Required Report - public distribution

**Date:** 4/19/2007

**GAIN Report Number:** KS7024

KS7024

**Korea, Republic of**

**Retail Food Sector**

**Biennial Market Brief**

**2007**

**Approved by:**

![](media/image1.wmf)Mr. Stan Phillips

U.S. Embassy

**Prepared by:**

Mr. Sangyong Oh

**Report Highlights:**

The retail food sector in Korea is undergoing a rapid change due to the
development of modern mass retail businesses, changes in consumer
tastes, and the increasing income levels. These developments translate
into growing opportunities for imported consumer-ready food products.
Total imports of consumer-ready foods from the United States increased
by 13.3 percent from the previous year to reach \$851 million in 2006
(Jan. through Nov., CIF value).

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

ATO Seoul

\[KS\]

**KOREA RETAIL FOOD SECTOR REPORT**

**TABLE OF CONTENTS**

I. Market Summary

A. Korean Retail Industry Overview

B. Consumer Trends

C. Food Imports

II\. Road Map for Market Entry

> A. Modern Mass Retail Businesses: Hypermarkets, Grocery Supermarkets,
> Convenience Stores, Department Stores, On-line Retailers

A-1. Entry Strategy

A-2. Market Structure and Product Flow

A-3. Sub-sector Company Profiles

A-3-1. Hypermarkets

A-3-2. Grocery Supermarkets

A-3-3. Convenience Stores

A-3-4. Department Stores

A-3-5. On-line Retailers

B. Traditional Retail Businesses: Wet Markets, Mom-and-Pop Grocers

III\. Competition

IV\. Best Product Prospects

A. Products Present in the Market Which Have Good Sales Potential

> B. Products Not Present in Significant Quantities but Which Have Good
> Sales Potential

C. Products Not Present Because They Face Significant Barriers

V. Post Contact and Further Information

**I. Market Summary**

**A. Korean Retail Industry Overview**

The retail sector in Korea[^1] has undergone dramatic change ever since
the opening of the first hypermarket store in 1993 (E-Mart store by
Shinsegae Co.) and the liberalization of mass retail business to foreign
ownership in 1996 (Macro, a Dutch retailer, was the first one to enter
the market). Modern mass retail businesses such as hypermarkets, grocery
supermarkets, convenience stores, and on-line retailers have grown
rapidly at the expense of traditional retail outlets, including wet
markets and family-oriented small grocers. Growth of these new
retailers, coupled with the development of information technology and
income levels, has significantly changed the way Korean consumers
purchase daily necessities and has also changed consumers' perception of
the value and quality of food products.

As of 2005, the size of the overall retail market in Korea is estimated
at Won (W[^2]) 157.1 trillion (approximately \$149 billion), a 5.2
percent increase from the previous year. The growth of overall retail
market sales has slowed down in recent years due to the sluggish economy
and stagnant performance of traditional retailers. However, modern mass
retail businesses have continued to expand rapidly, and accounted for 40
percent, or W62.8 trillion, of the market in 2005. Although diminishing,
traditional retailers still account for a significant part of the market
especially in areas where modern mass retailers have yet to penetrate.

Hypermarkets have become the single largest retail force in Korea,
replacing department stores. Hypermarkets currently account for 15.0
percent of overall retail market sales, or W23.5 trillion in 2005. The
share of hypermarkets is likely to increase further in the coming year,
as there still remains room in the market for an additional 100-200
stores. In particular, expansion of metropolitan areas across the
country fuels the growth momentum for hypermarket stores, which target
densely populated urban markets.

The growth of the on-line shopping segment has been most remarkable in
recent years. The sales of on-line retailers, including Internet
shopping, TV home shopping, and catalog shopping, has grown 188.7
percent during the last five years to take 9.7 percent, or W15.3
trillion, of total retail market sales in 2005. Convenience and better
assortment have been the driving force behind this explosive growth of
on-line shopping in Korea. Of course, dense population and high affinity
towards information technology were also the key factors behind this
success. It is expected that on-line shopping will become the second
largest retail channel in Korea by 2008 provided that the current growth
rate is maintained.

**Table 1. Breakdown of Korean Retail Market**[^3]

+------------------+------------+-------+-------------+------+-------+
| Segment          | 2001       |       | 2005[^4]    |      | G     |
|                  |            |       |             |      | rowth |
|                  |            |       |             |      |       |
|                  |            |       |             |      | \%    |
+------------------+------------+-------+-------------+------+-------+
|                  | Sales      | Share | Sales       | S    |       |
|                  |            |       |             | hare |       |
+------------------+------------+-------+-------------+------+-------+
| Hypermarkets     | W10.6      | 8.1 % | W23.5       | 15.0 | 121.7 |
|                  | trillion   |       | trillion    | %    | %     |
+------------------+------------+-------+-------------+------+-------+
| Department       | W16.1      | 12.2  | W17.2       | 10.9 | 6.8 % |
| Stores           | trillion   | %     | trillion    | %    |       |
+------------------+------------+-------+-------------+------+-------+
| On-line          | W5.3       | 4.0 % | W15.3       | 9.7  | 188.7 |
| shopping[^5]     | trillion   |       | trillion    | %    | %     |
+------------------+------------+-------+-------------+------+-------+
| Convenience      | W1.9       | 1.4 % | W4.6        | 2.9  | 142.1 |
| Stores           | trillion   |       | trillion    | %    | %     |
+------------------+------------+-------+-------------+------+-------+
| Chain            | W2.0       | 1.5 % | W2.2        | 1.4  | 10.0  |
| Supermarkets[^6] | trillion   |       | trillion    | %    | %     |
+------------------+------------+-------+-------------+------+-------+
| Traditional      | W86.6      | 65.9  | W91.3       | 58.1 | 5.4 % |
| Retailers        | trillion   | %     | trillion    | %    |       |
+------------------+------------+-------+-------------+------+-------+
| Others           | W19.6      | 14.9  | W26.5       | 16.9 | 35.2  |
|                  | trillion   | %     | trillion    | %    | %     |
+------------------+------------+-------+-------------+------+-------+
| Total            | W131.5     | 100%  | W157.1      | 100% | 19.5% |
|                  | trillion   |       | trillion    |      |       |
+------------------+------------+-------+-------------+------+-------+

Total food sales of the retail sector were estimated at W50.2
trillion[^7] for 2005, up 1.5 percent from the previous year. In other
words, food sales accounted for about 32 percent of overall retail
market sales. Hypermarkets have become the leading retail channel for
food products, selling an estimated W12.7 trillion of food products in
2005. The average Korean household spent W292,300 (approximately
\$307.7) per month, or 14.4 percent of total monthly expenditures
purchasing grocery foods in 2005.

**Table 2. Estimated Food Sales by Retail Format**[^8]

  -------------------- ------------------------ -------------------------
  Year 2005            Percent of Sales from    Total Food Sales
                       Food Products[^9]        

  Hypermarkets         54.1 %                   W12.7 trillion

  Department Stores    14.2%                    W2.4 trillion

  Convenience Stores   41.5 %                   W1.9 trillion

  Chain Supermarkets   82.4 %                   W1.8 trillion

  On-line shopping     8.4%                     W1.3 trillion
  -------------------- ------------------------ -------------------------

**Table 3. Breakdown of Monthly Expenditure on Grocery Foods by Average
Korean Household**[^10]

  ---------------------- -------------- ----------- -------------- --------
  Items                  2002                       2005           

                         Spending       Share       Spending       Share

  Grains & Cereals       W48,356        19.9 %      W45,652        15.6%

  Meat                   W38,601        15.9 %      W41,596        14.2%

  Milk & Dairy products  W19,229        7.9 %       W22,102        7.6%

  Fishery products       W29,138        12.0 %      W32,632        11.2%

  Vegetables including   W34,997        14.4 %      W39,917        13.7%
  Seaweeds                                                         

  Fruits                 W22,266        9.2 %       W33,505        11.5%

  Seasonings, Oils, Fats W16,157        6.6 %       W17,919        6.1%

  Bakery and Snacks      W15,817        6.5 %       W22,634        7.7%

  Tea, Soft drinks,      W15,578        5.7 %       W22,381        7.7%
  Alcoholic Beverages                                              

  Other foods            W4,470         1.8 %       W14,049        4.8%

  Total                  W243,103       100 %       W292,384       100 %
  ---------------------- -------------- ----------- -------------- --------

Rapid expansion of hypermarkets and on-line shopping retailers has
heightened the competition in the industry in recent years, resulting in
mergers and acquisitions (M&A) not only of small, regional retailers by
large national retailers, but also consolidation among large retailers.
In particular, acquisition of Carrefour Korea (a French -based
hypermarket retailer) by E-Land Group and acquisition of Wal-Mart Korea
by Shinsegae E-Mart in 2006 took the industry by surprise because these
incidents were seen as \'unexpected\' victories of local Korean
retailers against multi-national competitors.

