Market Information
Asia Pacific

Private Brands in the Food and Beverage Market
in Korea

Final Report

6th April 2001

Korea Associates Business Consultancy Ltd.

Contents

Introduction

Executive Summary

I. Overview of the Private Brand Food Market

1. Definitions

Processed Foods
Retail Private Brands
Other Private Brands
Subcontracting
Imported Private Brands

2. History

Expansion of the range of private brand products

3. Market Size

Imported Products
Future Market Share

II. Market Segments

1. Frozen Foods
2. Microwaveable Products
3. Dried Foods
4. Canned Products
5. Packaged Food
6. Other Items
7. Beverages
8. General Comments

III. Demand Trends

1. Retailers and Wholesalers

The Trade is Looking for New Products and Giving Private Brands More Space
The Distribution System is Changing
Hypermarkets and Supermarkets
Convenience Stores

2. Consumers

Shopping Habits
Consumer attitudes to private label bands

3. Conclusion and Recommendations
4. Canadian Foods
5. Potential to Create A Canadian Image

IV. Supply Arrangements

1. Domestic Manufacturers
2. Foreign Manufacturers
3. Procurement Practices
4. Getting Started

V. Distribution Channels

1. Hypermarkets
2. Supermarkets
3. Convenience Stores (CVS)
4. Voluntary Buying Chains
5. Wholesalers
6. Department Stores, Food-Service Companies, Kiosks
7. Consumer Cooperatives
8. Internet
9. Pyramid Direct Sales
10. Imported Food
11. Joint Venture Opportunities
12. Distribution Channels
13. Conclusions

VI. Specifications of the Korean Market

1. Korea is Different
2. Accurate Communication
3. Korean Regulatory Hurdles

Product Reclassification

4. Physically Getting the Product Cleared
5. Tariff Rates
6. Inspection of Goods
7. General Information on Inspection of Food Products

Testing Requirements and Standards

8. Inspection and Clearance Procedures for Foods

VII. Competition in the Korean Private Label Market

1. Domestic Competition
2. Imported Private Label Competition
3. Pricing and Standard Sizes

VIII. Case Studies of Successful and Unsuccessful Private Label Products

1. "Good and Cheap", a Successful Brand
2. Carrefour Brands
3. "Fonus", an Unsuccessful Brand
4. Brand Strategies
5. Conclusions

IX. Recommendations for Canadian Companies wishing to Enter the
Korean Market via the Private Brand Route

1. How Do I Start?

Start as Simply as Possible

2. Logistics
3. Do not Forget that Exchange Rates Vary
4. Conclusion

Breaking Common Ideas

X. Interviews

1. Focus Group
2. Buyer

XI. Contact Information

1. Contact List

Appendix I. Products, Sizes and Prices by Chain

Appendix II. Focus Group Interview

Introduction

The following report represents the results of research conducted in February and March 2001 into the private brand market in Korea. The interim report was enhanced by further research, and amendments and clarifications based on comments received during March 2001. The report presents the state of the private brand market and opportunities for Canadian manufacturers to enter the Korean market through this route, and the steps necessary to approach potential customers.

Korea remains a difficult market for imported food products to penetrate. The private label brand gives a foreign company an inside track into the market, since most of the work is done by the customer and not the manufacturer. In some of the comments on the interim report there seemed to be some confusion as to whether a private label brand produced in one country could carry over into another country. While at first sight a Walmart or Carrefour private label product might appear to be available to be sold in many markets, packaging regulations and taste may make a product produced for say the USA, less attractive in Korea. This is a matter of negotiation between the manufacturer and the commissioning customer, and Canadian companies are urged to prompt their customers to see if this is an option.

Executive Summary

Private label brands are still in their infancy in South Korea. They have grown from almost nothing to take about 6% of the food sold in hypermarkets in the last three years, but have not penetrated most other sectors of retail and distribution. Estimates of the total value of the market in terms of domestic and imported products sold under private label in 2000 is estimated at 275-300 billion won, (US$220-240 million.) All those involved in the food trade expect an expansion of market share in the future.

Imported products are mainly sold by foreign supermarket chains, Carrefour, Walmart, Cosco and Tesco, and therefore represent a small portion of the total. Consumers emphasise that products which are seen as "western food" might be readily accepted under private label when imported, but food seen as "Korean food" would not be, and only Korean manufacturers would be accepted.

Canadian manufacturers seeking to produce private label products for the Korean market are best advised to either contact buyers for the chains directly, or to use one of the large distribution companies such as Columbus, or find an agent who can both sell and import the product.

I. Overview of the Private Brand Food Market

1. Definitions

This report identifies the size of the Korean market for domestic and imported private label brands, which retailers and which products offer the best potential for future business opportunities, and the price differential between private label and branded goods. The focus of the report is to identify opportunities for Canadian processed food and beverage manufacturers and suppliers in relation to their possible marketing strategies. Consumer attitudes towards private label brands were examined, and used to give further insight and direction with relation to the evolution of the future Korean market.

Processed Foods

The Korean diet is very different from the western diet, and many of the processed foods eaten by a Korean are not currently produced in the west. The report covers the full scope of the Korean processed food and beverage market, since to concentrate on purely western foods would give a misleading view of the range of products involved. Processed foods are taken to mean dried vegetables, frozen products as well as other packaged food or beverages.

Retail Private Brands

Private Brands are defined as products produced by third parties which are branded by stores with their own store name or store brand name. Thus Hanwha Shopping a leading supermarket chain markets the "Good and Cheap" range of products involved. Carrefour markets under the Carrefour brands. In Korea these are known to the trade and to some consumers as "Private Label Brands". Most brands are also used for other non food fast moving consumer products.

Other Private Brands

A very few Korean companies have no manufacturing facilities and buy in all their products. The major company in this category is Hwanam Foods which sources canned fruit and fishery products in a variety of markets, and distributes them under the Hwanam Brand. Several other companies disappeared in the "IMF era - the period of the Asian crisis 1997 - 1999 when rapid currency movements made imported food more expensive.

A number of companies offer contract packed products in the food service business which are branded according to the franchise such as Burger King, or McDonalds. These include ketchup, sugar, creamer and mayonnaise. No imported private label product has been observed in the food service business, although Heinz packs in Korea for this market.

Subcontracting

Not strictly private branding, and not included in this report, is contract packing of products for companies which also manufacture their own branded products. This is particularly common in the frozen goods category.

Imported Private Brands

There are a number of imported private label brands in Korea at the present time. These are largely confined to the foreign retail chains and mainly come from the home country of the store e.g US products in Walmart and, French products in Carrefour. In the past several Korean companies have sourced products overseas and marketed them under their own brand name. This includes Hwanam which imports canned products and the now bankrupt Otto which used to source various sauce products before the crisis. Of imported products the most prospective category is canned meat. Juice is limited by high tariff rates.

2. History

The history of private brands in Korea is short. Although one or two retail chains tried random products as early as the late 1980s, until the foreign hypermarkets were allowed to establish themselves in the early 1990s there were no long running products or brands.

The Korean retail market is changing rapidly at the present time, and this greatly increases the potential of the private brand market. Likewise the "IMF era" 1997-1999 produced what Koreans call the "IMF mentality", the search for basic products which were less expensive than the brand leader or the second runner. This encouraged the trend to seek discount pricing and cheaper staple products. This mentality gave new life to the early private label brands and encouraged new stores to introduce this category.

Expansion of the Range of Private Brand Products

The range of private brand category was distinctively wider by 1999, especially in clothing, with 150-200 items developed every season. The following is the list of top selling five private brand item's by chain in 1999. 12 of the 44 were non-food products.

