The Korean Miracle Duty free & Travel Retail Insights Korean Miracle Duty free & Travel Retail...

© Martin Roll Company 2009 – All rights reserved - www.martinroll.com

The Korean Miracle Duty free & Travel Retail Insights

TFWA 2009Cannes, 21 October 2009

Martin Roll


Top 12 duty free and travel retail markets (2008)

777

851

851

999

1.073

1.110

1.184

1.258

1.442

2.738

3.108

3.182

0 500 1000 1500 2000 2500 3000 3500

Japan

China

Spain

US Virgin Islands

Singapore

Hong Kong

Germany

France

UAE

US

Korea

UK 7.2%

14.0%

17.0%

22.2%

10.1%

10.4%

24.1%

17.2%

7.8%

11.2%

27.5%

9.7%

8.6%

8.4%

7.4%

3.9%

3.4%

3.2%

3.0%

2.9%

2.7%

2.3%

2.3%

2.1%

CAGR03-08

M/S

Source: The Shilla, www.generation.se


If a global luxury brand can achieve success in Korea, it can flourish

anywhere....


South KoreaGeography

• Population: 49,540,367

– 43% of the total population belongs to Seoul & Gyeonggi Province

• Annual Growth Rate: 0.55%

• Total Area: 99,678 sq km (in 2007)

• Ethnic Groups: Korean

• Official Language: Korean

• Literacy: 98%

0-19 years

20-39 years

40-59 years

60-79 years

24.1%

31.7%

29.9%

14.4%

Source: TNS, Korean Statistical Information System (2008), The Statistics Year Book of Construction & Traffic in 2007

Seoul(10.2 million)

Inchon(2.7 million)

Busan(3.6 million)

Ulsan(1.1 million)

Daegu(2.5 million)

Daejeon(1.5 million)

Gwangju(1.4 million)

Cheju(0.6 million)

Gyeonggi(11.3 million)


Korean duty free market 1

• Korean duty free market started around 20 years ago

• 3.1 billion USD market (2008)

• Korean passengers duty free allowance:– Outbound: 3.000 USD– In-bound: 400 USD

• Korean Airlines largest in-flight shop in the world

• Incheon Airport no. 2 airport player worldwide

• 7 main operators in Korea

• Challenging market structure (oligopolistic nature) –strictly controlled (no more licences for operators)

• Lotte and The Shilla are the leading players


Korean duty free market 2

• Very aware, informed and demanding consumers

• Mature and very competitive market offering vast choices to consumers

• Quality and services dimensions more important success criteria than anywhere else

• Brands in high demand

• Attractive exchange rates has fuelled growth with Japanese customers (prices up to 40% lower than downtown prices in Japan)

• Huge market potential


Korean Duty-free operators

8%5%

5%

4%

3%

48%

27%AKKTODongwhaParadiseWalkerhillLotteThe Shilla

• 7 major players

• The Shilla and Lotte have significant grip on the market (75%)

Source: The Shilla, industry sources


Incheon Airport (IIAC)

Concourse(GATES 101-132)

Passenger Terminal(GATES 1- 50)

The Shilla stores



• World’s Best Airport 2009 (Skytrax Magazine)

• 12.4% decrease (1.9 mio pax) for 2009 due to economic downturn, swine flu and weak Korean won

• Decrease mostly from Korean family travellers – business pax less affected

• Main terminal (34 shops): Korean Air and Asiana

• New concourse departure area (June 2008) – 35% of pax

• Concourse area (30 shops): Foreign airlines

• Total duty-free space: 15.000sqm – 66 outlets

• Major overhaul of duty-free shops in 2008

• 4 operators hold 6 concessions: The Shilla, Lotte, AK Duty Free and KTO

• Awarede operators 8% rebate on airport concession fees for March – December 2009