Competition and consolidation in the industry is expected to remain
strong in the coming year as leading retail companies aggressively seek
to establish \'horizontally integrated\' businesses that encompass the
whole spectrum of retail segments. For example, both Shinsegae Co. and
Lotte Co., the top two retail conglomerates in Korea, have pursued an
active M&A strategy over the years. This strategy includes raising
capital from the public stock exchange to expand and operate
full-spectrum retail businesses, including convenience stores, grocery
supermarkets, department stores, hypermarkets, and on-line shopping
(Internet, TV, and catalog). The leading Korean retail conglomerates are
also making serious investments into developing Asian countries,
including China and Vietnam, in an effort to find new growth
opportunities. For example, Shinsegae Co. added two new stores in China
in 2006.

Currently, few of the modern mass retailers import food products
directly. Rather, retailers tend to purchase from specialized importers.
However, retailers of international origin, Costco in particular, do
import directly using international sourcing networks. Mass retailers of
local origin are seeking ways to increase the assortment of imported
foods through direct importing, but any rapid move is unlikely in the
near future as they lack experience and expertise on international
sourcing. Mass retailers are also paying more attention to private label
branded (PB) products, including processed food items, for higher
profits and consumer loyalty. But again it will take some years for
local mass retailers to catch up with the PB program of international
retailers for imported foods.

Growth of modern mass retail businesses has coincided with the rapid
development of a modern, large-scale logistics and distribution sector
in Korea. Most mass retailers are now equipped with a nationwide,
temperature controlled distribution network of trucks and warehouses.
However, small to medium size retailers generally rely on third party
independent logistics services due to the high overhead cost. Many food
importers have their own distribution force covering major metropolitan
markets but use third party distributors when supplying stores in
suburban regional markets.

**B. Consumer Trends**

Like consumers everywhere, Korean consumers are looking for better
value, convenience, new tastes, and safer and fresher products in their
shopping trips.

Due in part to the increasing health awareness of aging consumers, there
is a heavy emphasis among the general public on healthy eating. Organic
food and wine, among many others, are gaining popularity among
health-conscious aging consumers and young mothers. \'Well-being\' is
another popular theme in the market behind the consumer trend of seeking
healthier and more \'wholesome\' products. For affluent consumer groups
and young professionals, quality and image can be more important factors
than price and value when making purchasing decisions.

Korean\'s long-held strong belief in health-improving functionality of
regular foods (as an old Korean proverb says \"food and medicine are
from the same source\") still prevails and contributes to the ongoing
trend of seeking functional effects in almost every food they encounter
in the market. As a result, sales of functional foods (or regular foods
targeting health concerns) with government approved efficacy claims and
perceived efficacy based on word-of-mouth remain strong. Glucosamine,
Chlorella, vitamins, anti-oxidants, lactic bacteria, antlers, pollen,
green tea, fish oil, Ginseng and other Asian herbs are some of the
functional ingredients that are popular in the market.

Table 4. Aging Korean Population

  -------- ------------- -------- -------- -------- -------- -------- --------
  Age      1995                   2000              2005              Growth
  Group                                                               

           Number[^11]   Share    Number   Share    Number   Share    

  0-14     10,236        23.0 %   9,639    21.0 %   8,986    19.1 %   -6.8 %

  15-64    31,678        71.1 %   32,973   71.7 %   33,690   71.6 %   2.2 %

  65 +     2,640         5.9 %    3,372    7.3 %    4,365    9.3 %    29.5 %
  -------- ------------- -------- -------- -------- -------- -------- --------

Source: Korea Statistics Office

Consumer demand for products of higher quality and new taste are
increasing along with the growth of income level of Korean consumers.
Korean GDP[^12] reached \$787.5 billion in 2005, up 15.7% from the
previous year. Per capita GNI[^13] also grew by 14.8% to reach \$16,291.
Korean government estimates that the per capita GNI will reach \$20,000
for the first time in history in 2008. If the \$20,000 level is
realized, Korea would become one of the most affluent countries in Asia
following Japan, Singapore, and Taiwan. At the same time, broadening
consumer tastes and buying power are creating demands for more
diversified quality and price options. For example, while the strong
demand for lower prices by the middle to low income consumer group has
driven the rapid expansion of hypermarkets, sales of luxury goods of
premium quality and price in department stores have also shown strong
growth even under the economic slow down in recent years.

Korea\'s 50 million inhabitants occupy a country the size of the
Indiana. About 70 percent of the land is mountainous terrain and over 90
percent of Korean population lives in metropolitan areas, which explains
the high population density and land cost. Convenience remains a very
important factor behind many consumer trends in Korea as everyday life
gets busier. For example, an increased number of dual-income families
and single parent households have led to a growing demands for HMR (Home
Meal Replacement) products in retail stores.

Mass retailers have actively responded by introducing in-store fast food
and deli outlets, prepared food sections, and more microwavable (or
ready-to-eat) processed foods. Delivery service is extremely well
developed in Korea, as people do not want to waste time on the
traffic-jammed roads. Rapid growth of on-line shopping is also rooted
partly in the demand for convenience (of course, high land cost is
another factor that drives stores to go \'virtual\').

**C. Food Imports**

By nature, Korea depends heavily on imports as the local agriculture and
fishery industry alone can only supply 45.7 percent of average caloric
intake[^14]. Roughly 70 percent of all food in the market is imported.
In particular, local production is not capable of meeting increasingly
diversifying consumer tastes for international products and the demand
for wider price and quality options.

**Table 5. Imports of Agricultural, Forestry, and Fishery Products into
Korea**

**(Year 2006, Jan. through Nov., CIF value)**[^15]

  --------------------- --------------- ---------- -------------- ---------
  Category              From the World             From the U.S.  
                        Total                                     

                        Value           Growth     Value          Growth

  Basic Commodity       \$2.9 Billion   0.7%       \$1.3 Billion  44.7%

  Intermediary          \$4.0 Billion   10.7%      \$740 Million  5.5%

  Consumer-Oriented     \$4.4 Billion   16.2%      \$851 Million  13.3%

  Forestry              \$1.9 Billion   13.6%      \$153 Million  -2.2%

  Fishery               \$2.4 Billion   14.9%      \$124 Million  -5.0%

  Total                 \$15.6 Billion  11.2%      \$3.2 Billion  20.2%
  --------------------- --------------- ---------- -------------- ---------

Growth of modern mass retailers and changes in consumer tastes are
translated into growing opportunities for imported consumer-ready food
products. According to official import statistics, total imports of
consumer-oriented foods in 2006 (Jan. through Nov., CIF Value) increased
16.2 percent from the previous year to reach \$4.4 billion, while
imports from the United States also grew by 13.3 percent to reach \$851
million. "One-stop" themed hypermarkets and large supermarkets have
become the major retail channel for imported foods as they offer a
shopping environment where imported products can better compete against
locally manufactured or grown products. In addition, large retailers are
seeking ways to increase their assortment of imported foods in an effort
to differentiate their stores from competitors.

The outlook for U.S. exports to the Korean retail sector is excellent
for beef[^16], pork, poultry, seafood, processed vegetables, fruits,
nuts, dairy products, juices, alcoholic beverages, condiments, sauces,
cooking oils, organic foods, coffee, snacks, and confectioneries. In
addition, on-going trade liberalization will create new opportunities
for those products that are currently face restrictive import barriers
in the form of tariffs, quotas and food safety regulations.

