South Korea: an image of modernity

South Korea’s reputation as an advanced manufacturing economy has been built on the ability of its international conglomerates, such as LG or Samsung, to export their relatively high quality products to consumers around the world at affordable prices. The nation’s success in the realm of electronics coupled with its government’s commitment to fast internet connection at home (on average 16Mbps while in the US it remains a more pedestrian 5.8Mbps) have served to heighten the country’s image as not only progressive but cutting edge. Add to this image of modernity the South Korean economy’s encouraging 3.6% growth in 2011 (driven by a robust 10% growth in exports), the country appears in great shape, well away from the gloom surrounding the Eurozone and the still tentative recovery reported in North America.

Given this, South Korea still appears as an Asian tiger, and whilst this may be true in some instances, its domestic economy remains in many ways far from the state of advancement suggested by the country’s international reputation. In reality, it is still a little under 60 years since the end of the Korean War and partition which decimated what had largely been a poor agricultural society. The current economic progress the country is enjoying is a comparatively recent phenomenon, something illustrated by generally low per capita income levels when compared to other developed markets.

With US$16,000 gross income per capita recorded in 2011, this is less than half that of near neighbours Japan, and ranks fairly closely to the Czech Republic, which puts the South Korean economy and consumer market in a band which is much more in keeping with a country in transition.

Retail tissue an insight on development

The less developed nature of the South Korean economy is very clearly illustrated in its tissue market, in which per capita value sales were reported at just US$15 in 2011, less than half of near neighbour Japan at US$34. Value growth has, however, been more pronounced at a 2006-2011 CAGR of 5.5%, making South Korea the most rapidly growing of the developed markets and certainly a territory earmarked for further long term growth. Rising raw material prices and inflation in the domestic economy have had their own part to play, as volume sales growth lagged behind at just 2.5%. This is not unusual in developed market terms and typical of saturated markets where manufacturers are trying to drive value growth through premiumisation.

But curiously, in the case of South Korea, neither of these characteristics are evident; per capita tissue consumption is just 3.7kg, per capita, which ranks the country 36th in the world, on a par with Brazil and Estonia, despite being ranked 12th in terms of GDP (typically a good guide to tissue expenditure).

‘There have been signs that demand is widening, albeit slowly.’

Looking at the tissue market in more detail, the share taken by toilet paper in terms of total volume remains at above 80%, which is very high and more indicative of an emerging market structure. In general one would expect the share taken by toilet paper to decline as consumers ‘flush’ with higher incomes branch out into expenditure on boxed facial tissue and kitchen towels. This has failed to happen in South Korea, which might be considered a failure of manufacturers and retailers to develop consumer perception of tissue products in general and ultimately their willingness to invest in these products.

Retail structures and value deflation

An interesting feature of the South Korean market is the nature of its retailers, which are advanced not only in comparison with its regional peers but internationally, with 90% of sales emanating from supermarkets or hypermarkets. Major hypermarkets such as E-Mart, Lotte Mart and Homeplus have their own private label retail tissue on shelves, which typically emphasise larger volume at lower prices. This has helped propel private label tissue to take 12% of retail tissue which is by far the most developed private label market in the wider Asian region and must be seen as something as a model for development of other markets such as Indonesia or Thailand where chained retail is just beginning to take a grip on the consumer economy. Whilst private label penetration is an interesting feature of the country’s market development it is also a signpost for consumer attitudes to tissue products, in general a commodity item where consumers are often only willing to invest little to obtain passable quality.

As a reaction to this there have been attempts to try and get consumers to move up the value chain in terms of purchasing higher quality tissue products. But consumers will be difficult to move without some stand-out new product development features amongst brands. South Korean consumers seem confident in private label as the producers of private label tissue are well known as national brand producers and broadly interpreted as tacit quality assurance. For more discerning consumers, the standard tissue category beckons, again offering reliable quality at affordable prices, while there has been some premiumisation across the category with three-ply tissues, ultra softness based on high definition embossing and micro deco embossing as well as prints.

Health is also a key issue for South Korean consumers and toilet paper has been no stranger to health-orientated developments, with SsangYong C&B’s developing papers infused with clays designed to neutralise acid within the body and help to improve the immune system. Other examples include Monalisa Co introducing Bellagio, a toilet paper containing organic green tea extracts in 2010, a release that proved popular with an increasingly health conscious consuming public.

Tissue portfolio widens

Whilst the market has been dominated by toilet tissue there have been signs that demand is widening, albeit slowly. Boxed facial tissues, for example, are reported to be increasing in value sales with a CAGR of 5% reported for 2006-2011. Since most South Korean households do not use napkins in the home, it is typical to place boxed facial tissues on a dining table as an alternative to napkins and to have boxed facial tissues in other rooms, tissue commonly used for removing cleansing lotions. The disposable nature of tissues does appeal to Korean consumers although they are still in most cases unprepared to pay a premium for a wipe product, preferring to use lower priced tissues. There is a similar trend in the kitchen, where kitchen towel reported brisk sales growth as consumers looked to improve kitchen hygiene in the wake of H1N1, and have looked to the products as a replacement for traditional cloths. Yuhan Kimberly, for example, took this one stage further through the introduction of reusable kitchen towels which can be washed, expanding the range to include antibacterial products in 2009 following H1N1.

Choppy seas ahead?

Whilst social and economic progress will continue to underpin market growth, manufacturers will have to work hard to convince consumers to either purchase greater volumes through a wider portfolio of products or trade up to premium items in a bid to improve value sales. Volume gains will likely be more difficult to achieve as South Korea’s demographic structure will add little in terms of new consumers, the population set to rise by just 330,000 through to 2020.

With inflation rising in 2011, and personal indebtedness increasing rapidly, South Korea’s economy will need the success of its exports to continue to drive the economy forward. Meltdown in the Eurozone could, however, derail projected 3% year-on-year economic growth forecast through to 2020. There would also appear to be a threat from cheap imports; China is currently in a period of huge overcapacity in terms of its own tissue production and there is some likelihood that this overspill could begin to find its way on to the South Korean market, which could undercut value growth. While consumers still appear to favour reliable quality, a slowdown in the domestic economy or a tightening of credit and increase in interest rates may well encourage a dash for value in order to lessen expenditure, which will ultimately be bad news for a category which has still to gain broad acceptance as anything other than a necessary commodity item.