly by 3.3% in 2014, its impetus was hampered by the Seoul ferry disaster in April 2014, which had a disproportionate effect on consumption and investment.
In 2015 and 2016, annual real GDP is expected to grow by 3.0% and 3.7% respectively, but this is highly contingent on global economic development. A slump in exports to China and sluggish growth in consumer spending are drags. An increase in government spending, a boost in lending from state-owned banks and expansion schemes at state-owned firms all support the economy.
“ The devaluation of China’s currency could act as a further drag ”
The export dependency of South Korea’s economy has increased over time. In 2014, exports represented 40.6% of GDP. The dollar value of exports rose by 2.3% in 2014 and a fall of 2.7% is forecast for 2015. Export performance is curbed by continuing weakness in the European and Japanese export markets.
Exports of machinery and transport equipment including cars and electronics accounted for 54.6% of the total in 2014. China, USA and the EU were South Korea’s main export markets, accounting for 46.8% of the country’s overseas sales. In 2014, exports to the US grew at a surprising pace while shipments to China and EU slowed.
However the latest news of the devaluation of China’s currency which was announced on Monday 9th August could act as a further drag as imports to China will be more expensive, with the move therefore causing consternation in the boardrooms of multinationals already battling slowing economic growth in China.
South Korea has concluded free-trade agreements (FTAs) with at least 45 countries and expects negotiations with China to be concluded soon. Seoul estimates that an FTA with China could help the national economy grow by 0.95-1.25% five years after it takes effect.
Seoul also concluded a FTA with Australia in 2013 and hopes to conclude one with Vietnam soon. If all these agreements come into effect, South Korea will be engaged in free trade with economies representing more than 70% of the global economy.
“ The population with an income over US$150,000 reached 593,000 by the end of 2014 ”
The population with an income over US$150,000 reached 593,000 by the end of 2014, which supports stable growth for luxury goods. Of the South Korean population on an annual gross income of US$150,000+, 23.7% belonged to the 45-49 age band, with another 22.7% in the 40-44 cohort. With the country’s forty-somethings making up 16.9% of the total population in 2014, demographics are a factor here.
At the same time, many senior “salarymen” in South Korean companies are in this age band, as they combine the much-prized seniority in Asian business culture, with the youth to master the technology at the heart of many of the country’s flagship technology companies.
Through to 2030, South Korea’s rapidly ageing population – the fastest among OECD nations in 2014 – will inflate the share of seniors in the uppermost income band.
In 2030, while the 45-49 cohort will comprise the largest slice of the population in receipt of an annual gross income of US$150,000, at 16.3%, the 65+ demographic – which will encompass 24.2% of the total population that year, almost double the 12.7% posted in 2014 – will surge to account for 15.2%.
Tokyo is only around two hours flying time from Seoul and (despite the at times strained relationship between Japanese and South Korean people) there is a strong tourism flow between the two cities. In 2014, over three million Japanese visited South Korea and over five million Chinese visited during the same time, according to data from Euromonitor International.
Wealthy Japanese tourists have historically been an important driver of Seoul’s luxury goods market. But, with increasingly competitive prices for luxury brands in Tokyo and with the rising cost of foreign travel (due to the weaker yen), the flow of Japanese tourists is set to slow this year.
Seoul could also lose out in terms of numbers of wealthy shoppers from both China and Japan. This is a big deal because the reliance on these two neighbouring countries of Japan and China is very high. Last year over 60% of total inbound trips were originated from these two countries. The two markets seek Korea for similar reasons but the average spending is higher for Japanese as they are more individual based.
“ Young South Koreans that are turning to international online retailers ”
Since 2012 arrivals from China have outnumbered arrivals from Japan for the first time ever in South Korea, reaching 5.2 million. China, it seemed, was about to become a key driver of Seoul’s luxury goods market.
However, with the latest currency fluctuations in China this surge in Chinese luxury shoppers could now be siphoned off. As a result, both government and industry are planning to promote increased visits from other countries such as Russia and Southeast Asia.
Macroeconomic pressures would have wielded a negative impact on South Korea’s luxury goods spending even without unfavourable fluctuations in exchange rates. However, what we are now seeing is a market squeezed on two fronts – by softer domestic spending on the one side, and by a potential slowdown of inbound Asian tourism on the other.
Despite the aggressive discounting that takes place in Seoul’s luxury department stores there is a growing number of value-conscious young South Koreans that are turning to international online retailers in order to buy cheaper designer clothes, shoes and other luxury goods. The trend has been dubbed ‘jikgoo’, which means ‘direct buying overseas’. It follows a government move to double the maximum value of tax-free shipments from abroad to US$200.
According to government data, South Koreans spent US$1.2 billion on goods from overseas online retailers in 2013, with this figure rising to US$1.5 billion during the first 10 months of 2014. According to Konkuk University in Seoul local consumers are becoming smarter and more proactive as they look for higher-quality products at cheaper prices amid the slowing economy; this is putting further pressure on local luxury retailers to cut prices.
There are some peculiarities to luxury consumption trends, however. Sales of luxury cars have risen sharply over the past year, for example, albeit from a low base. In part, this is due to the signing of free trade agreements with the US and EU, which brought down prices.
“ South Korea’s luxury goods market is entering more turbulent times ”
There is also evidence that young people in South Korea are splashing out on imported cars rather than taking out mortgages to buy homes. Moreover, luxury cars accounted for almost 2 out of 3 cars imported into South Korea in 2014. At this rate luxury cars could easily capture 10% of the market in the short to medium term.
The wider picture is that South Korea’s luxury goods market is entering more turbulent times. Designer apparel, which accounts for over half of luxury goods spending, looks particularly vulnerable.
The upshot is that the year-on-year double-digit growth we have seen in luxury goods spending since 2006, measured at fixed US dollar prices, may be well and truly over.
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