November 2005 - South Korean Market

While DRTV and home shopping in this region are seen as a multibillion-dollar industry (U.S.), building strong distributor relationships is key to one’s success.

By Alexandra Harrington

With billions of dollars in sales and the third largest revenue-generating home shopping channel in the world, the Republic of South Korea is a pivotal player on the global direct response field. For direct marketers and electronic retailers looking to make an imprint on this market, you may want to investigate the market more closely before proceeding.

Currently, there are five televised home shopping channels based in South Korea. LG, the largest in the country, is also the world’s third largest shopping channel, trailing the U.S.’ QVC and HSN in revenue. Infomercials, which debuted in South Korea in the early 1990s, are a smaller player greatly overshadowed by home shopping, which was launched in the mid-1990s.

Korea, as a peninsula and being surrounded by the great powers of the Orient, has been subject to invasions throughout its history by warring nations from China to the north and from Japan to the east. According to Doug Choi, director of Samwon Interglobal, this unique geographical location allowed for Chinese culture to filter into Japan through Korea; resulting in a common cultural sphere of Buddhism and Confucianism being established between the three countries. “Even to this day, Japan and Korea show huge similarities in market structure, economics and cultural nuances,” adds Nicole Ali, international sales manager at Northern Response (Intl.) Ltd. in Toronto.

Both the ancient and modern history of South Korea play a role in the republic’s current economic, social and political climate. In 1945, 10 days after Japan surrendered ending the war in the Pacific, Korea was divided into North and South Korea. The United States took control of surrendering Japanese soldiers south of the 38th Parallel, while the Soviet Union took control of the north. The U.S. turned its authority over to South Korea in 1948, leaving a small group of military advisors. North Korea invaded South Korea on June 25, 1950, resulting in three years of brutal warfare. In 1987, South Korea elected Roh Tae-woo as president, ending about 26 years of military dictatorship and leading the nation into modern-day democracy.

Mr. Choi explains the geography and makeup of South Korea, “The Korean Peninsula extends about 1,000 kilometers southward from the northeast Asian continental landmass,” he explains. “It is roughly 300 kilometers in width with stronger climate variations along the north-south axis. South Korea contains seven metropolitan cities (urban areas with over 1 million in population), and nine provinces. Seoul, the capital of South Korea, is the largest urban center, with 10 million residents.”

The approximate population of South Korea is 48,600,000, with a population density of 490 people per square kilometer. Mr. Choi says a notable trend in the population structure is that it is getting increasingly older. A 2003 population estimate revealed that 8.3 percent of the total population was 65 years old or over. The number of people 15 to 64 years old accounted for 71.44 percent.

Statistics provided by Mr. Choi reveal that the average household income is around $3,000 (U.S.) per month, with 12 million households owning a television. The television landscape shows broadcast owning 60 percent of the viewing audience and cable TV making up the remaining 40 percent. Jason Kang, president of KML Enterprises in Los Angeles, offers that to date in 2005, daily cable TV viewers average 840,000 with broadcast viewers averaging 2.4 million.

CULTURAL DIFFERENCES
While Americans know that Koreans eat with chopsticks rather than forks, many don’t realize that Koreans prefer one knife in the kitchen. “In the States, Americans use different knives for different foods,” says Kang. “There are steak knives, bread knives, etc., but for Koreans along with all Asian people, there is only one kitchen knife.” He attests the popularity of the Miracle Blade in Korea to this cultural difference.

For George Hung, CEO of GD Spectrum in Henderson, Nev., the cultural differences lie in confidence. “Asians in general and Koreans definitely tend to trust big companies,” he says. “LG (the home shopping network) is basically the predominant direct response industry in South Korea.” Hung estimates that home shopping accounts for 95 percent of the direct response market in South Korea, while long and short form constitute the remaining 5 percent.

One of the first steps to sell products in South Korea is buying media. Mr. Choi explains that DRTV companies can buy airtime from the program provider and system operator directly. “Program providers and system operators want to sell airtime to DRTV companies for longer timeframes (more than three months),” he says. “DRTV companies can resell the extra airtime to other companies like a broker.” Program providers sell airtime in two-, four-, six-, eight- and 10-minute intervals for DRTV, while live home shopping programs air for 50 minutes. However, Hung contends that short form is not as desirable a medium in South Korea. “The cost of airtime is quite high compared to an infomercial,” he says. In his opinion, fitness is a good category for infomercials, while cosmetics and health and beauty do better on home shopping. However, he adds, “successful infomercial products all move to home shopping in Korea.”

RULES AND REGULATIONS
South Korean government regulations for products sold on television are somewhat stringent, especially for ingestibles and cosmetics. Any products of a topical, ingestible or cosmetic nature are subjected to a very rigorous approval process, which requires a great deal of supporting documentation. Ali recommends that before you bring this type of product to market you have all of your research and information ready, along with patience and a good local distributor that will help guide you through the process. “North Americans think that ‘anything goes in Asia’ and often don’t realize that ads and products themselves need to be approved by the KFDA (South Korean Food and Drug Administration),” says Ali. “The KDFA often imposes a myriad of restrictions, including no before-and-after comparisons, and substantiation or removal of claims on weight loss, which make it hard for DRTV distributors to maintain the original strength or message in the show.”

Hung adds that while the South Korean FDA is quite tough, the Japanese Health Ministry is the toughest in Asia. “If a product has been approved in the States or in Japan, everything seems much easier when bringing the product to Korea,” he says. Hung continues that certain health and beauty products, which don’t need FDA approval in the States, like tooth whitener, typically do require government approval in South Korea. “It is a much longer process to import these types of products,” he notes. “It helps to have the right player in Korea.” He adds that often if the manufacturing venue is changed; for example, from the U.S. to Japan, it eases the import process.