**Table 6. Advantages and Challenges Facing U.S. Products in Korea**

  ----------------------------------- -----------------------------------
  Advantages                          Challenges

  Korea is a market where new ideas   Consumers are generally biased
  and trends are eagerly tried and    toward locally produced products.
  accepted, leading to greater        Many consumers maintain a negative
  opportunities for new-to-market     view on the quality and safety of
  products. Consumers are looking for imported foods. Imported foods are
  new and international tastes as the often associated with
  income level continues to rise.     contaminations and potential
                                      food-born diseases. In addition,
                                      food safety issues are increasingly
                                      becoming a means to restrict
                                      imports.

  Korea, by nature, depends heavily   Consumers hold negative perceptions
  on imports for its food and         about GMO products. Retailers fear
  agricultural needs.                 reprisal from anti-GMO activists
                                      and, consequently, refuse to stock
                                      any product that would have to be
                                      labeled \"Contains GMO\".

  Liberalizations of import barriers  Imports of many products face
  improve market accessibility and    restrictive trade barriers,
  price competitiveness of imported   including high tariffs, volume
  U.S. products.                      quotas, safety documentation
                                      requirements, and Korean language
                                      labeling regulation. Certain food
                                      additives approved for use in the
                                      United States may not be approved
                                      in Korea.

  Growth of modern mass retail        Few large retailers import
  businesses offers new opportunities directly. Local retailers in
  to imported consumer oriented       general lack experience and
  products. Large retailers seek a    expertise for international
  way to increase the assortment of   sourcing. Markets outside
  imported products to differentiate  metropolitan areas have low access
  from competitors.                   to imported foods. Most retailers
                                      require minimum two thirds of
                                      designated shelf life left for
                                      imported products upon delivery to
                                      the warehouse.

  Due to the long history of economic High margins/markup on imported
  and political ties between Korea    products coupled with import
  and the United States, Korean       tariffs and taxes deteriorate price
  consumers are familiar with         competitiveness of many imported
  American products and food trends.  products against locally grown or
  English is the most popular foreign manufactured products.
  language for Koreans.               
  ----------------------------------- -----------------------------------

**II. Road Map for Market Entry**

**A. Modern Mass Retail Businesses - Hypermarkets, Grocery Supermarkets,
Convenience Stores, Department Stores, On-line Retailers**

**A-1. Entry Strategy**

*Establishing Korean Partner:*

Thorough research about the market and related regulations is necessary
for any U.S. exporter who seeks entry into the Korean retail market.
Korea has well established regulations and procedures on food imports,
as well as complex tariff and tax codes, which often make an entry of a
new-to-market product a time consuming process. In addition, certain
food additives approved for use in the United States may not be approved
in Korea. U.S. exporters must be willing to conform exactly to the
Korean labeling and documentation requirements. Working with established
importers is the approach that has been proven most efficient in
overcoming these challenges.

● Established importers are well aware of market intelligence, local
business practices, distribution channels, and most of all are the best
source for up-to-date information on government food import regulations.

● ATO Seoul maintains listings of established Korean importers by
product or by industry, which are available at no cost to U.S.
exporters. ATO Seoul also feeds trade lead information from Korean
importers to State Regional Trade Groups (SRTGs), which are disseminated
to U.S. exporters through the network of the state department of
agriculture or trade promotion agency. ATO Seoul regularly organizes
Korean buyer missions in cooperation with SRTGs and agricultural
cooperators to major food shows in the United States, such as the FMI
Show and the NRA Show, for matchmaking with U.S. exporters.

● Exhibiting in a Korean food trade show can be a cost-efficient way to
meet with a large number of key Korean importers/traders. Currently, the
Seoul Food & Hotel (SFH)[^17] is the only show in Korea endorsed and
supported by U.S. Department of Agriculture/Foreign Agricultural Service
(FAS). Exporters who are considering exhibiting at any Korean show may
contact ATO Seoul for guidance and information because most local shows
are consumer-oriented and are not particularly efficient for promoting
new-to-market products.

● The type of business relationship agreed between the U.S. exporter and
the Korean importer may vary from joint investment partnership, to
exclusive agent, to non-binding broker. The type of relationship mainly
depends on how the exporter sees the role of the importer in market
development. The most common practice is maintaining a non-binding
seller-buyer relationship during the test-market period and then
upgrading to a more binding option if the market shows bigger potential.

● There are many items that the U.S. exporter should follow closely with
the importer during the initial stage of market entry. The Korean
government maintains very strict regulations on food imports and
requires various certificates/documents and product information before
approving import of a new-to-market food product. Therefore, the
exporter must provide the importer with the necessary documents and
information to submit to the government authorities. More detailed
up-to-date information on the Korean food safety and labeling
regulations can be found in the FAS report #KS6080 (Korean Food and
Import Regulations Standards Report Year 2006, www.fas.usda.gov).

● New-to-market U.S. exporters should pay attention to protecting the
company/product trademark and patents, which can be easily handled by
working with the Korean partner or through local attorneys. For more
information, see the Korea Industrial Property Rights Information
Service website at: http://eng.kipris.or.kr or the Korea Institute of
Intellectual Property website at: http://www.kiip.re.kr/eng.

U.S. brokers or export middlemen may get involved in the entry of a
new-to-market product into Korea especially when the original U.S.
supplier (manufacturer or producer) is not interested in export business
or when the volume of business is small. Although Korean importers in
general prefer to work directly with the original supplier, using
experienced brokers or middlemen can be a more efficient way to find
established Korean importers. For those large retailers who import
directly, Costco Korea in particular, working directly with the
purchasing network of the retailer in the United States can be a way to
gain entry into Korea.

*Understanding Local Tastes:*

All foods sold in retail stores in Korea, whether traditional or
imported, reflect the contemporary dietary culture of Koreans. Even
those new-to-market imported foods that recently appeared on the shelf
mirror the on-going trends and tastes of local consumers. Accordingly, a
good understanding of trends and local tastes is the key to make a
successful entry into the Korean market. At the same time, considering
the rapid evolution of the sector, it is very important to be kept
informed of the changes in the tastes of Korean consumers to stay ahead
of the competition. A rule of thumb is that new food trends in Korea are
two to five years behind Japan, a reference market that Korea has
followed for the last 50 years when accepting western culture and
products, although the time gap between the two countries seems to be
narrowing.

Meeting the Korean consumer\'s tastes could mean anything from modifying
packaging material and design, to reducing unit size, to adding or
reducing ingredients. Package design, in particular, is a very important
factor in Korea and exporters should consider developing a new design
that can better attract Korean consumers. Although most Koreans read
English, adding Korean on the package design can improve the level of
exposure on the shelf. The current trends in package design include
"freshness", "new tastes", "fun", and "environmentally friendly" themes.

Another noteworthy issue in packaging is the separate Korean language
label required on imported products. This added stick-on label can
detract from the appearance of the product. Exporters should discuss the
design of the Korean language label with the importer. Korean language
labels are in general designed and printed by the importer and
hand-attached to the products in the duty free warehouse before the
customs inspection.

**A-2. Market Structure and Product Flow**

Few mass retailers currently import food products directly. Instead,
purchasing managers of the retail company in general rely on independent
importers for imported products. These purchasing managers tend to be
risk averse and many are not familiar with foreign products or brands.
Furthermore, many retailers maintain the policy of rotating purchasing
managers among different product categories every two to three years to
prevent corruption or job abuse. Consequently, few local purchasing
managers have the expertise and experience necessary for direct
international sourcing. This limits the entry of new-to-market products
to the Korean retail sector. The independent importers are required to
bear a great amount of the risk when placing a new product on the shelf.
As a result, importers tend to add high markups to new-to-market
products to cover potential losses.

In contrast, mass retailers who do direct importing, Costco Korea in
particular, take aggressive positions in introducing new-to-market
imported products by adding much lower markups. Korean agents of foreign
food exporters are another force that handles a significant amount of
imported food traffic in the sector. Independent importers and agents
may supply mass retailers directly, but may use wholesalers or brokers
when supplying small retail stores or traditional retail outlets in
suburban markets.