Source: April 2000, Monthly Discount Merchandiser

In general, most stores preferred utilizing the production lines of large manufacturers in developing private brand products, especially in the items of toilet napkin, baby diapers, noodle, milk and yakult. Big manufacturers tended to avoid developing private brand products in the past, because of possibility of the bad influence on the same items of national brand products. In fact, they are more actively getting involved in alliance with the private brand market at present. Small and medium sized manufacturers are also eager to get in the private brand market with distribution companies' support in marketing.

3. Market Size

Imported Products

It is difficult to establish an accurate market size at the present time. Few Korean retailers wish to release this information because of its sensitivity vis a vis branded product manufacturers. This study is being conducted at an early stage in the market process where the private brand is being carried on the back of a tremendous growth of large scale retailing. Table 3 gives a summary of major private brands

Estimates of the amount of the percentage of sales of hypermarkets which comes from food retailing is put by those interviewed at about 35%, or 3.15 trillion won (US$2.52 billion). Of this private label brand sales in hypermarkets amount to about 6% in February 2001 according to our survey, or 189 billion won (US$151 million). The top 2000 supermarkets sell about the same amount as the 150 hypermarkets, bringing the total to about 6.3 trillion won. Private label brands are at a lesser stage of development in the convenience stores, and the total there is 25-35 billion won. The total market was therefore about 275 - 300 (US$ 200 - 240) billion won in 2000.

Survey Trade Estimates

• Crown bakery and Tous Les Jours have a plan to expand private brand products continuously. They are on sale of private brand products by OEM method, especially focussing on jam and chocolate.
• Crown Bakery is also obtaining ice cream by OEM method.
• Paris Baguette and Shilla Dang are not concerned with private brand products.
• Imported Products

The imported product share in this total was low, as only three major chains are currently handling imports, Carrefour, Walmart and Cosco. The bakeries which have a long history of carrying imported delicatessen items have a higher level of interest. Imports are estimated at around 5%, or 13.5-15 billion won.

Future Market Share

In the next five years, hypermarkets are expected to double their sales of food items, and convenience stores about the same increase. Total food sales passing through these channels will then reach 10.8 trillion won.

Source: Trade Estimates

Estimating the percentage of food sales which will be Private Label Brands is less easy. Today's consumers have a mixed attitude, but retailers are eager to expand the market. We therefore have a range of estimates between 10% and 15%. The Private Label Brand market will then have reached between 1 trillion won and 1.5 trillion won. The share in imports in this total is estimated at between 10% and 20%, making the market size between 100 billion won and 300 billion won by 2005.

II. Market Segments

The concept of private brands goes well beyond the domain of food into personal and household products. The following segments described do not include non-food segments as only food segments.

The selection of products for private label by the stores was initially based on producing a popular staple product which can be sold at a lower price, and at a higher margin than the cheaper end of the branded manufacturer's range. The observation that higher equal priced private branded products sell well is changing the trade's perception of their business.

Source: April 2000, Monthly Discount Merchandiser

Food products in private labels are generally those which are the best selling food items within the Korean diet. Many of these products such as seaweed, kotchujang - red pepper paste mixed with soy, pickled radish are uniquely Korean. The top five private brand items of each store in 1999 included such items as rice, seaweed, dried fish as well as pork and cooking oil. However, a price comparison shows that private brands are by no means cheaper than branded products. Appendix 1 lists the full range of all private branded products currently on sale in February 2001, in hypermarkets, convenience stores and large supermarkets. From this list, the following categories are identified, and comparative prices of private branded and national branded products.

1. Frozen Foods

Frozen food is not a huge category in Korea, although for ten years foreign food companies have expected the category to grow. Not all stores stock Private Label frozen food. Where they do, they are mainly frozen dumplings, known as Mandu. This is a Korean/Chinese product with meat and vegetable mix in pastry similar to Dimsum. For many years Mandu sales were 50% of the frozen food market and are still estimated to be 30-40% of the market volume.

Ice cream was the first private brand in the form of a simple flavoured ice bar or lolly introduced in the 1980s. Two chains offer ice cream.

No product was ranked as the best selling 5 products private brand.

2. Microwaveable Products

Although Korea has a 90% penetration of microwaves, microwaveable products were not a large food category until recently. Microwaveable rice was introduced by a major food manufacturer Cheil Jedang and has become popular. No private label products were found in this category, but this is an area retailers are actively seeking.

No product was ranked as the best selling 5 products private brand.

3. Dried Foods

Dried foods are a huge category in Korea, since most traditional preservation was in this style ranging from fish to seaweed to vegetables and fruit. All stores stocking private brands have some dried foods and flour products

The best selling 5 products list includes are seaweed (E-mart, Haitai mart), rice (Hanhwa store, LG mart, Hanaro), dried fish (Hanaro) in this category.

4. Canned Products

Canned products have been a popular imported category, but of limited development from Korean manufacturers. Amongst local products fish and seafood and canned meat have been the major categories. Private Label imports include corn, fruit and potentially meat.

Smoked ham (Carrefour), grape juice (Carrefour) are ranked under the best selling 5 private brand products.

5. Packaged Food and Confectionery

If flour is classed as a dried food, only a limited range of confectionery and cooking oil may be classed in this category. Jam is the other product within this category which has a high potential. Confectionery has been offered in a number of stores. The confectionery category is seen as one offering a very high growth rate, since confectionery is an oligopoly of four companies and stores and consumers seek alternations. New products, jumbo packs and items offering the store a higher margin are actively sought. Bread, candy (Mega market, Aram Mart), corn oil (Haitai Mart), sticky rice choco pie (Carrefour) are the best selling items in this category.

6. Other Items

In line with the trend to produce private branded products of the most commonly consumed food items, other private label categories include traditional pastes, seasonings and miscellaneous products.

Products such as milk (Hanhwa store, Carrefour, LG Mart, Sewon Distribution, Hanaro), pork (E-mart, LG Mart, Hanaro), liquid yakult (Hanhwa store, Aram Mart, Sewon Distribution), eggs (Hanhwa store) is under the best 5 selling private brand pickled radish (Haitai Mart).

7. Beverages

Private Label canned drinks are common as well as plastic and paper packages. Products include the traditional Korean drink shikhae (a traditional sugar water and rice drink) and milk, but juice is only just being introduced. Carrefour had done well with fruit juice.

8. General Comments

There are 2 trends amongst private brand in Korea. The first is the same quality products as national brands with a lower price, and the second is higher quality products than national brands regardless of price. Imported private brand products, are still in the beginning stage of introduction. It will be effective to do marketing with differentiated products compared to domestic products, such as frozen foods and canned products.

It is more likely for chain stores to ally with well-known manufacturers for developing private brand items in the future. In case of Hanhwa stores, it believes it can make a success with international private brand products bared on tests. The key issue for the chains who want to have deal with overseas products is to connect the right suppliers and understand overseas practices, this is a considerable opportunity for Canadian manufacturers.

(for full details of segments see Appendix I Census of products)

III. Demand Trends

1. Retailers and Wholesalers

The Trade is Looking for New Products and Giving Private Brands More Space

The Korean retail trade is extremely volatile as the rapid growth of hypermarkets continues and competition between hypermarkets increases. All store buyers are looking for new products and new competitive opportunities. Private label brands are seen as one opportunity, since they give the chain a unique product which cannot be bought elsewhere, and which can either be a loss leader or a higher margin product compared with the cheapest end of the branded goods segment. The new discovery that private label brands can be high quality increases the interest of the stores.