Source: Courtesy of “The Travel Retail Business Magazine”Industry sources



-26%50%68%Korean nationals

+67%15%9%Japanese nationals

6%

13.5 mio

27-28 mio

500

1.000 mio

2009

5%

15.4 mio

29 mio

417 mio

767 mio

2008

+30%Duty free sales (full year)

+20%Duty free sales (1H)

-4-7%Outbound pax (full year)

-12.3%Outbound pax (1H)

+20%Chinese nationals

ChangeBrand

Source: Courtesy of “The Travel Retail Business Magazine”


Incheon Airport (IIAC)Category mix

38%

18%10%

9%

7%

4%

4%

4%

3%3%

Perfume/cosmetics

Leather

Tobacco

Liquor

Watches

Fashion accessories

Korean foodstuff

Sunglasses

Electrical goods

Fashion apparel



Lotte

• Operates 7 Lotte Duty Free locations• 12 shops in Incheon Airport• Lotte Group opens 123-storey shopping, entertaiment, office

and hotel comple in Kangnam area (2014) – re-locating excisting downtown duty-free store to new 8.000sqm two-level store (expected to be largest duty free store in the world)

• Challenge to attract Japanese to Lotte World – they prefer downtown main store at Myeonddong

• Last 2-3 years, outbound Koreans account for 80% of duty-free spending in Lotte World

• Increase in luxury brand purchases: Chanel (Jan-Aug 2009: +37%), Hermes (Jan-Aug 2009: +27%) etc. at the main store

• Exclusive rights to sell duty free liquor and tobacco at IncheonAirport



Lotte

-15%136 mio160 mioSeoul Lotte World (full year)

490 mio

358 mio

820 mio

1.250 mio

2009

452 mio

370 mio

882mio

1.300 mio

2008

-4%Duty free sales (full year)

-7%Duty free sales (Jan-Aug)

-3.5%Incheon Airport (full year)

+10%Seoul main store (full year)

ChangeUSD

Note: Jan-Aug 2009 revenues up 24% in Korean Won, but calculated in USD it becomes less (-7%). New concession in Incheon Airport started in March 2008



The Shilla

• Represents over 300 brands

• 27 duty free shops in Incheon Airport

• Holds retail concessions for perfumes, cosmetics, fashion and general merchandise in Incheon Airport

• Customer mix: Koreans (60%), Japanese (26%), Chinese (5%), US (2%) and others (6%)

• 25% of total cosmetics sales from 5 Korean cosmetics brands

• Operates boutiques for 21 brands at Incheon Airport –Prada shop is latest addition

• Gucci is largest selling boutique, followed by Chanel



The Shilla

+40%320 mio230 mioSeoul main store (full year)

65 mio

340 mio

725 mio

2009

41 mio

262 mio

528 mio

2008

+38%Duty free sales (full year)

+30%Incheon Airport (full year)

+60%Jeju (full year)

ChangeUSD

Note: Jan-Aug 2009 revenues up 24% in Korean Won, but calculated in USD it becomes less (-7%). New concession in Incheon Airport started in March 2008 and did not trade for the full year



Korean Airlines

• 20% pax decline

• Approximately 300 items including 40 exclusive products

• Productmix: Cosmetics (40%), liquor (25%), fragrances (5%)

• Most duty-free sales in-bound to Korea

• Pre-order is 20% of total sales

• Most sales recorded on North American routes, followed by European, China and Japan routes

• Tobacco products delisted since February 2008

• Trained more than 4.000 cabin crew in in-flight sales



Korean Airlines

+11%40%36%Cosmetics (1H)

-17%25%30%Liquor (1H)

5%

N/A

N/A

2009

4%

12.6 mio

185 mio

2008

Duty free sales (full year)

Pax (full year)

+20%Fragrances (1H)

ChangeBrand

Source: Courtesy of “The Travel Retail Business Magazine”www.koreanair.com


학연 - HAK YEON

지연 - JI YEON

인연 - IN YEON

Source: Insights from Pierre Lequeux, GLI Consulting, industry sources


The Korean distribution modelBrand > Agent > Operator

Brand responsibilitiesBusiness strategyBrand strategyBrand communicationsGuidelines, Training and workshops