It takes at least two weeks for a container ship from a western U.S.
port, and four weeks from an eastern port, to arrive in a port in Korea.
In general, most imported consumer ready products enter the country
through the port of Busan. In rare occasions, small-volume-high-value
products, such as premium wine and beef, are brought via air cargos
through Incheon International Airport (ICN).

The amount of time that the product sits in the port of entry for food
safety inspection and customs clearance process varies from one day to a
few weeks largely depending on the type of product. The detailed
laboratory inspection that all new-to-market products and randomly
selected returning[^18] products are subject to may take as long as ten
working days. In case of live animals, the quarantine sanitary
inspection can take more than a couple of months. The documentary
inspection allowed for products that have previously cleared inspection
may be completed within a couple of hours.

Once the products are cleared from the customs office, they are
transported to the importer's warehouse for storage. Importers may have
warehouses in more than one location (in the case of alcoholic
beverages, up to two warehouses are allowed). From the importer's
warehouse(s), products are distributed to retailers' warehouses (major
mass retailers now have a network of \"distribution-hubs\" across the
country, each of which services all stores in a given province or
market), or directly to individual retail stores when the volume of
transaction is less than the minimum volume requirement set by the
retailer\'s distribution hub. Many importers are using third party
logistics services for warehousing and trucking because of the high
overhead cost. When the supply chain includes wholesalers or middlemen
between the importer and the retailer, products from the importer's
warehouse are distributed via the wholesaler's warehouses.

However, distribution of product to department stores is quite different
from the above path. In Korea, a department store\'s grocery section
operates as a collection of individual food retail outlets occupying
space leased from the store. In addition to a fixed amount of lease
deposit paid up front, each tenant pays the department store a
pre-agreed percentage of its sales every month. Consequently,
distribution of imported foods to the department store involves a
multiple number of importers and logistics services, which is an
inefficient system and results in higher markups on the products sold.
This is why the department stores in general focus on high-value,
premium products. Each tenant is solely responsible for the procurement
and inventory management. The department store reserves the right to
extend or end the lease contract with tenants every two to three years
based on the sales performance. Department stores are less interested in
operating the grocery section directly, as they perceive grocery
products to be less profitable than non-food products.

The city of Seoul (capital city of Korea) and the surrounding area
within a 60 miles radius account for about half of the national
population and over 70 percent of total retail sales in Korea.
Aggravating traffic conditions and high real estate costs in this area
can make distribution of products time consuming and costly. Due to the
difficulty of building additional mass retail stores in Seoul,
traditional markets and small independent retail outlets still take a
significant portion of the food retailing. However, large supermarkets
and hypermarkets are expected to gradually replace traditional retailers
even in old metropolitan markets. The expansion of hypermarkets and
chain supermarkets has been more obvious in newly developed towns in and
around Seoul where preplanning of land usage allowed easier entry of
mass retail stores. Penetration of convenience stores has been a lot
easier and faster in old metropolitan areas and has rapidly replaced a
large number of mom-and-pop grocers.

The amount of slotting fee that the retailer would charge for adopting a
new product varies depending on the market potential of the product.
Local retail stores are eager to add new products to their shelves as
they strive to meet the consumer's strong demand for new tastes. However
at the same time retailers are very concerned about the risk of carrying
something new. Consequently, local retailers often ask for promotional
support instead of slotting fees for new products. Promotional support
may include in-store advertisement, in-store free sampling, and point of
purchase (POP) sales promotions such as sweepstakes, coupons, and games.
Free sampling is the most common tactic used. Thus Korean retail stores
always have many \'sampling ladies\' working in the store. In-store
promotions are highly recommended for launching new-to-market products
since local consumers are strongly influenced by such educational
experiences when making a buying decision on new products.

Most of the leading retail companies in Korea are horizontally
integrated and operate across the full spectrum of retail businesses,
encompassing department stores, hypermarkets, supermarkets, convenience
stores, and on-line shopping. For example, Lotte Shopping Co. has under
its umbrella "Lotte" Department Stores, "Lotte Mart" hypermarkets,
"Lotte Lemon" supermarkets, "Seven Eleven" convenience stores, \"Lotte
TV home shopping\", and "Lotte.com" Internet shopping mall. Entry into
one part of an integrated retailer can lead to an access to the whole
system.

**A-3. Sub-Sector Company Profiles**

**A-3-1. Hypermarkets**

The rapid growth of hypermarkets continued in 2005 with the opening of
an additional 31 new stores across the nation. Room still remains for an
additional 100 to 200 new hypermarket stores in this market, according
to industry experts. However, consolidation among competitors is
expected to continue. Korea\'s leading retail companies are seeking
expansion into foreign markets, especially China and Vietnam, for new
growth opportunity. Wal-Mart Korea pulled out of the Korean market in
2006 by selling all 16 stores to Shinsegae Co. (E-Mart, the market
leader), shortly after Carrefour Korea\'s announced withdrawal from the
Korean market (E-Land Retail Co., Ltd. won the bid for 31 Carrefour
stores in Korea).

![](media/image2.wmf)

Now Costco Korea and Home-Plus (by Tesco) are the only two hypermarket
chains owned by foreign retailers. The growth of this segment has been
mainly driven by a few leading companies as evidenced by the fact that
the top three chains accounted for 24 out of the 31 new stores opened in
2005. The market share of the top five companies has continued to rise
from 50.5 percent in 2000 to 82.3 percent in 2005.

**Table 7. Description of An Average Hypermarket Store in Korea
(2005)**[^19]

+--------------------------------+-------------------------------------+
| Annual Sales                   | W80 billion                         |
+--------------------------------+-------------------------------------+
| Share of Foods in Total Sales  | Fresh Foods: 25.9%                  |
|                                |                                     |
|                                | Processed Foods: 23%                |
|                                |                                     |
|                                | Fast Foods: 3.4%                    |
|                                |                                     |
|                                | Other Foods: 1.8%                   |
+--------------------------------+-------------------------------------+
| Average Value of Product in    | W2.5 billion                        |
| Inventory                      |                                     |
+--------------------------------+-------------------------------------+
| Size of Store                  | 15,964 square meter                 |
+--------------------------------+-------------------------------------+
| Number of Employees            | 131 full-timers, 97 part-timers,    |
|                                | 181 promoters from suppliers        |
+--------------------------------+-------------------------------------+
| Number of SKU                  | 46,908 (25,494 in 2001)             |
+--------------------------------+-------------------------------------+
| Number of Consumers Daily      | 6,739                               |
+--------------------------------+-------------------------------------+
| Per Consumer Purchase Amount   | W33,704                             |
+--------------------------------+-------------------------------------+

**Table 8. Profile of Major Hypermarket Chains (2005)**[^20]

  ---------------------- ----------- ----------- ----------- -------- --------
  Company Name           Store Name  Ownership   Annual      Stores   New
                                                 Sales                Stores

  Shinsegae Co.          E-Mart      Korea       W8.1        83       10
                                                 trillion             

  Samsung Tesco Co.,     Home Plus   U.K.        W4.6        40       7[^21]
  Ltd.                                           trillion             

  Lotte Shopping Co.     Lotte Mart  Korea       W3.2        43       7
                                                 trillion             

  Carrefour Korea[^22]   Carrefour   France      W2.0        31       4
                                                 trillion             

  KAC Inc.[^23]          Hanaro Club Korea       W1.6        16       1
                                                 trillion             

  Mega Mart Co., Ltd.    Mega Mart   Korea       W0.8        9        0
                                                 trillion             

  GS Retail Co., Ltd.    GS Mart     Korea       W0.8        13       2
                                                 trillion             

  Wal-Mart Korea[^24]    Wal-Mart    U.S.        W0.8        16       0
                                                 trillion             

  Newcore Co., Ltd.      Kim's Club  Korea       W0.5        11       1
                                                 trillion             

  Costco Korea           Costco      U.S.        W0.4        5        0
                                                 trillion             
  ---------------------- ----------- ----------- ----------- -------- --------

**A-3-2. Grocery Supermarkets**

Although traditional independent grocery stores have given way to
hypermarkets and convenience stores, the consolidation of the industry
has left room for large size grocery supermarkets to grow. In
particular, large grocery supermarkets target regional markets of
population less than 100,000, where the collective buying power is not
big enough to support the entry of a hypermarket store.