Diagram III.1. Purpose of developing private brand products

All chains have expanded the space displaying private brand products and arranged it forward. The top 5 discount stores, E-Mart, Kim's Club, Hanhwa Mart, Carrefour, and LG Mart, are reinforcing the merchandising of private brand products in stores. They have given bigger and even golden space for displaying private brand products than national brand products at the present. They are also promoting private brand products using outside advertising on buildings as well as leaflet, discount sale.

The Distribution System is Changing

The retail structure of Korea has been changing. The major feature is the rapid growth of hypermarkets, several of which are foreign owned.

About 28% of Fast Moving consumer Goods (FMCG) are passing through hypermarkets in early 2001 according to household panel data collected by Taylor Nelson Sofres.

It has been estimated that the percentage of Fast Moving Consumer Goods passing through the hypermarkets will reach 40% within 5 years. The main competitive impact will be on large supermarkets, whose sales will fall and some small supermarkets. However Korea is a high-density country and many consumers have preferred to shop at the supermarket within their apartment complex, or near their home rather than travel for 40 minutes to an hour each way to a hypermarket. Consumer surveys suggest that this practice is now changing, and a once a week visit to a hypermarket is beginning to be fashionable.

The growth of the hypermarkets, convenience stores and potentially e-commerce clearly offers a future opportunity for Canadian private brand manufactures.

Supermarkets as opposed to hypermarkets have been slower to adopt private label brands. This is because the total sales volume of most supermarket chains is smaller than a hypermarket chain. In Korea most supermarkets are independent, or franchise operations without central purchasing, using the franchise purely for lower margins in the liquor trade and to gain tax incentives. Therefore the quantity of any particular product produced under a private label will be smaller and the pricing less profitable. To be competitive, supermarkets will demand a lower price, and a smaller run of product. The exceptions are Hanwha and Nongshimga, where the chain is larger enough to offer economies of scale.

Creating business opportunities out of these changes is not easy without close relations with the hypermarket and e-market chains. This cannot be done at a distance. If access to the hypermarket or e-market system is achieved then sales should grow rapidly. This will require considerable work to build relations and incentives with the buying chains.

Hypermarkets are looking for the best price rather than the best quality in products which the consumer really wants. Convenience chains will be more discriminating.

Hypermarkets and Supermarkets

Opportunities for Private Label:

• Hugely simplified sales channel
• Access to very large market share
• Chains are exclusive about products
• Private label brand pricing does not affect "own" brand privacy
• Cannot demand advertising and promotion support

Accessing Convenience stores (CVS) is much simpler than to hypermarkets, as the CVS are always willing to churn product to put something new on the shelf alongside the best sellers. This gives a narrow window of opportunity to prove that the product will be a best seller.

Convenience Stores

Opportunities for Private Label:

• Simplified sales channel
• Access to a sizeable market share
• More willing to take new products
• Supplier cannot be asked to take back unsold product

The trade in Korea believes that the retail company in Korea needs to have minimum of 10 stores for efficient management of inventory and cost of private brand products. In the case of department stores, they are expanding private brand products only focussing on clothes, because of lower recognition value amongst consumers, and lack of volume in food sales.

2. Consumers

Shopping Habits

Korean consumers have changed their shopping habits from using small and medium sized traditional markets to using big scaled discount stores or big supermarkets including department stores. 75% of interviewees answered that they make weekly shopping trips for food to discount stores or big supermarkets and visit grocery stores near the house just in case of running short of something during the week. Convenience stores are rarely visited for the purpose of regular shopping. Monthly shopping is not popular yet. In an average, 25-45 year old interviewees spend 100,000-150,000 won for weekly shopping, excluding 10,000-20,000 won for daily shopping.

The size of the Korean family has been greatly reduced, to about 3.5 persons per household. It has become convenient for consumers to pick up small amount of food as they want in clean and cozy atmosphere of the stores. Moreover, stores have made it more easy to get there by providing by shuttle buses, which serve residential areas regularly. Another attractiveness about using discount stores or department stores are bonus points, which is accumulated to obtain loyalty gifts later on.

Consumer Attitudes to Private Label Brands

Perception of Private label Brands (Comparing with National brands)

The image of the private label brand is cheaper but lower quality. This is why consumers hesitated to purchase private label products at first. They tend to assume that lower quality as the reason for lower prices than national brand products. This kind of negative prejudice and lower recognition of private label products prevents customers from purchasing them. It is often defined as risky to take big size packaged products without tasting. Even 4 out of 16 interviewees answered that they have not chosen any private label products yet because of distrust on quality. Moreover the crude private label brand logo on many packages is perceived as substandard foods. As a result, unfashionable or cheap looking packages should be improved for successful private label sales.

On the other hand, interviewees who have tasted private label products realized the quality of private label products is not as low as they expected. Once they are assured of the taste and the quality, they are eager to keep purchasing them. In this point, the trustworthiness of private label brands and the image of quality needs to be built up by the stores.

Lower income Korean housewives are getting more serious about what to eat from a nutritional point of view, considering the quality of products, rather than the price compared to the past.

Popular private label names in Korea

According to the focus group interviewees, the most popular private label names are E-Plus of E-Mart, Carrefour of Carrefour, P'ple of Kim's Club. The second most favorite brand names are Good & Cheap of Hanhwa, Hambak Usum of LG, Nonghyup of Hanaro Club, Chukhyup of Chukhyup. Thirdly, Kirkland of Costco, Great Value of Walmart, brands themselves are less known to housewives. Consumers were not aware of CVS private label brands. Especially, E-Plus products as well as E-Mart won popularity among housewives thanks to association with mother companies, Shinsaege and Samsung. The image of private label brands depends on the popularity of the retailing company to the public.

Consumer Preferences for private label products

According to consumers the key of private label products are as follows: (random order)

a. Canned foods including jam, sweet corn, fruit preserves, fish, sea snail, etc.

b. Seasoning such as cooking oil (corn, soy), sesame oil, olive oil, soy sauce, pepper paste, vinegar, starch syrup, salted sand lance

c. Fresh foods such as egg, cheddar slice cheese

d. Dried foods such as seaweed, glutinous rice flours, corn starch, noodle, sweet potato noodle, cold noodle, Chinese noodle, spaghetti, macaroni, various kinds of eatables, snack, candy, jelly, toasted laver, raisins, dried fish including squid fried with butter

e. Processed foods including ham, cheese, pickled radish, bean sprouts, seasoned rice cake, bean curd

f. Frozen foods such as fried dumpling, cheese bars, ice cream

g. Beverage such as milk, fruit juice, fermented rice drink, mineral water, yakult

h. Coffee and tea including green tea, instant coffee, coffee creamer

i. Fast foods including kimchi, kimbab, sandwich, barbecued pork feet, espresso coffee, Starbucks house brand coffee

Asked to choose private label samples under the name of E-Plus(E-Mart), Carrefour(Carrefour), Good & Cheap (Hanhwa), Hambak Usum(LG), Nonghyup(Hanaro Club), Great Value(Walmart), the focus group interviewees defined E-Plus as the most reliable brand. The best design of brand logo they selected was Carrefour(with small letters, no recognition of private label product) and E-Plus(which brought out the image of E-Mart).

Interviewees answered that they preferred buying private label products in the items of beverages, frozen foods, egg, jam, bread, tea and coffee & cream. However, the flavour of fresh foods, packaged foods, traditional seasoning, snack and noodles are more attractive in certain national brands. The interviewees spend approximately 5% of total foods expenses on buying private label products. Especially, the Korean consumers highly preferred specific national brand products in the baby food segment. Favourite items in general private label products are commodities for non-food daily necessities, such as napkin, diapers, detergents, and so on.

