Required Report - public distribution

**Date:** 2/14/2005

**GAIN Report Number:** KS5009

KS5009

**Korea, Republic of**

**HRI Food Service Sector**

**Semi-Annual Report**

**2005**

**Approved by:**

![](media/image1.wmf)Mr. Marcus E. Lower

Agricultural Trade Office, U.S. Embassy Seoul, Korea

**Prepared by:**

Mr. Sangyong Oh

**Report Highlights:**

Large-scale restaurants under franchise operation and broad-line
distributors are rapidly growing at the expense of small, family-owned
businesses. There is an increased emphasis on products with new tastes,
added value, stable pricing and volume capability, and products with
specifications geared specifically for the food service industry. As a
result, the demand for imported products is growing.

Includes PSD Changes: No

Includes Trade Matrix: No

Semi-Annual Report

Seoul ATO \[KS2\]

\[KS\]

**Table of Contents**

I. Market Summary

A. Executive Summary

B. Advantages and Challenges for U.S. Exports

II\. Roadmap for Market Entry

A. Entry Strategy

B. Market Structure: Distribution Channel

C. Sub-Sector Profiles

1\. Hotel Segment

2\. Restaurant Segment

3\. Institutional Restaurant Segment

III\. Competition

IV\. Best Product Prospects for U.S. Exporters

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

**I. Market Summary**

**A. Executive Summary**

Changes in Korean lifestyle and dietary culture coupled with increased
consumer income have led to a rapid growth of the food service sector.
Despite the on-going economic slowdown, monthly average per capita
spending on eating outside of the home has continued to rise, reaching
Korean won\* (~~W~~)74,849 in the third quarter of 2004, up 11 percent
from the same quarter in 2003. In other words, each Korean spent 44
percent of his/her food expenditure, or 11 percent of total spending,
dining out. Although the share of food expenditure in total spending has
been continually falling, the share spent on eating-out, relative to
both food expenditure and total spending, has consistently increased.

\* Note: US \$1 = Korean won (~~W~~)1,025, 12/31/04.

**Figure 1.** **Eating-out and Food Expenditure as a Share of Total
Spending**

![](media/image2.wmf)

Source: Korean Government Statistics (Dec. 2004)

**Figure** **2. Change in Composition of Food Expenditure**

![](media/image3.wmf)

Source: Korean Government Statistics (Dec. 2004)

The Korean food service sector garnered ~~W~~44.3 trillion of cash
register sales in 2003, up 9 percent from the previous year. The total
number of restaurants showed a slight 2 percent-increase to 605,614 with
1.59 million employees. However, 90 percent of restaurants were small
family-owned businesses that hire less than five employees. In addition,
about 64 percent of restaurants made less than ~~W~~50 million of annual
cash register sales.

# Figure 3: Growth of the Korean Food Service Sector

![](media/image4.wmf)

\* Note: Number of restaurants

\*\* Note: Annual cash register sales (unit: ~~W~~100 million)

Source: Korean government statistics (Dec. 2004)

**Figure** **4: Breakdown of Restaurants by Annual Sales (Year 2001\*)**

![](media/image5.wmf)

> \* Note: Year 2001 is the most recent data available.
>
> Unit: Annual cash register sales in Korean won
>
> Source: Korean Government Statistics (Dec. 2004)

Restructuring, fueled by increasing competition and the on-going
economic slowdown, has led to a rapid growth of restaurants under chain
or franchise management of various formats, including full-service
family restaurants, quick-service fast food restaurants, institutional
restaurants and bars, at the expense of small-scale family-owned
establishments. At the same time, consumers' increasing demand for new
and international tastes has resulted in a diversification in
new-to-market recipes, products and dining formats. Streamlining of the
supply chain is another area in which the sector has made significant
progress in recent years. 'One-stop, broad-line' distribution is rapidly
growing, as several conglomerates are making heavy investments in the
market, replacing traditional multi-layered channels comprised of
independent wholesalers and wet markets.