Merger and acquisition have also prevailed in the supermarket segment in
recent years, favoring expansion of stores under leading retail
conglomerates at the expense of regional small-scale companies. Major
supermarket chains have spent the last ten years restructuring their
businesses to reposition stores in the niche between hypermarkets and
convenience stores. The restructuring has resulted in an aggressive
\"scrap and build\" process in which a considerable number of existing
stores were replaced by larger new stores in new locations. New stores
emphasize improved assortment (bigger HMR[^25] section, more fresh
products), convenience (ground floor location, parking lot), and
customer service (home delivery, in-store service outlets such as
pharmacy, laundry and bank).

**Table 9. Description of an Average Grocery Supermarket in Korea
(2005)**[^26]

+-----------------------------+----------------------------------------+
| Annual Sales                | W7.7 billion won                       |
+-----------------------------+----------------------------------------+
| Share of Foods in Total     | Fresh Foods: 38.7%                     |
| Sales                       |                                        |
|                             | Processed Foods: 41.5%                 |
|                             |                                        |
|                             | Other Foods: 2.2%                      |
+-----------------------------+----------------------------------------+
| Size of Store               | 1,631 square meter                     |
+-----------------------------+----------------------------------------+
| Number of Employees         | 14 full-timers, 12 part-timers         |
+-----------------------------+----------------------------------------+
| Number of SKU               | 7,388 SKU                              |
+-----------------------------+----------------------------------------+
| Number of Consumers Daily   | 1,383                                  |
+-----------------------------+----------------------------------------+
| Per Consumer Purchase       | W15,328                                |
| Amount                      |                                        |
+-----------------------------+----------------------------------------+

**Table 10. Profile of Major Supermarket Chains (2005)**[^27]

  ---------------------- -------------- ------------- -------- -------- --------
  Company Name           Store Name     Annual Sales  Total    New      Stores
                                                      Stores   Stores   Closed

  GS Retail Co., Ltd.    GS Supermarket W691 billion  83       10       2

  Seowon Utong Co., Ltd. Top Mart       W475 billion  40       5        3

  Lotte Shopping Co.     Lotte Super    W439 billion  46       8        2

  Haitai Utong Co.,      Haitai Mart    W157 billion  32       0        1
  Ltd.[^28]                                                             

  Samsung Tesco Co.,     SuperExpress   W130 billion  18       14       3
  Ltd.                                                                  

  CS Utong Co., Ltd.     Goodmorning    W107 billion  15       2        0
                         Mart                                           
  ---------------------- -------------- ------------- -------- -------- --------

**A-3-3. Convenience Stores**

The strong expansion of convenience stores under large-scale franchise
management has continued in recent years at the expense of traditional
mom-and-pop grocery stores. The year 2005 alone saw the opening of 1,364
new stores across the nation. The total number of convenience stores in
Korea reached 9,085 at the end of 2005 and another 1,000 to 2,000 new
stores are expected to open every year in the coming year. Introduction
of more meal replacement products, including fast foods, and private
label branded (PB) products have been the segment's top priority in
product assortment in recent years. Another area of emphasis has been to
add more non-product services, including postal service, quick delivery,
banking, and photo processing, to increase consumer traffic to stores.

**Table 11. Description of an Average Convenience Store in Korea
(2005)**[^29]

+---------------------------+------------------------------------------+
| Annual Sales              | W548 million won                         |
+---------------------------+------------------------------------------+
| Share of Foods in Total   | Beverages: 8-11%                         |
| Sales                     |                                          |
|                           | Liquor: 4-8%                             |
|                           |                                          |
|                           | Snacks: 5-7%                             |
|                           |                                          |
|                           | Daily delivery fresh foods: 10-18%       |
|                           |                                          |
|                           | Processed: 4-7%                          |
|                           |                                          |
|                           | Fast Foods: 2-6%                         |
|                           |                                          |
|                           | Tobacco: 35-45%                          |
+---------------------------+------------------------------------------+
| Size of Store             | 89 square meter                          |
+---------------------------+------------------------------------------+
| Number of Employees       | 4                                        |
+---------------------------+------------------------------------------+
| Number of SKU             | 2,500 SKU                                |
+---------------------------+------------------------------------------+
| Number of Consumers Daily | 533 (706 in 2001)                        |
+---------------------------+------------------------------------------+
| Per Consumer Purchase     | W2,800                                   |
| Amount                    |                                          |
+---------------------------+------------------------------------------+

**Table 12. Profile of Major Convenience Store Chains (2005)**[^30]

  ---------------------- ------------- ------------- -------- -------- --------
  Company Name           Store Name    Annual Sales  Total    New      Stores
                                                     Stores   Stores   Closed

  Korea Seven Co., Ltd.  Seven Eleven  W650 billion  1,238    124      0

  Bokwang Familymart     Familymart    W1.2 trillion 3,152    576      189
  Co., Ltd.                                                            

  GS Retail Co., Ltd.    GS25          W967 billion  2,060    306      110

  Ministop Korea Co.,    Ministop      W428 billion  925      83       82
  Ltd.                                                                 

  Buy The Way Co., Ltd.  Buy The Way   W398 billion  997      230      75

  SK Networks Co., Ltd.  OK Mart       W45 billion   305      39       9
  ---------------------- ------------- ------------- -------- -------- --------

**A-3-4. Department Stores**

![](media/image3.wmf)

The rapid expansion of hypermarkets and on-line retailers has suppressed
the growth of the department store segment in recent years and has
resulted in active merger and acquisition of independent regional
department stores by large national chains. Consequently, the market
share of the top three department store chains has continuously risen to
take 78 percent of total department sales in 2005, which is a
significant increase from 41 percent in 1998. Currently, there is a
heavy emphasis in the segment to reposition product assortment and
customer service to target more affluent consumer groups. The goal of
this strategy is to differentiate the segment from value-oriented
hypermarkets and on-line retailers. Leading companies have initiated
expensive store renovation programs to adopt a premium look and product
assortment. The share of food products in overall department store sales
has been on a gradual decline since the advent of other modern mass
retail businesses. However, it is likely that department stores will
remain the leading distribution channel for imported foods of premium
quality and price in the coming year.

**Table 13. Description of An Average Department Store in Korea
(2005)**[^31]

  -------------------------------- --------------------------------------
  Annual Sales                     W147 billion won

  Share of Foods in Total Sales    14.2 %

  Size of Store                    30,449 square meter (17.8 % of the
                                   space is leased out to independent
                                   retailers)

  Number of Employees              251 full-timers, 66 part-timers, 842
                                   promoter staff paid by suppliers

  Number of SKU                    220,000 SKU

  Number of Consumers Daily        11,729 (17,515 in 2001)

  Per Consumer Purchase Amount     W47,400
  -------------------------------- --------------------------------------

**Table 14. Profile of Major Department Store Chains (2005)**[^32]

  ----------------------- ------------------- --------------- -------- --------
  Company Name            Store Name          Annual Sales    Stores   New
                                                                       Stores

  Lotte Shopping Co.      Lotte Department    W8.6 trillion   19       0
                          Store                                        

  Shinsegae Co.           Shinsegae           W1.9 trillion   6        0
                          Department Store                             

  Hyundai Department      Hyundai Department  W0. 8 trillion  6        0
  Store Co., Ltd.         Store                                        
  ----------------------- ------------------- --------------- -------- --------

**A-3-5 On-line Retailers**

![](media/image4.wmf)Changes in consumer life-style and development of
information technology have fueled the rapid growth of on-line
retailing, which includes internet shopping, TV home shopping, and
catalog shopping. Currently three out of four Koreans use internet on a
regular basis.[^33] In particular, the size of the population that has
access to high-speed internet service has increased rapidly, which is
vital for the penetration of e-commerce in the daily life of regular
consumers.