Promotion activities for private label products

Interviewees confessed that Korean consumers tend to be easily affected emotionally by direct advertising including in store promotion activities. Since the quality of private label products is initially suspect, the in-store food tasting method was seen as effective promotion. E-Mart has promoted ham and sausage in private label brands by this method. There is a lack of promotion of private label food products in stores, while the promotion for national brand products is widely practiced by manufacturers. Consumers recognized that it is definitely helpful to enhance the trustworthy of private label name by using leaflets store magazines, TV advertisement or newspapers advertisements well.

Consumer Attitudes to the imported private label products

Concerning imported products, consumers want to be assured of the source and sell by dates of products all the time. In case of products like jam, coffee and cream, and beverages, the imported private label is most accepted. As far as the design of brand logo concerned, the smaller and cuter ones would be more attractive they thought. Cuter includes animation style character. On the contrary, the bigger and more distinctive private label logos were expected to be more successful for imported products. Since Korean housewives have problems choosing the imported products due to lack of English and Knowledge of the brand, the creation of a reassurance of the reliability of the private label brand would be valuable.

Since Koreans became accustomed to upgrade their diet, consumers anticipate tasting more imported private label products in the future. Consumer attitudes to the imported private label products were more black and white than their attitudes to domestic products. While the products that originally came from foreign countries are also acceptable in private label market, it seems difficult for foreign products that have a more traditional taste to get into the Korean market under a private label name. Not every product can be introduced under the private label.

3. Conclusion and Recommendations

Korean consumers hope to get the same level of quality guaranteed in private brand products as national brand products with a price benefit as well. This kind of assurance, which is not established yet in the Korean market, should be advanced in promotions.

At present, Korean housewives tend to prefer purchasing private brand products in non-food areas, such as clothes and other daily necessities. In relation to food matters, consumers are getting so fastidious that they hesitate to choose cheaper products. They tend to stick to take particular brand products selected overtime by their own taste and flavour as well as experience. The price is not the priority on food shopping for most consumers, a marked change since 1998.

Regarding private label products, they are firstly cautious about the manufacturers, secondly the private label brand name, thirdly the place of origin, fourthly percent of raw ingredients as well as additives in products.

If the image of the private label name is sufficiently well known, it will to be welcomed by Korean consumers. Korea society has strongly influenced by public reputation. It is necessary to build up strong and trustworthy private label brands through aggressive promotion activities. Frequent chances for food tasting, multiple choices in terms of package size, leaflets, and advertisements on TV or newspapers are expected by consumers to be strongly effective.

Since Koreans are becoming accustomed to a wider range of food, they anticipate tasting more imported private label products in the future. However, imported private label products proved to be clearer on the like or dislike items by Korean consumers. While the products that originally came from foreign countries are also acceptable in private label form it seems difficult for the products that are more traditional to get into the Korean market under private label names.

In summary, the success of private brand products is only followed in case of harmony with three dimensions, distribution, production, and consumers. Firstly, the quality should be guaranteed. Private brand products which are merely cheaper will not appeal to consumers. The same quality as national brand products or even better should be focussed on. Secondly, it is important to find good manufacturers as allies. Consumers really check the label to see who did the manufacturing. The third concern should be the choice of items that have high rate of purchasing frequency. Fourthly, continuous advertising and promotion activities should be reinforced.

4. Canadian Foods

There are no Canadian products known to be sold under private labels in the Korean market at the present time. Currently imported products tend to come from the country of origin of the retail chain - from France in Carrefour and from the US in Walmart.

Studies made last year of various Canadian food categories showed that neither the trade nor consumers had a clear image of Canadian food - as opposed to US or Australian food products. The discovery of Canada by the Koreans lies in the future. To create an impact on the market, and trade buyers Canadian firms will need to sell and market actively their products. The initial image of Canadian foods Korean consumers have was "modern & decorative and clean & fresh", even in the case of products not yet tasted. Canadian products are potentially in a good position in the Korean market by satisfying top value through clear private brand labels. Interviewees defined that Canadian products in special items like natural honey, confectionery, chocolate, candy, and dried foods can easily penetrate into the Korean market. However, other products that should be eaten quickly to keep their freshness will be hard to be accepted.

Customers stress quality, trust and freedom from preservatives and addictives as the key issues in choosing a product. This can be projected as a Canadian advantage. However the Korean consumer is becoming concerned about Genetically Modified Organisms (GMO), and future legislation may require labels to state whether the products contain GMOs. Korean consumers are unlikely to purchase products labelled as containing GMOs.

5. Potential to Create A Canadian Image

In discussion in focus groups conducted for this study, the Korean consumer has a high, but unclear, expectation about Canadian products. This repeats the conclusions of studies made in 2001. There is a strong potential to create a unique "Canadian" image in the mind of the consumer but this cannot be done by a single food manufacturer alone, but could be developed to the benefit of many Canadian producers on a collective or collaborative basis starting with popular items. How this can be done in the case of private label products is not so clear, except by establishing a Canadian "family" logo. Koreans, like Japanese, love character brands. A Canadian example could be a bear in an RCMP scarlet uniform - with an identified character name such as Albert which could create a Canadian food identity.

IV. Supply Arrangements

Retail private label brands are the result of contracts between the retail chain and the manufacturer. Current imported private label products are of products produced for the foreign chains in their country of origin and imported by the Korean subsidiary. There is no known case of a foreign manufacturing company contacting the foreign owned retail chain in Korea. Hanwha Shopping is now in negotiation with foreign buyers on a range of products.

There is no reason to suppose that this needs to continue to be the case. Discussion with both retail chain buyers and those in the import business say that the supply of product from - say - Canada is entirely possible, but that the initiative must come from the Canadian side. Korean retailers and distributors will not seek foreign suppliers proactively outside of Korea.

1. Domestic Manufacturers

Most private brands are produced by small Korean food companies or large manufacturers who are runners in third or fourth place in terms of brand and market share. These companies either have lower overall production costs or have large surplus capacity. Decisions on which supplier to use for a specific product is decided by the buyer for the supermarket, though unsolicited requests can be considered.

For core Korean staple foods, such as ramyon (packaged instant noodles), the buyer negotiates with the probable suppliers for contracts for one year's supply at the lowest price. In the case of ramyon, a core product, the winner has been a company called Hankuk Yakult which was the last entrant into the ramyon market, and has massive overcapacity but a good reputation. Because consumers check the manufacturer as well as the brand, retail chains will not select companies with a bad reputation.

2. Foreign Manufacturers

Most foreign manufacturers to date have supplied under global contracts made with the parent group in its home country. However the actual process of supply is more complicated since Carrefour and Walmart and others do not have their own import and logistics services. Therefore these companies use local trading companies to handle the arrangements between the supplier and the Korean supermarket.

The local super and hypermarkets state that there is no reason why Canadian or other foreign companies should not contact them directly, or work through an existing trading company. Subject to cost controls, the use of Korean trading companies will be encouraged where the Korean retailer has no interest in handling the mechanics and logistics of imports, and wishes to make a basic supply contract.

3. Procurement Practices

All current products are supplied by the solicitation and request of the buyer of the chain. Branding, outer packaging, container and product specification guidelines are either supplied by the chain or follow the industry standard in Korea and are approved by the buyer and where necessary the food regulatory authorities (KFDA)

Since most buyers expect an expansion n of the private brand system, they are prepared to consider unsolicited offers especially from overseas companies. In this case, the products must be at a lower price than local supply and of a type of product which the Korean consumer expects to be imported rather than made locally, such as jam or canned products. There are also opportunities for basic commodities such as packaged flour and other basic necessities.