The growth of franchise restaurants is resulting in increased demand for
products with new tastes, stable pricing, volume capability,
added-value, and customized food service specifications, characteristics
where U.S. products are competitive. In addition, the premium restaurant
segment is expected to lead the demand for U.S. products in the coming
years. The outlook for U.S. exports is excellent for pork meat,
processed meat, poultry products, seafood, fresh fruits, processed
fruits and nuts, processed vegetables, dairies, alcohol beverages,
sauces and condiments, organic foods and roasted coffee. U.S. beef
products and uncooked chicken meat, which are currently banned, also
have good potential once the market is reopened. Other items that are
currently under restrictive import regimes, such as rice and fresh
potatoes, should gradually gain greater export volumes as a result of on
going trade liberalization.

**B. Advantages and Challenges for U.S. Exports**

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

  1\. This is a growing market where  1\. Consumers in general maintain a
  new ideas and trends are eagerly    negative public view on the quality
  tried and accepted, leading to      and safety of imported foods.
  greater opportunities for           Imported foods are often associated
  new-to-market products.             with contaminations and potential
                                      food-born diseases. In addition,
                                      import opponents often use food
                                      safety issues as a tool to restrict
                                      imports.

  2\. Consumers are looking for new   2\. Many products, such as fresh
  and international tastes. Korean    potatoes, honey, and apples, are
  consumers are familiar with         still under strict trade barriers
  American style menus and restaurant and, thus, have limited market
  concepts.                           access.

  3\. Restaurants under chain         3\. Although changing, price is
  operation, as well as broad-line    still the most important factor in
  distribution, are leading growth in procurement decisions.
  the sector.                         Unfortunately, few decision makers
                                      understand the overall benefit of
                                      using higher quality, value-added
                                      products.

  4\. On-going lifting of import      4\. Many U.S. products directly
  barriers improves the market        compete with items from
  accessibility and price             export-oriented countries,
  competitiveness of imported U.S.    including China, Australia,
  products.                           Thailand, and New Zealand, which
                                      employ more aggressive marketing
                                      strategies.

  5\. On-going depreciation of the    5\. U.S. suppliers often find it
  U.S. dollar against Korean won and  difficult to supply customized
  other international currencies      product specifications required by
  makes U.S. products more            Korean food service buyers mainly
  price-competitive.                  because: 1) the ordered volume is
                                      too small to justify the needed
                                      changes in the manufacturing
                                      process, labeling, etc.; or, 2) the
                                      supplier has little understanding
                                      about Korean recipes and may not
                                      know how to meet the
                                      specifications.
  ----------------------------------- -----------------------------------

**II. Road Map for Market Entry**

**A. Entry Strategy**

● The following is a list of key components of market entry strategies
that have been proven effective for new-to-market suppliers:

-   Finding an established importer who has an effective sales/marketing
    and distribution network focused on target customers.

-   Development of products, including making changes to existing
    recipes and specifications, that meet consumer tastes and trends.

-   Selling new-to-market recipe ideas, not products.

-   Maintaining price competitiveness by trading in a large volume
    and/or adding value to the product.

-   Quick response to changes in the supply and demand situation in the
    market.

● Any U.S. supplier seeking opportunities in the Korean food service
sector first needs to understand the sector's specific needs. Dishes
served in Korea largely reflect the contemporary dietary culture of
Koreans and may require different specifications, even when the products
are used for similar dishes served in the U.S. Meeting the sector's
specific needs could mean anything from modifying cuts and portion sizes
to reducing the saltiness to adding or deleting some ingredients.
Considering the rapid evolution of the sector, it is also important to
be kept informed of the changing 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, although it may not always be
the case.

