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South Korea Faces Luxury Aberrations and External Shocks

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As one of the leading Asian consumer markets, South Korea provides ample opportunities for luxury goods companies across many categories. Stable economic growth, low income inequality, and the industrial hubs of Seoul and Gyeonggi-do have fuelled spending on luxury goods and high-end services. However, the population is ageing and youth unemployment is high. While the minimum wage has been raised, social welfare is still inadequate.

Valued at KRW13 trillion (US$11 billion at current 2016 prices), the luxury goods market in South Korea ranked 8th out of the 32 countries covered by Euromonitor International's luxury goods research and accounts for just under 3% of the global market. However, with real value growth of 44% in the five years to 2016, South Korea currently stands as the fourth fastest growing luxury goods market in the world behind India, Malaysia and Indonesia.

The national capital Seoul ranks as the largest consumer market in the country, followed by Gyeonggi-do and Busan. Seoul is the hub of luxury retail, high-tech manufacturing and is home to leading banks and other financial companies. Moreover, a highly skilled workforce and advanced technologies have fuelled income and consumption growth among the residents. Luxury goods businesses can target both the middle classes and richest households in Seoul with a range of products and luxury services.

Inflow of Chinese tourists and higher domestic purchasing power has boosted sales

According to our latest data, the number of tourist arrivals from China decreased in 2015, due to the unexpected MERS outbreak, but recovered to post an 11% increase in 2016 to reach 6.6 million visitors. This number exceeds the pre-MERS period, which implies that South Korea maintains its strong attraction for wealthy Chinese tourists. Indeed overall retail expenditure by Chinese tourists in South Korea increased by 10% in 2016. South Korea offers a convenient and highly attractive shopping environment for wealthy Chinese customers.

However, as we move further into 2017 and political instability between Beijing and Seoul continue to increase over the installation of a US anti-missile system in South Korea, the outlook in terms of Chinese tourist is uncertain as more mainland Chinese tourists are now returning to Hong Kong to shop for their luxury goods. According to data from the Hong Kong tourist board, in March 2017 arrivals from the mainland surged 10.4%, resulting in a near 9% increase in overall visitors to the island. In the same month it was announced that Beijing was going to place a ban on Chinese tour groups from visiting South Korea and stricter visa restrictions would be implemented.

In terms of domestic wealth, according to Euromonitor International’s latest data, the population with an annual income in excess of US$150,000 (in constant terms) increased by just under 3% in 2016. At the same time, South Korea boasts the third largest concentration of middle class households as a percentage of all households after Azerbaijan and Kazakhstan.

Global luxury behemoths eye South Korea as next fashion and beauty capital

In April 2016, the second Conde Nast International Luxury Conference was held at The Shilla Seoul hotel in South Korea. After the inaugural event in Italy in 2015, Conde Nast selected South Korea as the second venue for its conference, evidence that South Korea is firmly establishing a foothold as a luxury goods market.

In July 2016, L Capital, the private equity arm of LVMH Moët Hennessy Louis Vuitton, announced that it planned to invest USD50 million in CLIO, a South Korean colour cosmetics company. This is the first investment by the LVMH group in a South Korean company. LVMH had previously invested in YG Entertainment, a South Korean K-pop stars management group, which later launched a proprietary colour cosmetics brand, Moonshot. Goldman Sachs and Bain Capital Private Equity have also agreed to acquire Carver Korea, the owner of the recent homeshopping hit, AHC Real Eye Cream for Face.

South Korean beauty companies are a good target for global beauty giants, as Korean beauty brands are in huge demand in China and other Asian countries, but have also more recently made headway into markets further afield such as the UK and US. Global companies aim to take advantage of this trend to capture China and emerging markets by investing in Korean beauty product manufacturers.

Luxury aberrations

Real GDP is predicted to rise by 2.4% in 2017, after gains of 2.8% in 2016. A fiscal stimulus launched in October 2016 coupled with sluggish gains in private consumption is expected to drive the economy. Exports make up more than a third of GDP and will continue to contract, owing in part to the slowdown in China. Producers of smartphones, carmakers and the shipping industry all face serious challenges. Fallout from Seoul’s messy political situation undermines economic sentiment and deters investment.

Concerned about external conditions, many firms including those in the luxury goods industry are hesitant to boost investment. Sales of luxury goods are nevertheless expected to maintain moderate value growth (at constant 2016 prices) over the 2017-2021 forecast period; however, a slower CAGR is anticipated as the category experiences maturity.

In terms of digital, luxury goods continues to be one of the industries most impacted by the rise of the connected consumer. Online luxury goods sales will continue to outpace the industry’s overall growth rates and countries such as South Korea are clearly appealing to the mobile-first mind-set of today’s luxury consumer. In fact, South Korea is the most digitally-connected population today based on the digital connectivity component of Euromonitor’s proprietary digital index. The country’s tech-savvy culture is unparalleled, with 99% of the population using broadband connections. It is a leader in technological development and has implemented some of the world’s fastest and most extensive networks, meaning this country is ideal for future digital commerce luxury spend.

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