The supplying company will be responsible for meeting the criteria in the contract which will include the delivered price and not ex-factory price. The buyers in the chain have no interest in anything but the total cost from which they can calculate their margin. This means that the Canadian or other foreign company will need to work with an import company in Korea capable of calculating there costs accurately and handling these tasks. Retailers do not wish to work with agents who add cost, but do not actually handle the logistics - they prefer direct contact.

4. Getting Started

Further information is given in section IX. If the first approach should be from the Canadian side this could be by providing a capabilities portfolio to a suitable importer in Korea, or by direct approach to the buyers listed at the back of this report.

V. Distribution Channels

1. Hypermarkets

The biggest growth of retailing in Korea is the growth of the hypermarket or discount store which sells everything. This is also the largest market for private brands

Diagram V.1. Sales of Hypermarkets
(food 35% of total sales)

Source: Discount Merchandiser Jan. 2000

In provincial areas and cities the share of hypermarkets was significantly higher than their share in Seoul. This was the conclusion from Taylor Nelson Sofres consumer panel purchase data which samples good households every month. The same source indicates that Seoul is now catching up.

2. Supermarkets

The supermarket sector is static. There are about 2,000 large supermarkets within the AC Nielson category of stores with more than 2 check outs. Many supermarkets feel keen competition from the hypermarkets. The best managed chains such as Hanwha have also developed parallel hypermarkets.

Most supermarkets have been independently managed and act as independent buying units. The total number of members of the Chain Store Association of Korea is about 15,000 and has been static for many years. Of these, 2000 are large and 13,000 small. Apart from Hwannam's the only private labels sold are those of Hwanam, selling imported canned fish products and canned fruit. Hwannam's total turnover is only about 20 billion won.

3. Convenience Stores (CVS)

There are between 3,000 and 5,000 convenience stores depending on definition. These have also developed private brands.

CVS sales are much more concentrated on convenience foods than hypermarkets, which sell a wider range of household products. For food products alone, CVS probably sell the equivalent of 22% of the value sold by hypermarkets.

In 2000, hypermarkets' biggest threat was seen e-commerce working through the convenience stores. This is a model of e-commerce developed in Taiwan and Japan and about to be applied in Korea, where the consumer pays and receives their order at the local convenience store. Lotte aims to be the leader in this trend having bought 7-11, Lawson and Best Store. In 2001 there is less talk of this, and more talk of expanding the conventional CVS chains.

Table V. 2. Status of Convenience Stores

Source: Food Distribution Year Book ((1) Excluding e-commerce effect)

* Voluntary chain convenience stores do not belong to the major chains and do not have central distribution

4. Voluntary Buying Chains

Voluntary buying chains like the European SPAR system do not exist. Of the 15,000 supermarkets, most are organized in voluntary chains, but this is a tax and liquor distribution regulatory convenience and almost no products are bought by the chain as a whole and there is no proper central distribution.

5. Wholesalers

The majority of wholesalers are tied agents to a single company known as dairichom. They service about 30,000 stores, and in one or two provincial cities such as Daegu there are real wholesalers carrying a multiple line. Independent wholesalers are small and service few outlets, mainly the 100,000 smallest Ma and Pa stores

Over the past ten years logistics companies have sometimes developed their own sales and distribution capability. The largest is Columbus which is actively looking for new products.

6. Department Stores, Food-Service Companies, Kiosks

Department Stores are important high class outlets where consumers expect to see the latest imported products. Each department store has a large foodhall. There are about 100 department stores. Department stores tried private label products, but abandoned them as poor performers.

Food service wholesalers are better developed than general wholesalers. There are estimated to be 10,000 in Korea, all fairly small scale but handling restaurant sales, except for the fast food chains which have their own buying offices.

There are about 100,000 kiosks, selling drinks and snacks and confectionery. Reaching them from a distribution point of view is difficult.

7. Consumer Cooperatives

These groups sell organic foods and some other items. They tend to be linked to fairly nationalistic NGOs and are unlikely to take imported products. They sell unbranded products.

8. Internet

9% of Koreans have purchased food over the internet, according to an international survey and this is a growth area. Mainly purchases are through the websites of the large retail organizations, and cable shopping channels. This is a potential future channel and worth exploring in the future.

9. Pyramid Direct Sales

Korea is Amway's third largest market, and sells health foods and an extensive "1 for 1" programme started in 1997. This means that for every imported product sold Amway aims to sell one locally sourced product which is rebranded as an Amway product. This has included beverages, cornflakes and other products.

10. Imported Food

Imported food is sold through the channels listed above. There are also "import corners" which started as illegal dealers in foreign products smuggled off the US base or carried by airline crews, but which now have a reasonable range of imported products handled by specialist wholesalers. Volumes are fairly small.

11. Joint Venture Opportunities

There are opportunities to form distribution joint ventures and a number of importer / distributors / logistics companies would welcome approaches from foreign companies. These would require Canadian companies to take the initiative. Many small Korean food companies have poor balance sheets, and would welcome cooperation with foreign companies. In the UK and other countries, food with foreign companies that concentrate on private label and contract packing have existed for a long time, Especially in the frozen food sector, the potential exists.

12. Distribution Systems

Unlike Japan, Korea has no intrinsic "distributor barrier". In Japan all products must be carried by licensed distributors who often carry competing products as mentioned above in section 5. In Korea distribution is entirely deregulated. This means that the apparent attraction of private brands in Japan for foreign retailers does not exist in Korea. Carrefour may pursue its normal procurement practices in Korea as in France.

Any company in Korea may get an import and a distribution license. Whereas in Japan, distributors form what may be described as "common carrier wholesalers," Korean companies tend to have exclusive distributors who only handle their own products as mentioned above in sector 5. In recent years several logistics services have developed, the largest being Columbus, an off-shoot of Hanwha stores and Cheil Logistic Services (CLS) an off-shoot from Cheil Jedang, Korea's largest food company.

13. Conclusions

Canadian companies need access to the first three channels named to market private label brands. Possible routes are given in section IX.

Of these multiple channels only the first three are currently the major markets and channels for private brands.

VI. Specifications of the Korean Market

1. Korea is Different

Korea is different. It is regarded internationally as a difficult market to do business in. Success or failure depends on good partners. In the private label business many of the normal problems of entering the Korean market do not exist. The distributor is the customer, and he will take responsibility for marketing and for unsold stock. The distributor will (hopefully) understand the market he is operating in. At the same time the Canadian supplier would have zero input into the marketing mix, the packaging and logo design. Marketing could of course be supported by the manufacturer, especially in the form of free product for sampling, but this is really the retail chain's responsibility.

Consequently the issues which affect a foreign supplier of private label products are two fold:

(1) Accurate communication
(2) The complex regulatory environment of the Korean Food Industry

2. Accurate Communication

The profitability of dealing with private label brands depends on accurate communication. The slightest mistake in production could lead to the rejection of a production run by the customer, and an unsaleable product. If rejected, who would buy a Korean labelled product in Canada?

Koreans are notoriously bad communicators even in their own language, due in part to the language itself which encourages vagueness, and equally from the Confucian notion that one should not reveal ignorance in front of superiors or strangers. Secondly Koreans assume that the partner has a range of knowledge which he is unlikely to possess, and which requires careful cross examination of the Korean who is at the "working level" and actually handles details. Great care in checking details by the Canadian side is essential.

3. Korean Regulatory Hurdles

Korea has regulations in the food industry which are arbitrary and liable to change without prior notification. These regulations are much clearer and more rational since Korea entered the WTO in 1996, but it is a continuing battle between the importer and regulatory officials. A major issue is the size of print on labels, which can lead to whole consignments being refused clearance. Since in private brands, the specification is that of the customer who may never experience these problems in the domestic market, very careful research and a reliable agent are required.