● Because of the many variables involved, there is no one best way to
enter the Korean market. Success is unlikely, however, without proper
local representation and catered attention. What form this local
representation takes depends on the nature of the exporter, the product,
and the local distribution channel. Unless the U.S. supplier has a
specific position on this, working with an established broad-line
importer on a commission basis during the initial stage of market entry
is highly recommended. Established importers are well aware of
up-to-date market demand/supply intelligence, business practices, local
business laws, distribution channels, and, most of all, are the best
source of current information on government labeling and inspection
regulations for imported foods. A brief report on the Korean
government's regulations for imported food products (FAIRS Report
#KS4039) can be found in the ATO Seoul website (www.atoseoul.com) or
USDA/FAS website (www.fas.usda.gov). ATO Seoul also maintains listings
of local importers by product, which are available to U.S. suppliers
upon request at no cost. Exhibiting in a local food trade show is a
cost-efficient way to meet with a large number of key traders in the
sector. Currently, the Food & Hotel Korea (FHK) is the only local show
endorsed and supported by U.S. Department of Agriculture/Foreign
Agricultural Service (FAS). Detailed information about the trade-only
FHK show can be found in its website (www.fhko.com).

**B. Market Structure** **- Distribution Channel**

● Most of the small independent, family-owned restaurants still procure
products, including imported products, from the traditional distribution
channel involving multiple layers of wholesalers and wet-markets, partly
for the purpose of concealing transaction data and, thus, avoiding
income tax. Tax reduction on credit card and debit card use is a policy
newly introduced by the local government in an effort to improve
transparency within the supply chain.

● Due to the outstanding growth of local restaurant chains , use of the
modern broad-line distribution channel is rapidly expanding. Currently,
about four large conglomerate businesses, all committed to becoming the
"Sysco of Korea", are operating nationwide distribution networks with
modern temperature-controlled warehouses and truck fleets. They supply a
wide variety of products mainly to large-scale chain restaurants and
hotels. There is also a third-party logistics service involved in the
supply chain. However, these broad-line distributors are focusing mainly
on high-volume products and, thus, are not capable of genuine 'one-stop'
distribution service. Consequently, restaurants that use broad-line
distributors also transact with several 'specialty' suppliers that
provide specific small-volume, high-value products. Following is a brief
description of the way products are procured by broad-line distributors:

-   Long-storage agricultural products (such as onions, dried pepper,
    carrots, and potatoes) are procured from local contract farms and/or
    from the National Federation of Agricultural Cooperatives(NACF).

-   Fresh vegetables are procured from local contract farms, usually
    large-scale green houses operated near warehouses.

-   Fresh vegetables with high seasonal supply fluctuations (such as
    Chinese cabbage and radish) are procured through middlemen in the
    wholesale auction market using price bidding.

-   Locally produced meat is procured through middlemen in the wholesale
    meat auction market using price bidding.

-   Local processed vegetables (such as frozen, canned, and pickles) are
    procured from domestic manufacturers every one to three months using
    price bidding.

-   Local processed foods (such as oils and sauces) are procured from
    domestic manufacturers on a yearly contract.

-   Imported food products of all types are procured from importers or,
    to a lesser extent, directly from overseas suppliers. Broad-line
    distributors prefer to import directly from overseas suppliers for
    high-volume products, such as meat, seafood, and canned vegetables,
    while using middlemen for low-volume or high seasonal products .

-   Imported products regulated by quotas, including fresh potatoes,
    onions, grains and honey, are handled by the Agri-Fishery Marketing
    Corporation (AFMC), a government agency under the Ministry of
    Agriculture and Forestry. In general, the set annual import quota is
    divided evenly among the importers who signed up for the product. In
    some cases, the quota is allocated to importers by auction. A
    broad-line distributor may acquire an import quota allocation and
    import on its own or purchase from other importers who acquired an
    allocation.