What’s to buy? The variety of products sold through home shopping mirrors that of the States and includes food such as kimchee and dried fish. “While in the states, QVC now sells Omaha Steaks from the get-go Korea sold food on the home shopping networks,” explains Hung. The food ranges from delicacies, to regional specialties, to standard fare. “Korea is a small country compared to the U.S.,” he says, “but it does take a long time to drive from the top to the bottom by car-there are definite regions with different regional foods.”

As for short and long form, Mr. Choi notes that typical items sold include: health food, beauty, diet, household, medical devices and exercise equipment with prices ranging from $29 to $190 (U.S.)-lower prices than live home shopping items. Patents also play a role for many of these products. For example, Hung points out, “household products are popular, but without an exact patent it is difficult to control knockoffs flooding the market at a lower price,” he explains. Ali comments that she believes registered trademarks and patent protection hold weight in the South Korean market and most reputable distributors will help police the market for infringement. “What is really important for those types of products is to have a quality product that is priced properly to keep the distributor from overselling or lowering the perceived value,” she says.

Whether or not North American companies choose to use their current advertisements or start from scratch, South Korea has the ability to handle both alternatives. For dubbing or editing, the country has its own facilities to modify imported direct response advertisements. In deciding which route to pick, Ali offers that, “if you have a U.S. product with a 15-minute or 30-minute show, the inclination of local distributors in South Korea is first to localize the footage to merge with local production for debuting on the live shopping channels.”

For infomercials, Hung says, “Koreans use dubbing and editing to change the offer and call to action.” Typically, the bonus offers, so common in the States, are removed from Korean ads. For example, while in the States a piece of exercise equipment may come with free videos or a diet program, those free offers would be changed in the Korean version. Further, editing is normally done to the call-to-action screen to reflect these changes. In the fitness category, he notes that the South Koreans usually leave the Western faces in the ads, as they are perceived as “stronger and healthier.” While for health and beauty, advertisers use localized Asian faces because Hung explains, Asians are concerned that skin tone and needs are different. He further comments that while often some of the Western testimonials remain intact, “soft sells” are changed to “hard sells,” with pricing and contact information readily available.

Once a product is sold, Korean direct response customers are promised very tight turnaround times for their merchandise. “While it varies by distributor and shopping channel, customers are typically promised their merchandise in under a week,” says Ali. “Companies can’t do ‘dry testing’ (where a retailer runs an ad without having inventory in stock to gauge customer interest) in Korea.” For infomercials, Mr. Choi says, “Korean DRTV companies deliver goods to their customers within seven days of payment. If a customer doesn’t want the item or is not satisfied by the quality of the product-even if they use it-DRTV companies refund customers within 15 days typically.”

THE CHALLENGES
North American marketers will face some challenges in the South Korean market. “The No. 1 challenge is finding the right player,” says Hung. “With the popularity of home shopping growing so big in such a short period of time, owners of products deemed valuable will receive 20 to 100 calls from people claiming they can distribute into Korea. The key is to screen these distributors to make sure they have a direct connection to the right people in Korea.” The screening process should also discern if they have funding, experience and what products they have brought to the Korean market. For health and beauty, he suggests requesting documentation demonstrating they were able to bring this category to market.

Technologically speaking, South Korea is firmly in the 21st century. Ali estimates total South Korean Internet users at approximately 29.22 million. Hung explains that South Koreans’ use of the Internet with regard to direct response is similar to Americans in that they mainly use it for further research on products. He does note that the predominant Internet users are professionals and members of the younger generation. Unlike some American elders, older Koreans are not as Internet savvy. Mr. Choi explains that Digital Multimedia Broadcasting (DMB) service started this year, whereby consumers can watch television-and advertisements-on their mobile phone. This technology far surpasses that in the States.

What kind of sales should North Americans expect? Our experts estimate very different overall sales figures. Hung and Ali both estimate the South Korean direct response industry to be about $9 to $10 billion (U.S.) in yearly sales, roughly half of Japan’s, through all distribution channels. While Mr. Choi estimates total DRTV sales at $20 billion (U.S.) and live home shopping at $40 billion (U.S.). Kang estimates the DRTV market at $40 billion (U.S.) as well.

Ali gives the following reminders to direct response players looking to work in South Korea. “North American suppliers need to remember that nothing stays the same forever and that each market sees its ups and downs economically and structurally,” she says. “It’s important to stay current with what’s happening and to shift focus and keep momentum going when active markets like Korea fluctuate.” She echoes Hung’s need for diligent choices of local partners to ensure there are measures of accountability and propriety in place. Lastly, she adds, “Product, price and production are the variables we plug into existing distributor relationships to incite consumer response and sell at the end of the day, but without the relationships there is no channel of distribution to plug into, so the relationships are key in whether we fail or succeed in marketing to Korea.”

A final factor to consider when debating whether or not to bring product to Korea comes from South Korea’s Yonhap news agency. According to Yonhap, South Korean TV home shopping companies are looking to China, the world’s most populous country, which has 90 million cable TV subscribers as opposed to South Korea’s 10 million, for their next investments due to perceived saturation in the Korean market. Recent sales growth in Korea has slowed considerably. In fact, Korean TV home shopping, which once garnered annual growth of several hundred percent, is now recording negative growth.

Alexandra Harrington is a contributing writer to Electronic Retailer magazine. We would appreciate your feedback. To submit comments, point browser to southkoreanov.marketing-era.com.