In the case of normal branded products, a mistake which costs money can be added to the retail mark up further down the distribution chain with a fair chance of recovery. However in the case of imported private label products, the contractor will hold the supplier to the original price, regardless of the cost to the supplier.

Product Reclassification

In recent months there have been several cases of products being reclassified to a different food code number, resulting in substantial increases in customs duties. Such actions are inconsistent with normal trading practices. There have been recent cases where the government doubled the duty on a good by abruptly reclassifying the respective products. Specific examples include potato flakes, soy flakes, flavoured popcorn, peanut butter chips and select dairy products (e.g. skim milk powder and whey compound)

The following sections outline the major issues which a foreign private brand supplier would need to face, since there problems may cause the importers to blame the manufacturer.

4. Physically Getting the Product Cleared

Complaints about customs procedures on clearance for food products continue into 2001. Both Amcham in its Annual Report on Business Conditions in Korea and the Investment ombudsman which handles business complaints find that arbitrary action by quarantine and customs individual officers fill up their case books.

The first time is likely to be the worst and the following are the most common causes of delay:

(1) Paperwork not in order. The necessary documentation on contents are inadequate
(2) Korean labels proposed for the product are too small or do not conform to specification.
(3) Products tested reveal minimal trace elements of proscribed products.

The second and subsequent shipments should go through much more easily unless there is a change in local officials or in local regulations

2001 is predicted to be more difficult than 1998-2000 because of the slow down in the economy and managing track gap which will encourage nationalistic officials to look for ways to create problems, meaning that due diligence will be even more important, to avoid problems.

We quote the Amcham comments on trade practices published at the end of March 2001:

"Certain food items, ironically those holding high out-of-quota tariffs, tend to have problems during customs clearance. On several occasions Korean Customs arbitrarily reclassified these products under the HS (Harmonization of Standards) code, holding a much higher tariff classification. Also the length of time needed for customs clearance still needs to be reduced to ensure the quality of products imported. The current importation time can take processed foods up to four of five weeks for first-time items if all food additives are pre-approved for the food item, four to six months for first-time items if a food additive has to be approved for that food item and three-to-five days for on-going items. Although reforms have recently been implemented, customs clearance in Korea is still slow by global and regional standards."

A Regular Regulatory Check Up is Essential: Korean regulations are notorious for their complexity and for changing frequently.

5. Tariff Rates

The tariff rates on many food products are in the 7% - 10%. However there are a very wide range of higher tariff items where the ingredients such as milk or juice compete with Korean agriculture and the world price is much lower than the Korean price.

It can be seen that precisely those products where Canadian products could be attractive as private label brands have high tariff rates. 

6. Inspection of Goods

Inspection of goods or their labels / packaging is necessary to determine:

• The value of the goods for customs purposes and their dutiable status;
• Whether the goods must be marked with the country of their origin or are in need of special making or labelling. If so, whether they are marked in the manner as prescribed;
• Whether the shipment contains prohibited articles;
• Whether the goods are correctly invoiced;
• Whether or not the goods are in excess of the invoiced quantities.

The contents of each package shown on the invoice, the orderly package of the good, the proper marking and numbering of the packages, and the placing of the corresponding marks and numbers on the invoice facilitate proper duty adjustment according to actual volume of goods brought in and the ascertainment of whether any excess goods are contained in the shipment. If any package which has been designated for inspection is found by the customs official to contain any article not specified in the invoice with fraudulent intent on the part of the seller, shipper, owner, or agent, the contents of the entire package in which the excess goods are found are subject to investigate for possible violation.

The following comments were made by Amcham in March 2001.

"Another good example is the labelling requirements for Genetically Modified Organisms (GMOs). Both the Ministry of Agriculture and the Korea Food and Drug Administration have issued standards for labels. However, these standards define labelling requirements as products having GMO ingredient-content based on different tolerance levels. To complicate the issue further for businesses wishing to abide by Korean laws, neither agency provides guidance on how to determine the level of GMO content in the product. Companies are left exposed to arbitrary enforcement of the regulation by port inspectors, as they have no measure by which to prove they qualify to use a particular label under the standards.

Non-standard labelling requirements confuse consumers as well as manufacturers because they are inconsistent with international practices. For example, the Korean food code (while acknowledged as being upgraded) has a limited number of food categories but still requires all food products to be classified and labelled according to the government's recognized categories. International standards, as defined by CODEX, give a broader assortment of categories offering a more accurate depiction of the product, and thus are less misleading to the consumer. The Korean government recognizes its list of product categories is insufficient by its inclusion in the Korean Food Code a category called General Common Standard, which is a catch-all category.

Various ministries have put out respective labelling standards, which must appear on the label. Examples include: the Country of Origin label by the Ministry of Commerce, Industry and Energy and Ministry of Agriculture and Forestry; and the Health Promotion Act which requires warning labels for liquor etc., put out by the Ministry of Health and Welfare."

7. General Information on Inspection of Food Products

(1) In principle, the inspection of food products should finish within 5 working days from receiving the import report. The imported foods etc. subjected to incubation test such as canned or bottled foods and retortable pouched foods, and the other imported foods etc. subjected to inspection by special order from the Commissioner of Korea Food and Drug Administration, are exempted from this processing date limit.

(2) The test items for the laboratory inspections and the random sampling inspections for the imported foods, equipment and containers/packages are referred to in Appendix 2 Primary Laboratory Analysis List for imported foods.

The Amcham March 2001 comments may be quoted.

Testing Requirements and Standards

"In some instances, Korea's testing practices are a subtle secondary barrier hindering Korea's liberalization initiatives. The standards set by ROKG for some products still deviate from international practices and, in some cases, are not based on science or risk assessment (i.e. for bottled water, etc.). Tests should be administered to protect the health of Korean citizens and not as a means to hinder the entry of imported goods. In many cases, the standards are set to zero tolerance without scientific bases (i.e. for bacterium in jams and jellies, etc.). Food imports are required to undergo a Food and Drug Administration (FDA) inspection of each shipment of food; this lasts three to four weeks, and a major ingredient compositional breakdown and processing chart is required to be submitted. This process is too long, and the disclosure of confidential product information is contrary to global practices on proprietary information."

8. Inspection and Clearance Procedures for Foods

The following sets out the government guidelines for clearing food products.

(1) Application for food safety inspection

Since the imported foods and domestic foods are regulated by the Food Sanitation Act the importer would normally make an application for a safety inspection to one of the six Regional KFDAs which are substructures of the Korean Food and Drug Administration (KFDA). As the pre-arrival application system was introduced in August 1995, an arrival application can now be conducted for five days before the arrival of the shipment.

(2) The criteria and the types of inspection

i. Confirmation of safety

- Residual test for pesticides, antibiotics, heavy metals etc.
- Confirmation of micro-organisms
- Test of toxicological substances such as aflatoxin
- Perishability test

ii. Confirmation of standards and specification

- Confirmation of meeting the standards provided by the Food Code
- Confirmation of additives in compliance with provisions of the Food Additives Code

iii. Provision of consumer information

- Examination of labelling in Korean (nine items including main ingredient, etc.) to confirm the suitability of information for consumers

iv. Ensuring the soundness of food

- Protection of sound dietary habits through the elimination of unsuitable foods

(3) Procedures after rejection of food

i. Food that has not passed the KFDA inspection is destroyed except in the following cases:

- The food rejected is to be returned to the exporting country or converted for other use as non-edible products.
- When the sanitation hazard sanitation can be eliminated by processing, heating or selection after customs clearance

ii. Inspection Procedure of Imported Food

The following stages are required

Declaration

Health and Environment Research (as needed)

Document Test

Organoleptic Test

Laboratory Test

Random Sampling Test

Customs Office(Pass)

Customs

Clearance

(In case of rejection: return to the origin or diversion to other use destruction)

Diagram VI.2.