Virtually all kinds of food products that are found in conventional
retail stores are available on-line since conventional retailers now
operate internet stores coupled with home delivery service. Furthermore,
on-line shopping has greatly expanded the assortment of products
available, in particular to those consumers in suburban areas where
modern mass retailers are yet to penetrate. However, most of the sales
of food products through on-line retailing are focused on a limited
number of \"well-known\" or \"reputable\" existing products as many
consumers still do not feel comfortable with on-line purchasing of foods
with which they have little personal experience. Obviously price and
convenience are the two leading factors that make people shop on-line.

It is expected that leading players in the conventional retail industry
will also become the major players in the on-line retailing segment as
all leading retail companies seek to build up their on-line capacity.
Market experts agree that maximizing synergy between the conventional
retail network and the on-line technology will be the key in wining the
competition in the on-line market.

**Table 15: Internet Connectivity in Korean Households (June,
2006)**[^34]

  ----------------------------------- -----------------------------------
  Age of Leading Household Member     Rate of Internet Access at Home

  20\'s                               90.3%

  30\'s                               92.4%

  40\'s                               90.7%

  50\'s                               49.6%

  Total                               76.1%
  ----------------------------------- -----------------------------------

**Table 16: Annual Sales of On-line Retail Segment**[^35]

  ------------------ ------------ ------------ ------------ --------------
                     2001         2003         2005         2008
                                                            (forecast)

  Catalog Shopping   W1.1         W700 billion W580 billion W650 billion
                     trillion                               

  TV Home            W2.6         W4.2         W4.3         W5.3 trillion
  Shopping[^36]      trillion     trillion     trillion     

  Internet           W1.7         W6.6         W10.4        W18 trillion
  Shopping[^37]      trillion     trillion     trillion     

  T-Commerce[^38]    0            0            0            W60 billion

  M-Commerce[^39]    0            0            W10 billion  W900 billion

  Total              W5.4         W11.5        W15.3        W24.9 trillion
                     trillion     trillion     trillion     
  ------------------ ------------ ------------ ------------ --------------

**Table 17: Breakdown of On-line Shopping Sales**[^40]

  --------- ---------------------------------------- ----------- ----------
  Ranking   Category                                 2003        2005

  1         Home Electronics                         18.3%       16.8%

  2         Fashion & Clothing                       10.3%       14.8%

  3         Computer Products                        12.9%       9.6%

  4         Home & Garden & Car                      11.6%       9.9%

  5         Tourism & Travel                         7.4%        15%

  6         Cosmetics                                6.6%        5.5%

  7         Books                                    4.9%        4.6%

  **8**     **Processed Foods & Beverages & Health   **4.0%**    **5.0%**
            Foods**                                              

  9         Sports & Leisure Goods                   4.1%        3.7%

  **10**    **Fresh Agricultural & Fisheries**       **4.2%**    **2.7%**

  11        Child & Baby Goods                       2.7%        3.8%

  12        Helps & Labor                            3.2%        0.9%

  13        Audio & Video Material                   1.4%        0.9%

  14        Office Supplies                          0.9%        1.0%

  15        Computer Software                        1.0%        0.9%

  16        Flowers                                  0.5%        0.4%

            Others                                   5.9%        4.5%

            Total                                    100%        100%
  --------- ---------------------------------------- ----------- ----------

![](media/image5.wmf)

**Table 18. Profile of Major On-line Retailers (2005)**[^41]

+------------------+----------+-------------------+--------------------+
| Retailer Name    | Sa       | Business Type     | Internet Site      |
|                  | les[^42] |                   |                    |
+------------------+----------+-------------------+--------------------+
| GS Home Shopping | W526     | TV home shopping  | www.gseshop.co.kr  |
|                  | billion  |                   |                    |
|                  |          | Internet shopping |                    |
|                  |          | mall              |                    |
|                  |          |                   |                    |
|                  |          | Internet          |                    |
|                  |          | marketplace[^43]  |                    |
|                  |          |                   |                    |
|                  |          | Catalog shopping  |                    |
+------------------+----------+-------------------+--------------------+
| CJ Home Shopping | W452     | TV home shopping  | www.cjmall.com     |
|                  | billion  |                   |                    |
|                  |          | Internet shopping |                    |
|                  |          | mall              |                    |
|                  |          |                   |                    |
|                  |          | Catalog shopping  |                    |
+------------------+----------+-------------------+--------------------+
| Hyundai Home     | W285     | TV home shopping  | www.hmall.com      |
| Shopping         | billion  |                   |                    |
|                  |          | Internet shopping |                    |
|                  |          | mall              |                    |
+------------------+----------+-------------------+--------------------+
| Woori Home       | W246     | TV home shopping  | www.woori.com      |
| Shopping[^44]    | billion  |                   |                    |
|                  |          | Internet shopping |                    |
|                  |          | mall              |                    |
+------------------+----------+-------------------+--------------------+
| Nongsoosan Home  | W199     | TV home shopping  | www.nseshop.com    |
| Shopping         | billion  |                   |                    |
|                  |          | Internet shopping |                    |
|                  |          | mall              |                    |
+------------------+----------+-------------------+--------------------+
| Shinsegae I&C    | W184     | Internet shopping | www.               |
|                  | billion  | mall              | mall.shinsegae.com |
+------------------+----------+-------------------+--------------------+
| Auction          | W154     | Internet          | www.auction.co.kr  |
|                  | billion  | marketplace       |                    |
+------------------+----------+-------------------+--------------------+
| Yes24            | W143     | Internet shopping | www.yes24.com      |
|                  | billion  |                   |                    |
+------------------+----------+-------------------+--------------------+
| Daum Onket Co.,  | W135     | Internet          | www.onket.com      |
| Ltd.             | billion  | marketplace       |                    |
+------------------+----------+-------------------+--------------------+
| Interpark        | W104     | Internet          | www.gmarket.com    |
| G-Market         | billion  | marketplace       |                    |
+------------------+----------+-------------------+--------------------+
| Interpark        | W94      | Internet shopping | w                  |
|                  | billion  | mall              | ww.interpark.co.kr |
+------------------+----------+-------------------+--------------------+
| Lotte.Com        | W45      | Internet shopping | www.lotte.com      |
|                  | billion  | mall              |                    |
+------------------+----------+-------------------+--------------------+
| Korea Home       | W29      | TV infomercial    | www.ezket.co.kr    |
| Shopping         | billion  |                   |                    |
+------------------+----------+-------------------+--------------------+
| Samsung          | N/A      | Internet shopping | w                  |
| Corporation      |          | mall              | ww.samsungmall.com |
+------------------+----------+-------------------+--------------------+

**A-3-6. Franchise Specialty Food Retailers**

Although currently taking a small portion of the overall food retail
industry, specialty food retailers under franchising arrangements are
growing rapidly in Korea. This trend highlights the diversifying tastes
of Korean consumers. These stores are specialized in a limited category
of products, such as health & beauty (drugstore), wine & liquor, or
functional & natural foods, but offer a deep assortment of goods within
the category. Due to the smaller space and investment needed, specialty
stores are spreading in the metropolitan markets where mass retail
stores have limited access.

**Table 19. Profile of Major Franchise Specialty Food Retailers
(2005)**[^45]

  ------------- ------------ ----------- ---------------- -------- ---------
  Company       Store Name   Sales       Products         Stores   Food
                                                                   Share

  CJ Oliveyoung Olive Young  W27 billion Health & Beauty, 31       15%
                                         Drugs                     

  W Store       W Store      W4 billion  Heal & Beauty,   32       30%
                                         Drugs                     

  GS Retail     Watsons      W3 billion  Health & Beauty, 7        N/A
                                         Drugs                     

  Hansalim      Hansalim     W64 billion Organic &        69       Over 90%
                                         Natural Foods             

  Hankyoreh     Chorok Maeul W54 billion Organic &        196      Over 90%
  Plus                                   Natural Foods             

  ORGA Whole    ORGA         W26 billion Organic &        18       Over 90%
  Foods                                  Natural Foods             
  ------------- ------------ ----------- ---------------- -------- ---------

**B. Traditional Retail Businesses - Wet Markets and Mom-and-Pop
Grocers**

The traditional wet markets and independent, family-owned stores
accounted for about 58 percent of total retail sales in Korea as of
2005. Traditional retailers still prevail in old metropolitan areas
where traffic and real estate infrastructure make the entry of large
size hypermarkets or department stores physically difficult. A ban on
mass retailers' shuttle bus operations enforced by the Korean government
in July 2001 has somewhat restricted the reach of mass retailers to
these areas. However, the on-going development of old neighborhoods in
metropolitan areas is likely to expand prospects for mass retail stores.
At the same time, as car ownership is now quite common for most Korean
families, more consumers are willingly driving a long distance to a
hypermarket or large supermarket store, seeking lower prices, better
assortment, and one-stop shopping convenience. The Korean government's
strong initiative to identify the actual income of small independent
businesses by reinforcing the usage of credit cards and debit cards has
further suppressed the profit level of traditional retailers, which now
have to comply with elevated tax and social security responsibilities.