The brandThe brand The Korean agentThe Korean agent The operatorThe operator

Agents

Total of 108 agents20 major players

Cultural aspectsKnowledge aspectsEconomic aspects

Agent & operator responsibilitiesMarket managementDistribution managementOperational marketingSalesCompetitor surveillanceMarket feedback & evaluation

Source: Insights from Pierre Lequeux, GLI Consulting, industry sources


Consumer behaviour

Self-Actualisation

Prestige

Belonging

Safety

Physiological

Affiliation

Safety

Physiological

PERSONAL

SOCIAL

PHYSICAL

SOCIAL

WEST ASIA

Status

Admiration

Source: Professor Hellmut Schütte, INSEAD


Symbolic struggle of a recognised social being

• Sensitivity to being seen as prestigious causes a high preference for premium or luxury brands

• Korean consumers’ preference for premium and luxurious brands is very high compared to the rest of Asia

• Discerning about true and fake luxury• A premium and luxury brand is translated as “명품 (名品,

myeong-pum)”, which is widely used to indicate quality commodities (both goods and services), gorgeous body shapes, etc.

• Example: Showing-off through cars is the one most important code in car purchase and driving (most cars are silver-grey or black)

Source: Insights from Synovate Korea, industry sources


Concept of self: In-group/out-group affiliations

Self

FriendSibling

Co-worker

Father

Self

FriendCo-worker

FriendFather

The independant self

The interdependant self


Group behaviour dominates

• When drinking on-premise:– You order large bottles – not single serve– You order the same beer for everyone– Your pour for someone else – never for yourself– For special events, you share the glass



A new agenda for brands in Asia

• Connected countries• Separate countries

• Modern urban Asia• Exotic Asia

• Mosaic of cultures• Homogeneous region

• Prominence of Asian images and music

• Invaded by Western images

ToFrom

Transforming the way we view Asian culture

• Being different but in the same way• Conformist cultures

• Different types of in-group and out-group affiliations

• Collectivist cultures

ToFrom

Transforming the way we view Asian psychology


Being different but in the same way...


The rise and fall of a trend occurs quickly

• Korean consumers are curious and enthusiastic to try new products

• The speed and the scale of trend changes are fast and large

• It is unusual to see women wearing styles that were trendy a couple of years ago

• The fastest changing product cycle (1.5 years for mobile phones) and enthusiastic consumption make Korea a test market for high-technology products, fashion and luxury products



Korea: The future of the Internet

• 95% is the diffusion rate of broadband at home. The highest rate in the world – Singapore is second at 88%

• 1.5 million number of IPTV’s in use (end of 2008)• There are more than 57.000 blogs in Korean language

in 2008 – 85% of them operated by young people from 12-30 years old

• Online purchase is widespread:– Usage past year: 68%– Monthly frequency: 1.4 purchases

• Estimated 30-40% of branded products sold online and not in official stores (naver.com, feelway.com etc)

• Internet sales of luxury fashion brands hit a record high of 15.7 billion USD in 2008 – up 18% from 2007

Source: Insights from Synovate Korea, industry sources, TIME Magazine, South Korea National Statistics Office


Social media: Growing importance

69729Amorepacific

3911.240Louis Vuitton

1971.349Bulgari

213596Cartier

5729.054Gucci

79311.511Chanel

3631.406Rolex

5942.755Prada

4522.032Giorgio Armani

3661.823Hermes

2976191Lotte

2283.090Shinsegae

1996.969Laneige

Buzz ChannelsBrandSource:

Courtesy of Brandtology exclusively for TFWAwww.brandtology.com

Sample from 8 August – 8 October 2009 from selected channels across Asia Pacific

Languages: English, Chinese (simplified and traditional), Korean, Japanese, Bahasa (ID and MY)