**Table 1: A List of Broad-line Food Service Distributors (Year 2003)**

  --------------------------- --------------- ----------------------------
  **Company Name**            **SKU**         **Annual Distribution
                                              Volume**

  CJ Food System Co.          20,000 items    ~~W~~412 billion

  Our Home Co., Ltd.          N/A             ~~W~~100 billion

  Samsung Everland Co., Ltd.  4,000 items     ~~W~~110 billion

  Doosan Trading Corp.^\*^    200 items       ~~W~~30 billion

  Foodmerce Co.               10,000 items    ~~W~~103 billion

  KTSC Co., Ltd.              3,000 items     ~~W~~172 billion
  --------------------------- --------------- ----------------------------

\* Note: Food service distribution division only.

Source: Korea Food Distribution Yearbook 2004, Industry Sources

● The local food processing industry is an important supplier to the
food service sector. Although food processors are heavily focused on
retail products, more and more are shifting attention to the food
service business to capitalize on the growth of that sector. In
particular, major food processors have developed strategic alliances
with broad-line distributors and have launched co-packed brands for the
distributors. While large portion of these co-packed products are simply
the same retail products in bigger volume packages, some are uniquely
developed exclusively for the food service market, such as prepared
soups, pickles, and sauces. CJ, Daesang, Ottogi, and Dongwon are some of
the leading players in this area. It is expected that increased demand
for prepared products by the food service sector will attract more
processors to join these companies in the future. Products from local
food processors are generally distributed through multiple layers of
wholesalers before reaching the end user unless they are bound directly
for broad-line distributors.

● Discount retailers, hypermarkets and membership warehouse clubs are
also an important distribution channel for the food service sector, as
many small, family-owned restaurants procure products there. Currently,
there are about 250 discount stores nationwide, which, considering the
size of Korean market, is thought to be the saturation point. E-mart, a
local chain, is the leading player, while four international chains,
Carrefour, Wal-Mart, Tesco, and Costco, form the second tier. In
particular, Costco openly targets small-scale restaurants as a major
customer group.

● Development of the modern food service distribution system in Korea is
an outcome of on-going market liberalization. It was not until the early
1990's that conglomerate businesses were allowed to enter the food
service sector. These are now the key influence behind the outstanding
growth of chain and franchise restaurants, as well as the broad-line
food distribution business. Imports and distribution of food products to
the food service sector were under a monopoly system of the Korea
Tourist Supply Center Co. (KTSC) up until the early 1990's.

**C. Sub-Sector Profiles**

**1. Hotel Segment**

**Table 2:** Lodging Industry Market Share (Year 2001)

  ------------- ------------------- ------------------ -------------------
                Number of Company   Number of Room     Cash Register Sale

  Hotels        1.8%                10.1%              68.0%

  Inns          78.5%               77.6%              23.1%

  Resort Condos 0.3%                4.3%               6.1%

  Others        19.4%               8.0%               2.8%

  Total         34,317 companies    584,304 rooms      ~~W~~6,545,113
                                                       million
  ------------- ------------------- ------------------ -------------------

Note: Year 2001 is the most recent data available

Source: Korean government statistics 2004

**Table 3: Hotel Segment Statistics Broken Down by Number of Rooms
(1999-2003**)

  ------------ -------- ----------- ----------- ----------- ----------- ------------
  Category              \<50        50-100      100-300     \>300       Total

  Number of    2003     162         221         117         35          535
  hotels                                                                

               1999     332         276         118         25          751

               Change   -51.2%      -19.9%      -0.8%       +40.0%      -28.8%

  Number of    2003     2,904       7,216       13,299      18,445      41,864
  employees                                                             

               1999     4,431       9,659       14,317      10,591      38,998

               Change   -34.5%      -25.3%      -7.1%       +74.2%      +7.3%

  Cash         2003     108,130     336,371     778,861     1,940,574   3,163,936
  register                                                              
  sales\*                                                               

               1999     155,076     373,573     716,976     831,143     2,076,768

               Change   -30.3%      -10.0%      +8.6%       +133.5%     +52.3%

  Sales from   2003     46,058      152,796     331,202     628,683     1,158,739
  room sales\*                                                          