Traditional wet markets in Korea take the form of large wholesale
markets and local neighborhood markets. They tend to specialize in a
limited assortment of fresh products, including produce, fish, and
meats, rather than processed foods. Imported products that are
distributed in significant volume through traditional markets include
fresh fruits and vegetables, processed fruits, dried vegetables,
seafood, meat, spices, cereals, and oils. The wholesale markets serve as
major distribution channel to the mom-and-pop grocers and street
vendors. Consumers may also purchase at these wholesale markets, and do
so to obtain fresh products at a price lower than in a downstream
mom-and-pop outlets. Independent wholesale distributors are still
playing an important role in supplying suburban regional food retail
markets but are facing increasing competition from hypermarkets. With
the growth of modern mass retailers, the share of traditional retailers
in Korea will continue to decline in the years to come.

**III. Competition**

Korea has a well-developed food processing industry for both processed
and fresh products. Korean food processors compete directly with
imported consumer-ready U.S. products. The domestic food industry
currently leads the market in many processed products since domestically
produced products better reflect the tastes and trends of Korean
consumers. Furthermore, Korean consumers are generally biased toward
locally grown and manufactured products and willingly pay a premium.
However, the Korean food industry depends heavily on imported raw
materials and ingredients for almost all processed foods. The United
States maintains significant market shares in the supply of raw
materials and ingredients to the Korean food processing industry but
faces increased competition from export-oriented competitors such as
China, Australia, Italy, Chile, and Thailand.

The Unites States also faces increased competition in consumer-ready
foods that are not produced by the Korean food industry. For
confectioneries and snacks, European countries and Japan are the major
competitors for American exporters. For meats and dairy products,
Australia, New Zealand, and France are the major competitors. For
fishery products, Norway, China, Thailand, and Vietnam are the major
competitors. China and Chile are the major competitors for fresh fruits
and produce. The growth of imports from China has been most significant
in recent years extending to almost all kinds of consumer-ready products
other than those currently banned for food safety issues. On-going trade
liberalization is likely to heighten competition in the Korean market
for American products in general. For example, the free trade agreement
between Korea and Chile, which went into effect in April 2004, has
increased Chile\'s market share in many products, including wine, fresh
table grape, pork meat, and olive oil.

Export promotions by competitors are focused on the areas where
competitors have built up significant market shares or where market
access has been newly approved by changes in Korean import regulations.
Fresh and processed meat (beef, pork, poultry), fresh fruits and
vegetables, processed fruits, dairies, seafood, and functional
ingredients are some of the areas that competitors are engaging in
aggressive promotional efforts.

Weakening of the U.S. dollar against major international currencies,
including Korean won, has helped American products gain an edge against
competitors in recent years. For example, the value of U.S. dollar
decreased against the Korean won by 20.6 percent since January 2004,
which means that the import price of American products dropped by 20.6
percent in Korea. Additionally, the Korea -United States free trade
agreement has focused attention of Korean importers on American
products.

Table 20. Exchange Rate Change

  -------------- -------------- -------------- -------------- --------------
                 Jan. 2004      Jan. 2005      Jan. 2006      Jan. 2007

  Value of \$1 = W1,186.70      W1032.10       W986.80        W941.10
  -------------- -------------- -------------- -------------- --------------

Source: Korea Exchange Bank

**IV. Best Product Prospects**

**A. Products Present in the Market Which Have Good Sales Potential**

● The largest and fastest growing categories of imported consumer-ready
foods from the United States include:

\(1\) Pork meat, chilled or frozen (\$162 million[^46] of imports from
the United States, 34.7 percent growth from the previous year)

\(2\) Processed meat (\$17.9 million, 40.2 percent growth)

\(3\) Frozen fish (\$67 million, 13.9 percent growth)

\(4\) Crustaceans (\$5 million, 13.1 percent growth)

\(5\) Mollusk (\$3 million, 19.1 percent growth)

\(6\) Fresh fruits (mainly oranges, grapes, cherries, \$143 million, 5.8
percent growth)

\(7\) Nuts (mainly walnut and almond, \$68 million, 38 percent growth)

\(8\) Coffee (\$7.8 million, 34.7 percent growth)

\(9\) Soybean oil (\$11.4 million, 40.9 percent growth)

\(10\) Chocolate confectioneries (\$37.9 million, 8.2 percent growth)

\(11\) Bakery products (bread, pastry, and cake, \$23 million, -1.1
percent growth)

\(12\) Processed vegetables (\$49 million, 8 percent growth)

\(13\) Processed tomatoes (\$9.3 million, 3.8 percent growth)

\(14\) Preserved fruits and jams (\$15.8 million, 4.6 percent growth)

\(15\) Fruit juices (\$37 million, 11.6 percent growth)

\(16\) Sauces (\$15.5 million, 15.2 percent growth)

\(17\) Beer (\$4.8 million, 19.6 percent growth)

\(18\) Wine (\$10.1 million, 24.3 percent growth)

**B. Products Not Present in Significant Quantities but Which Have Good
Sales Potential**

● American products are losing market share to lower-priced imported
products from competitors in many areas, including:

\(1\) Fish fillets (\$45 million, -26.5 percent growth)

\(2\) Processed cheese (\$22 million, -4.6 percent growth)

\(3\) Fresh/chilled vegetables (\$3.2 million, -9.1 percent growth)

\(4\) Processed vegetables (frozen, dried, canned, \$7.1 million, -41.8
percent growth)

\(5\) Processed soups (\$2.9 million, -17.4 percent growth)

However, American products still maintain significant market share in
these areas and are likely to regain lost shares if exchange rate trends
for the U.S. dollar continue to favor U.S. suppliers.

● Despite the growth of overall import volume into Korea, the share of
American products remains small in the following products:

\(1\) Out of \$34 million of imported preserved/processed fruits and
nuts, imports from the United States accounted for only \$3.5 million
(135 percent growth).

\(2\) Out of \$85.6 million of imported olive oil, imports from the
United States accounted for less than \$0.5 million.

\(3\) Out of \$106 million of imported processed fish, imports from the
United States accounted for less than \$1 million.

\(4\) Out of \$172 million of imported processed crustaceans, imports
from the United States accounted for \$1.8 million (29.1 percent
growth).

\(5\) Out of \$10.3 million of imported ice cream, imports from the
United States accounted for \$2.2 million (73 percent growth)

\(6\) Out of \$231 million of imported hard liquor, imports from the
United States accounted for \$3.2 million (-4.7 percent growth).

More aggressive marketing approaches in these areas are likely to expand
the market share of American products in the future.

● Although official import data are not available, imports of the
following products are likely to increase rapidly in the coming year:
processed turkey meat, specialty cheeses, soup and broth, ethnic sauces
and spices, prepared foods (packaged Home Meal Replacement products),
processed organic products, packaged fresh vegetables, specialty fresh
fruits (such as grapefruits, cherries, avocados). Private label branded
(PB) products also offer new opportunities to American exporters.