Social media: Growing importance

2.17955.255Samsung

1.32126.420Nokia

2980100.902Google

106019.044BMW

6033.919Citi

2.46757.730Apple

1.06515.782IBM

83017.304IKEA

2.27840.925SONY

Buzz ChannelsBrandSource:

Courtesy of Brandtology exclusively for TFWAwww.brandtology.com

Sample from 8 August – 8 October 2009 from selected channels across Asia Pacific

Languages: English, Chinese (simplified and traditional), Korean, Japanese, Bahasa (ID and MY)


Personal appearence

• Koreans are highly conscious about beauty, perfection and glamour

• Very important to feel healthy and look pretty

• 50% of Korean women in ther 20’ties have undergone plastic surgery

• Typical Korean women use around 5 cosmetics products for their basic make-up, which is 2-3 time more than consumers overseas

• The demand for a slim body shape has created a steep rise in fitness centers since 2000 – stimulated by celebrities whom are typical role models



“The purpose of price is not to recover costs, but to capture the value of the brand in the minds of

the consumers”

Akio Morita, Founder of SONY


McKinsey & Company 1

Working D

raft -Last Modified 10/16/2009 11:08:22 A

MP

rinted

|

Foreign luxury market in Korea has grown significantly and is a keymarket in global arena

1 According to ‘Luxury brand marketing’ by Yonsei Fashion Center and Samsung Design Net2 Estimated with 2007 figure with average sales growth rate of luxury goods at department store in FY 2008 = 28.5%

SOURCE: MPI Consulting report ‘Luxury Market in Korea’, 2005; Luxury Brand Marketing, 2009; Ministry of Economy, MckInsey analysis

1.00.4

1997 2008e

+120% p.a.

2003

3.0

2007

3.9

Luxury market in KoreaTrillion KRW

Financials of major luxury brands in KoreaRevenue and operating income ratio, Billion KRW

281169

+48% p.a.

1218959

Luxury market in Korea, taking ~15% of total fashion industry in the country, accounts for 4% of global luxury market and is counted as key test-market for luxury players1

146140122112

+26% p.a.

58

6755484341

+13% p.a.

3% 7% 9% 14% 11%

16% 21% 22% 22% 18%

6% 2% 4% 5% 7%

2004 2005 2006 2007 2008

Source: Courtesy of McKinsey & Company”Korean consumer behaviour in luxury retailing”



Working D


MP

rinted

|Source: Ministry of Economy, Fashion Channel magazine, Korea Economic Daily

1 52.8% of sales at department store is apparel (female formal suits, female casual wears, male wear)

Luxury market in Korea has grown even in time of recession

Monthly growth rate of luxury goods vs apparel sales Percent

20092007 2008-20

-10

0

10

20

30

40

50

Apparel1

LuxuryGoods

▪ Luxury brand sales has been showing much higher growth rate than overall apparel sales in the past years

▪ Even in recession, luxury goods sales showed annual average of 29% in 2008 and reached the peak of 48% in Feb 2009, compared to 1.4% in 2008 and -5.9% in Feb 2009 of overall apparel sales

Foreign luxury brands offeredShinsegae Main branch

250-300

2009

~20

Early 2000s▪ Branches solely for luxury brands have been either newly

opened or renewed and are all performing much better than expected– Galleria East reopened in 2004– Lotte opened Avenuel in 2005– Shinsegae luxury main branch reopened in 2006

Department stores in Korea

Number of luxury brandsTop selling brands 1H 2009

1

2

3

4

5




Working D


MP

rinted

| 3Source: 2009 Korea Retail Yearbook, Literature search

Luxury consumption has moved to ‘hard luxury’ from ‘soft luxury’

Luxury consumption before were in ‘soft luxury’

…but increasingly consumers are purchasing ‘hard luxury’

Luxury watch market in Korea is growing at 30-40% per year and department stores are building ‘luxury watch specialized corner’1

1 ‘Big Ben’ in Galleria, ‘Chronodigm’ in Lotte, ‘The house of fine watch’ in Hyundai

Until 2009, most of the luxury items purchased in Korea were cosmetics, accessories and perfume etc.