(4) Imported food product inspection system

i. Compliance Sampling Group(subject to mandatory laboratory testing):

- New-to-market products
- Products with a record of violation
- Products with prior information of sanitary risk
- Products falling under the health supplementary products of the ginseng products category, for which laboratory testing is compulsory.

ii. Surveillance sample groups (Products random sampling for laboratory testing)

- Same products from same producer which passed the laboratory testing.
- Raw materials which a manufacturer imports to make his own products.

New issues are constantly emerging, the latest being certification related to ingredients as being free from B.S.E.

VII. Competition in the Korean Private Label Market

1. Domestic Competition

The Korean market is characterized by extreme price competition where open market conditions exist. However where deals can be structured to avoid open market conditions, competition is lower. In general once a supply contract is made there is no competition for that category except when the contract is due to be renewed.

The buyer will normally approach domestic companies for an offer. Companies which are not approached will canvass for an opportunity to compete on the next occasion.

2. Imported Private Label Competition

Foreign companies will need to approach the buyer for private label brands and start negotiation to persuade him to accept an offer. Note that for international retailers these may be global contracts and not negotiated at the local level. If the buyer is approached, he may also approach local manufacturers, import agents or multinational food companies in Korea to get a comparative offer. Any of these may counter with an offer.

In the future as private label brands grow in market volume, there may be an increase in competition, but at the time of writing this is not something anyone interviewed made any special comment about.

3. Pricing and Standard Sizes

It was assumed on the commencement of the study that private label brands would be lower priced than national brands and that this was the unique selling point. In fact the recovery of the Korean market since 1998 and the retailers' experience of the private brands sales led them to discover that pricing was not as important as quality and trust. Moreover the retailer's brand itself carries the mark of quality and trust and yields a higher margin than a national brand.

This was discussed in section II. The result of this discovery is extremely important for Canadian producers in that they do not have to beat Korean prices, only Korean quality. In this instance existing producers for private brands have an advantage in that they can cite their experience with retailers in other countries. Such a track record can build confidence.

Appendix 1 carries the Korean private brand by store and our judgement on the nearest competitor. Although sizes differ slightly, unit prices are clearly not very distinguished for most products and in many actually higher. The use of different sizes also indicates that there is no "standard unit" which Korean consumers are looking for. Indeed by producing a non-standard size, the consumer may be fooled on unit price to the store's advantage.

A careful study of the size and price issue suggests a further advantage to a Canadian producer who is producing an "imperial" measure size for the US market. In all probability, it will not be necessary to modify a production line to meet Korean size needs.

VIII. Case Studies of Successful and Unsuccessful Private Label Products

1. "Good and Cheap", a Successful Brand

One of the most successful private label brands in Korea is "Good and Cheap", the house brand of Hanwha Store chain. "Good and Cheap" was first introduced in 1988, but not progresses until 1998 as a response to the "IMF" era change in consumers. The brand name was a simple description of a product which was both "good" and "cheap". The use of English, rather than Korean - the brand is also written in Korean letters so that Korean consumers who could not read English could pronounce the brand name correctly. Cheap was never a key value in Korea prior to 1997, but the changed environment said that this was exactly what the consumer in early 1998 was looking for.

The key features which make this a successful brand are:

• Clear brand name

- Many private label products do not have such a clear message on their brand

• Distinctive packaging style and colour

- A consumer looking across the supermarket can identify the different products in the range.

•  A wide range of products

- There are 48 food SKUS, as well as many non food SKUs which allows the price conscious consumer to search the store for more "bargain" items.

• Potentially Hanwha can also promote the range in simple leaflet style advertising

Hanwha is a large enough chain with 44 directly managed stores and central distribution to manage the brand. Hanwha estimates that they currently sell about 5-6% of their sales of food and beverage in their own brand, and are keen to expand the range of products further. They have one imported product, canned sweet corn, at the present time.

The success and the range illustrates the nature of private brand sales. The product has to be a core category to be worth handling. Most of the products are Korean made not because of a buy Korea policy, but because only Korean firms - or at least Asian firms -make these kind of products. Consumer groups told us that imported private branded products should be in categories where imports are already expected and canned sweet corn is precisely this category.

2. Carrefour Brands

Carrefour uses the name of the store as its private brand name which is a simple promotional technique which instantly allows the consumer to identify the product on the shelf. Carrefour also promotes its private label products in-store.

The products consist of 34 SKUs at the present time and Carrefour claims that they represent about 10% of sales. A consideration of the products shows that a large number are imported. But to get the volume of sales to 10%, although Carrefour has a preference for imported products which are part of a world sourcing programme, Carrefour must turn to Korean manufacturers to secure the core products which Korean housewives buy.

3. "Fonus", an Unsuccessful Brand

The history of private brands is too short to have built up a large file of failed private label brands. Since the brand is unsupported as long as the product is more profitable for the store even the sale of a few packs a day does not lead to it being withdrawn.

Fonus is a brand of carton packed milk in two sizes produced especially for Family Mart, a Korean owned chain of convenience stores. It sells only about 2% of the milk sold in the Family Mart, and sells because the stores allow stocks of other milks to sell first, so consumers have little choice. In recent weeks the price has been lowered to 990 won, compared with 1,200 won for regular milk. At this price neither the store nor the producer, a major dairy company, Haitai Dairy makes money. The brand has been expanded to 100ml yakult drinks in five packs.

Milk is a competitive product, with about 10 brands competing in the Korean supermarket. On the shelves of Family Mart, Fonus stands along with six other branded milks.

• The pack is distinctive, but there is no connection with the store itself except in small print.
• There are no other Fonus products in Family Mart so that the brand identity does not carry across categories.
• The price of Fonus is not markedly different from other milks on promotion (because of the extreme competitiveness of milk, usually one company's products are subject to a special promotion each month)
• There are small shelf talker labels close to the product with the slogan "Satisfactory product, Satisfactory price". This is considered rather a weak statement
• Family Mart is not a very well managed chain. Its stores are franchised and the image is not well sustained from store to store. Its pricing is about 10% higher than LG-25, which means it can only survive in locations which are competitive.

All department stores have experimented with private brands to see if they are attractive, but all are now withdrawn. The conclusion is that the kind of consumer who visits a department store is not looking for a bargain, but a superior product, and that the volume which a department store would handle is too small to be interesting to either supplier or store

4. Brand Strategies

The stores are changing their attitude towards private label brands based on their perceptions of the customers response. This is a kind of summation of the learning curve by Korean stores over the past few years. Table VII.1 shows the concept which each store adopted last year in terms of the distinctive market strategy of the various stores. In seeking to approach particular chains, these marketing strategies and marketing concepts need to be taken into account.

Source: April 2000, Monthly Discount Merchandiser

5. Conclusions

A successful private brand depends on other several issues

• The quality of management of the store chain
• The size of the chain
• The brand identity chosen
• The range of products

The price differential is not critical at the present time as far as the store is concerned. The store would rather capture the extra profit and make the product just a little cheaper or even more expenses.

IX. Recommendations for Canadian Companies wishing to Enterthe Korean Market via the Private Brand Route

1. How Do I Start?

Start as Simply as Possible

Our recommendation is to start in as simple and easy way as possible. This requires a fax contact with either chain store buyers, or selected importers to see whether they have an interest in representing the company as private brand producers in Korea. The short list of importers is appended to this report and buyers contact details are listed.