**C. Products Not Present Because They Face Significant Barriers**

● Korea utilizes a "positive list" system for importing fresh
agricultural products meaning imports of any product that is not
pre-approved in the Korean government regulation is prohibited. Because
of the risk of transferring pests, trade of fresh fruits and vegetables
are only possible when the importing country (Korea) approves
phytosanitary standards of the exporting country (the United States)
through a pest risk assessment, which takes a considerable amount of
time as it involves extensive amount of both laboratory and field
studies. Many fresh fruits from the United States, including apple,
pear, peach, and pomegranate, are currently not importable as there are
no phytosanitary import agreements made on these products between Korea
and the United States.

● Imports of approved fresh fruits and vegetables are frequently
restricted for phytosanitary reasons (such as outbreaks of fruit flies).
The internet home-page of the Korean National Plant Quarantine Service
has up-to-date information on plant (including fresh fruits and
vegetables) import restrictions and regulations in English
(www.npqs.go.kr.). Outbreaks of animal diseases, such as swine cholera,
avian-flu virus, and mad-cow-disease (BSE), also restrict imports of
related animal products into Korea. U.S. suppliers may contact
established importers or ATO Seoul for up-to-date import restriction
information and regulation on animal products. Below lists some of the
outstanding import restrictions currently in place for food safety
issues:

\(1\) Value of annual beef meat imports from the United States was as
high as \$813 million before the import ban ordered in Dec. 2003 due to
the outbreak of \"mad-cow-disease\" in the United States. Even though
the Korean government ostensibly lifted the ban on deboned U.S. beef
from cattle under 30 months old in December 2006, it is unlikely that
the beef trade will resume to the previous level in the near future.

\(2\) Korea maintains an import ban on elk antlers from the United
States due to the occurrence of Chronic Waste Disease in the United
States. Consequently, American elk antler exporters currently have no
access to the Korean market, which imported \$24 million of antlers in
2006, up 13.5 percent growth from the previous year.

● Imported fresh fruits and vegetables, including cherries, oranges, and
shelled walnuts, from the United States are subject to a mandatory
methyl-bromide fumigation treatment before being shipped to Korea or at
the bonded warehouse in the port of entry in Korea. This fumigation can
damage the quality of products and shorten the shelf life of the
products. In particular, fumigation regulation results in no market for
imported fresh organic agricultural products because these products will
lose \"organic status\" once fumigated.

● Many products, including rice, honey, fresh potato, and popcorn, are
subject to tariff rate quotas and high out-of-quota tariffs that
restrict open market access.

● The Korean Food Additive Code defines specifications and usage
standards for individual food additives. Korea utilizes a "positive
list" system for food additives meaning any food additive not listed in
the code is prohibited. As of January 2007, the code lists 627 approved
food additives and the usage standard for each additive on a
product-by-product basis. The Korean standard differs from the CODEX
standard in some cases and consequently may prohibit entry of American
products manufactured solely under the CODEX standard. The home-page of
Korea Food & Drug Administration
(http://fa.kfda.go.kr/foodadditivescode.html) provides detailed
information about the food additive code in English. Working with an
established importer is the most efficient way to check whether a
new-to-market product would meet the Korean standard or not.

**V. Post Contact and Further Information**

If you have any questions or comments regarding this report, please
contact:

Street Address:

U.S. Agricultural Trade Office

Room 303, Leema Bldg.

146-1 Susong-dong, Jongro-gu, Seoul 110-140, Korea

U.S. Mail Address:

Agricultural Trade Office

American Embassy-Seoul

Unit #15550

APO AP 96205-0001

Tel: 82-2-397-4188

Fax: 82-2-720-7921

E-mail:

Internet: www.atoseoul.com

Please log on to our internet home page for more reports, including The
Exporter Guide, The HRI Sector Report, and product briefs on fruits and
vegetables, organic products, wine, etc
(http://www.atoseoul.com/mktbreif.htm).

[^1]: Korea refers to the Republic of Korea (South Korea) in this
    report.

[^2]: \$1 = W950 as of January 1, 2007

[^3]: Source: Food Distribution Yearbook 2006 (The Monthly Food
    Journal), The Yearbook of Retail Industry 2006 (Korea Superchain
    Association), Shinsegae Retail Industry Research Institute Data

[^4]: Year 2005 data are the most up-to-date official statistics
    available currently.

[^5]: On-line shopping includes Internet shopping, TV home shopping, and
    catalog shopping.

[^6]: Large supermarket retailers that operate multiple number of
    stores.

[^7]: Source: Monthly Household Spending, National Statistics Office

[^8]: Traditional retailers are excluded in this table.

[^9]: Source: The Yearbook of Retail Industry 2005 (Korea Superchain
    Association)

[^10]: Source: Monthly Household Spending, National Statistics Office
    (Average size of a household in Korea was 3.3 people as of year
    2005)

[^11]: Unit: 1,000 people

[^12]: Gross Domestic Production Annual, GDP

[^13]: Gross National Income Annual, GNI

[^14]: Korean Government Annual Report containing 2005 official
    agricultural data issued on December 2006.

[^15]: Source: Korea Trade Information Service (KOTIS), Korean
    Government

[^16]: Current regulation allows imports of deboned skeletal muscle meat
    of cattle under 30 months old from pre-approved slaughter houses
    only.

[^17]: April 24-27, 2007 (www.seoulfood.or.kr)

[^18]: \'Same Product from Same Origin\' rule allows quick \"documentary
    inspection\" on imported products that have been imported regularly
    in the past.

[^19]: Source: The Yearbook of Retail Industry 2005 (Korea Superchain
    Association)

[^20]: Source: The Yearbook of Retail Industry 2005 (Korea Superchain
    Association), Food Distribution Yearbook 2006 (Monthly Food Journal)

[^21]: Including 3 stores from the acquisition of Aram Mart Co., Ltd. in
    2005

[^22]: Sold to E-Land Retail Co., Ltd. in 2006.

[^23]: KAC: Korean Agricultural Cooperative Inc.

[^24]: Sold to Shinsegae Co. in 2006

[^25]: HMR: Home Meal Replacement

[^26]: Source: The Yearbook of Retail Industry 2005 (Korea Superchain
    Association)

[^27]: Source: The Yearbook of Retail Industry 2005 (Korea Superchain
    Association), Food Distribution Yearbook 2006 (Monthly Food Journal)

[^28]: Sold to E-Land Retail Co., Ltd. in 2005

[^29]: Source: The Yearbook of Retail Industry 2005 (Korea Superchain
    Association)

[^30]: Source: The Yearbook of Retail Industry 2005 (Korea Superchain
    Association)

[^31]: Source: The Yearbook of Retail Industry 2005 (Korea Superchain
    Association)

[^32]: Source: The Yearbook of Retail Industry 2005 (Korea Superchain
    Association)

[^33]: Source: Korea National Internet Development Agency (NIDA), June
    2006

[^34]: Source: Korea National Internet Development Agency

[^35]: Source: The Yearbook of Retail Industry 2006 (Korea Superchain
    Association)

[^36]: Sales of both home shopping channels and infomercials in cable
    and satellite TV.

[^37]: Sales of both commercial Internet shopping malls and Internet
    open markets (such as auction).

[^38]: T-commerce is an interactive TV home shopping tool tied with
    regular TV programs.

[^39]: M-commerce is an on-line shopping tool utilizing cellular phones
    or other mobile communication.

[^40]: Source: Korea Statistics Office

[^41]: Source: Company IR Information

[^42]: New local fiscal regulation defines the sales of on-line
    retailing as the amount of commission fee the on-line retailer
    receives from the transaction since the on-line retailer works as
    intermediary between the suppliers and the buyers. Therefore, the
    actual value of products distributed by the on-line retailer is much
    bigger than the sales figure in the fiscal data.

[^43]: Internet Marketplace is an on-line virtual marketplace where
    buyers and sellers transact freely and frequently while the owner of
    the marketplace collects a pre-agreed percentage of the transactions
    as commission. In contrast, there is only one seller (store) in the
    Internet shopping mall.

[^44]: Sold to Lotte Shopping Co. in 2006

[^45]: Source: The Yearbook of Retail Industry 2006 (Korea Superchain
    Association)

[^46]: Source: All data in Chapter IV are from Korea Trade Information
    Service (KOTIS), Year 2006, January through November.