SEOUL — The South Korean luxury goods market is showing signs of a slowdown but industry observers stress that the market, Asia’s third largest after China and Japan, remains an important one in the long term.
Consumers in South Korea are expected to spend about 7.77 trillion won, or $6.96 billion at average exchange, on luxury goods this year compared to 7.25 trillion won, or $6.53 billion in 2012, according to Benedicte Dia at Euromonitor International.
The consultancy forecasts that the South Korean luxury market will register a compound annual growth rate of 6.4 percent from 2012 through 2017.
Federica Levato, manager at Bain & Co. in Milan, said that many luxury players saw a slowdown in South Korea in the first few months of the year. She declined to give a numeric estimate, saying that the market is still posting growth but at a “very low” level.
“[The slowdown is] possibly connected to the political tensions between North Korea and South Korea that have attacked consumer confidence and also tourist flows,” Levato said.
The Korean luxury market relies heavily on tourism, particularly from China and Japan; the two neighboring superpowers account for more than half of the 5.5 million international tourists who have visited Korea this year. In the last two quarters, the number of Chinese visitors rose 45.6 percent to 1.74 million people, according to the Korea Tourism Organization. They have now surpassed the number of Japanese tourists. Over the same period, the quantity of Japanese tourists decreased 26.3 percent to 1.34 million people.
“The Korean luxury market benefits from the rise of Chinese tourists who choose to purchase in Korea for fear of fake or counterfeits back home,” said Sarah Chung, cofounding partner of Luxe Brand Advisors. “They also have to pay extra luxury taxes back home.”
Chung attributes the depreciation of the Japanese yen against the Korean won as a cause for the decrease in Japanese visitors.
KTO official Yeong Ju Kim suggested that the decline in visitors stems from the flare-up over disputed versions of events surrounding the Japanese occupation of Korea.
Diplomatic conflicts with North Korea may also have had an impact, according to the business community. While Chinese visitors seemed unaffected by threats, KTO’s Kim added, “Japanese tourists being more concerned with safety are influenced by war crisis.”
Once a nation in abject poverty in the Sixties, South Korea is now the world’s 15th largest economy in terms of GDP. Euromonitor forecasts an average 4 percent increase in the country’s GDP from 2012 to 2017.
Traditionally, Koreans purchased luxury goods as a way of signaling their social status through prominent logos and labels, but that has started to change as Korean shoppers seek more individual looks and new brands, according to a luxury report published in 2011 from McKinsey & Co.
Kering managing director Jean-Francois Palus said in June that his group’s biggest luxury brand, Gucci, had a “tough time” in Korea last year and the first quarter of this year but is seeing a recovery now.
“We have had a tough time in Gucci to adjust with the new [local] customer base,” he said, citing the drop in Japanese tourists. Palus said Gucci reworked its product assortment and merchandising to offset reduced traffic in stores. The executive said Gucci’s global shift away from logo product to leather accessories took more time to execute in Korea but it is resonating with customers.
“The brand perception has improved, the customers have become more sophisticated,” he said. “So those two movements converge to this upgrading of the price points.”
Palus said the rest of Kering’s luxury portfolio is doing “fine” in Korea although he did not elaborate further on specific brands. Kering’s other brands include Bottega Veneta, Stella McCartney, Saint Laurent and Alexander McQueen,
Minji Kim, a research analyst with Euromonitor, said Korean consumers are moving away from big brands like Gucci and Louis Vuitton. Kim cited the January closing of a 13-year-old Louis Vuitton branch (replaced with an Omega watch store) at a Hyundai Department Store in Korea’s second-largest city, Busan.
Department stores such as Shinsegae, Hyundai and Lotte dominate the luxury-goods market in Korea but they still appear to be coming up with new strategies to lure customers.
“To attract consumers, department stores started season-off sales for luxury goods earlier than previous years in 2013,” said Euromonitor’s Kim. “Also, they opened family discounts to the public, which was originally available to VIP customers and employees only.”
Korean department stores are savvy at categorizing their consumers into specialized demographic groups and catering to their particular needs. But now they are facing competition from e-commerce and home shopping.
“Internet commerce is the bright new star of the Korean retailing industry,” according to Luxe Brand Advisors, citing younger shoppers as the most enthusiastic e-commerce users.
The consultancy estimated that Koreans spent $12.9 billion on e-commerce overall in 2012 and will spend $20 billion by 2015.
The mobile-commerce industry is also growing at a rapid pace, in a nation that has the highest percentage of smartphone users in the world, according to Strategy Analytics. Last year, Korea had about a 67.6 percent penetration rate of smartphone users, said Scott Bicheno, a senior analyst at Strategy Analytics in London, who estimated that will increase to about 79.5 percent this year.
Home shopping is another popular retail channel here, Luxe Brand Advisors reported. “Unlike the U.S., most Korean home shoppers are mid- to upper-class consumers,” according to the consultancy, noting that customers appreciate the convenience and consider it as a form of entertainment.