Given the rapidity of change in Korea, the past may not be a guide to the future, but some 70% of foreign companies dealing with Korea have learnt expensive lessons with respect to agents and partners. Time spent in studying the market and learning who has a successful track record is essential. It is possible that even after a visit there will be a minimal response, and that one of two decisions must be made, to look for a suitable agent, or to attend a trade show or make an independent assessment.

(1) Potential Agents may be found either by a professional consulting company, the Canadian embassy or a trade organization such as AFTAK.

(2) It is more likely that they will be the result of a trade visit.

(3) The final way is to make a special visit. This would normally follow on one of the other routes in any case. The aim of a visit should be to inspect the market for confectionery products, visit some of the potential partners and distributors.

Normally a potential exporter is recommended to start with a week long visit to Korea. But this first visit should be well prepared without committing to an agency relationship first. It should include visits to major, hypermarket and CVS store buyers.

The Canadian company is often better served by dealing with a large company than a small agent. This may be a distribution company or even an existing food company. Columbus has expressed a continuing interest in handling imported products, while even the largest food company in Korea, Cheiljedang is always on the look out for overseas partners and even potential acquisitions. Most large companies have a trading department, which may look at a potential Canadian partner. In addition retail chains may recommend that the potential supplier work through an importer. Even Carrefour uses a relatively small importer.

Before leaving Canada an adequate supply of brochures and name cards (100 is not enough) should be prepared. At the same time at the start of the process, the company website should be reviewed. Current big Korean company and hypermarket practice is to look at the website on receipt of a fax or inquiry.

The Canadian company may be judged purely on its Canadian website and on this may hang the acceptance of a proposal for a meeting.

2. Logistics

The chain buyer will not be concerned about logistics. This is the Canadian sides' responsibility. Consequently it will be important to ensure that order size is consistent will full container load size.

3. Do not Forget that Exchange Rates Vary

The Korean buyer will try to eliminate risks by trying to fix the delivered price in won and not US or Canadian dollars. The contract will need a good enforceable clause of what will happen if the exchange rate moves more than 5%. In 1997 the drop in the value of the won destroyed the market for many imported food items. The won dropped again in late 2000, and further in 2001 but in general the prospects are for a strengthening won. It is hard to find a forecast for the future value of the won, but the pot entail supplier may find a yen to dollar forecast and multiple by about 10.5 won per yen. This has been an accurate measure since January 1998. The won is "almost" unofficially pegged to yen. Both sides to a contract should look at the possibility of a hedge contract, though this is expensive. Bank One or Citibank are some of the biggest dealers in this area. A hedge contract in which the first 2-5% fluctuation is absorbed by the contractor is a lot cheaper than an absolute contract.

4. Conclusion

The private brand market in Korea is an interesting opportunity for Canadian business. The market is still in its early stages and Canadian companies could establish a key role. Compared with the problems of entering the branded goods market, the private brand market appears relatively simple. The major risk would be in cost control and exchange rate issues.

Private label Canadian food produced for particular stores is a less risky way for some companies to enter the Korean market than with the same product in a Canadian brand. The reasons are straightforward:

• The brand is recognizable to Koreans
• The packaging conforms to Korean taste
• Any promotion expense is carried by the store and not the manufacturer
• The store carries the risk for unsold products
• Unlike Japan, Korea has no intrinsic "distributor barrier"

It should be remembered that private label products produced by Canadian companies at present for other markets offer no special advantage in the Korean market except as a reference. In short such a product suffers the same problem as a branded imported product. That is:

• The brand is not recognizable to Koreans (and needs relabelling)
• The packaging probably does not conform to Korean taste
• Any promotion expense is carried by the manufacturer/importer not the store
• The manufacturer/ importer carries the risk for unsold products

That is not to say that the product may not offer some merits, chiefly price

Breaking common ideas

It is not necessary that private brand products should be cheaper than in the same items of national brand products. It can be helpful to break common ideas that high price private brand products have more chance to go failed. Premium private brand products, which possess higher quality than normal national brand products are another way to go in order to reach verified consumers' needs. Providing top value and useful information through quality, price, design, logo, package, private brand products definitely meet consumers' satisfaction of the concern about health and safety in the long run.

X. Interviews

1. Focus Group

Two focus groups were conducted on 15th February in the Lotte Hotel. The participants were interviewed with a discussion guide that was complied by Korea Associates Business Consultancy.

2. Buyers

XI. Contact Information

1. Contact List

Appendix I. Products, Sizes and Prices by Chain

1. Private Brand Label

2. Census of Private Branded Food Products and Their Nearest National Brand Competitors

Appendix II. Focus group interview

1. Methodology of Focus Group

2. Results from the Written Questionnaires

Focus Group Interview's Participants

.................. Group

Name:
Age:
Address:
Telephone/H.P:
Marital Status
Occupation:

1. How many members do you have in your family?

2. Monthly Household Income

3. Monthly Expenditure

  4. Monthly Food Expenditure

5. How often do you go shopping?

6. Where do you usually go shopping?

7. Have you bought private brand products? (Yes - 75% / No - 25%)

Items:

Electronics, Clothes, Foods(Milk, Baby, Formula), Jam, Bread, Tea, Toilet paper, Kitchen necessities(Wrap, Hoil....), Baby diapers, Wet napkin, Detergent, etc....
Place: E-mart, Magnet, Carrefour, LG-mart

8. Why do you prefer buying private brand products?

3. Guideline for the Focus Group Interviews

(Summary included in section of III. Demand trends (2.consumers) in the main report)

Subject: Consumer Attitudes to Private Label Brands in Korea

1. Shopping Habits

How often do you go shopping?

Daily:
Weekly:
Bi-weekly
Monthly:

Where would you like to go shopping most?

(Department Store/Big-scaled discount store/ Big supermarket/Wholesale market/ Traditional small market/ Mom&Pop/Convenience store/Others)

For Foods:
For Clothes:
For living appliance:
Others:

How much do you usually spend for food?

Daily:
Weekly:
Bi-weekly:
Monthly:

2. Consumer attitudes to Private Label
Perception and Image of private label

2-1. What kind of image is coming across in your mind when you are considering private brand products?

2-2. Have you purchased any private brand products? (Yes/No)

2-3. What do you think about private brand brands?

Any change about the private brand brands in your mind compared to the past?
Best private brand brand you have known?

2-4. Items of private brand products:

Favorite private brand products:
Reasons:

2-5. Preference of private brand products

What items do you prefer to choose private brand products compared to national brands?
How often do you purchase those products?
How much do you spend?
What portion of purchasing foods are in private brand products?

2-6. (Comparing with national brands) Image of private brand products

Merit:
Default:

2-7. (Comparing with national brands) Trustworthy in private brand brand?

Stronger:
Weaker:

2-8. (Comparing with national brands) Price of private brand products

Merit:
Default:

2-9. Other reasons why you prefer to choose private brand products?

3. Opinion about private brand Samples

3-1. What are the most attractive products in terms of trustworthy in Brand?

Reasons:

3-2. What are the most attractive products in terms of Design/Size?

Reasons:

3-3. What are the most attractive products in terms of Price?

Reasons:

3-4. Things to be developed

4. Promotion activities for private brand products

Frequency:
Effect on consumers:

5. Consumer attitudes to Private Label (Imported)

What do you think about foreign private brand products?

What kind of private brand products would you expect to be successful when they are introduced in the Korean market?

- Frozen products:
- Microwaveable Products:
- Dried Foods:
- Canned products:
- Packaged Foods
- Beverage:
- Other Items:

4. Samples of Private Brand Label Logo (E-Plus, Carrefour, Good&Cheap)