Working D


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rinted

|

Department store still accounts large for luxury retailing in Korea but other non-traditional channels are emerging

Source : Luxury Brand Marketing, 2009, Literature search

1 Survey done towards 1,208 Korean female customers in 20-30s2 Non store include online shopping and TV home shopping3 Yeoju Outlet opened in 2007 by Shinsegae and Chelsey, Kimhae Outlet in Dec 2008 by Lotte

43

21

13

18

Department store

100%Others

Outlets

Brand stores

5

2008

Non-store1

1,209 persons

Shopping channels of luxury items1

2008

Non-store▪ TV Home shopping firms

expand direct merchandising of foreign luxury goods as the performance is significant –140% sales increase by Hyundai Home shopping in 1H2008

Premium outlets▪ Yeoju Outlet (Shinsegae)

and Kimhae Outlet (Lotte)3

showing 50%, 155% sales increase respectively while luxury sales increase at department stores was 22%

Non-traditional but growing luxury retailing channel



25

30

35

40

45

50

55

60

-6

-4

-2

0

2

4

6

8

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Consumer Sentiment Index CSI (left axis)

GDP Growth (right axis)

Korean consumer sentiment is rising

Source: Samsung Economic Research Institute: Consumer Sentiment Index, 3Q 2009

2006 2007 2008 2009


Travel forecasts 2009-2011International travels - Korea

16.455.870

7.795.7477.420.0697.093.883

17.356.221

15.675.214

0

2.000.000

4.000.000

6.000.000

8.000.000

10.000.000

12.000.000

14.000.000

16.000.000

18.000.000

20.000.000

2009 2010 2011

ArrivalsDepartures

Source: Pacific Asia Tourism Association (PATA)Asia Pacific Tourism Forecasts 2009-2011

+4.6%

+5.0%+5.5%

+5.1%


Arrogance and complacency are the most lethal enemies of global

brands in Korea....


Success criteria for duty free in Korea

• Collaboration with Korean partners essential• Be sensitive to channel management• Very high expections of service (patience, information

seeking, test etc)• Good price/value essential• Build and maintain premium brand visibility • Merchandising and point-of-sales promotions are crucial

(general high need for status indicators and external admiration)

• All procedures in Korea takes time, patience and money• Be sensitive to local culture: Don’t try to change the

rules – you can’t!...• Be passionate – you are in that business!


”We are not in the business of selling handbags. We are in the business of selling dreams...”.

Robert Polet

CEO, Gucci Group


www.asianbrandstrategy.com

www.martinroll.com


Martin Roll

• LinkedIn: www.linkedin.com/martinroll

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Martin Roll

• Business & Brand Strategist Martin Roll delivers the combined value of an experienced international strategist and a senior advisor to corporate boards and top-management teams of Fortune 500 companies

• Martin Roll facilitates business leaders and organizations to think bold for future strategies. By focusing on building iconic businesses and brands, Martin Roll advises boardrooms on how to create sustainable competitive advantage and enhance shareholder value

• Martin Roll brings more than 20 years of management experience from the international advertising and branding industry


Martin Roll

• Martin Roll is a frequent guest lecturer at INSEAD and CEIBS, and guest lectures at Harvard, Wharton, London Business School, UCLA, Yonsei, Boston University and many others

• Martin Roll is the author of the international bestseller Asian Brand Strategy, a compelling book of frameworks for Asian branding and the winning formula for any global boardroom (“Best Global Business Books” by Strategy+Business magazine)

• His next book (2010) looks at value creation through branding and how this guides leadership and performance at CEO and boardroom level

• MBA from INSEAD


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