               1999     56,855      159,171     253,220     196,538     665,784

               Change   -19.0%      -4.0%       +30.8%      +219.9%     +74.0%

  Number of    2003     6,181       14,586      18,597      16,586      55,950
  rooms                                                                 

               1999     12,484      17,745      18,020      10,637      58,886

               Change   -50.5%      -17.8%      +3.2%       +55.9%      -5.0%

  Number of    2000     5,037,564   7,650,031   8,776,468   9,892,972   31,357,035
  guests\*\*                                                            
  ------------ -------- ----------- ----------- ----------- ----------- ------------

\* Note: Unit in million won

\*\* Note: Year 2000 is the most recent data available

Source: Korean government statistics 2004

● There were 535 hotels in Korea at the end of 2003, 216 less than five
years earlier. This significant drop was mainly due to the decrease in
the number of small-scale hotels with less than 50 guestrooms. However,
the growth of large-scale hotels compensated for the loss of hotels and
rooms, yet resulted in an outstanding growth of cash register sales of
the sector, which earned ~~W~~3.16 trillion of cash register sales in
2003, up 52 percent from 1999. The hotel segment is estimated to
comprise about 60 percent of total annual lodging industry sales in
Korea. Another 30 percent of industry sales are generated by 30,000
inns, while resort condos and recreational facilities account for the
remaining 10 percent.

● Competition precipitated industry restructuring, favoring the
expansion of large-scale hotels at the expense of family-owned,
independent small-scale hotels. With five star hotels expanding in both
regional markets and Seoul, many four star hotels have joined
international management franchises, such as Hyatt, Ramada, and
Marriott, to remain competitive in price and management skill. Another
group of middle-scale hotels under the umbrella of budget-format
franchises, such as Best Western, Day's Inn, Ramada Inn, and Holiday
Inn, are being developed to meet the needs of low-budget tourists and
business travelers. Rapid growth of untraditional lodging formats, in
particular service residences, pension homes, by-the-hour motels, and
hot-spa houses, has also resulted in the closings of many small-scale
hotels and inns.

● Although currently experiencing a business slowdown due to the
on-going sluggish local and world economic situations, the hotel segment
is expected to maintain a healthy growth trend in the coming years both
from business and tourism travelers. In particular, the five-work-day
system, which is scheduled to become a national standard for most Korean
workers in mid-2005, will significantly boost domestic tourism. In
addition, an increasing number of foreign travelers to Korea are
anticipated.

● A good number of new hotels are currently under construction or are
planned to meet the increased demand for additional hotel rooms.
According to a government study, the market will need additional 16,000
guestrooms by 2010 in Seoul metropolitan area alone. A hotel belt in
Goyang-city, a satellite town of Seoul, is currently under development
by the government to meet the need. The shortage of hotel rooms is
expected to be worse in regional markets where new industrial or tourist
districts are under development. Recognizing the emerging opportunities,
local conglomerates have unveiled plans for new hotels. A 106 story
hotel currently under construction by Lotte Hotel in Busan, which, upon
completion, will be the tallest hotel building in the world, is an
example of investments being made in the sector.

**Figure** **5: Foreign Travelers Visiting Korea (1980-2003)**

![](media/image6.wmf)

> \* Note: Unit in \$1,000
>
> Source: Korean government statistics 2004

● The hotel sector, especially five and four star hotels that operate
in-house, premium restaurants, has played a leading role for the entry
of new-to-market food products and recipes. It also has served as an
efficient venue for promotional activities, including menu promotions,
product launchings and product seminars. Currently, food and beverage
sales are estimated to comprise 40-50 percent of total sales in five and
four star hotels. Some leading hotels, including the Shilla and the
Westin Chosun, have greatly expanded their food service businesses and
currently operate stand-alone food outlets of various formats outside of
the hotel, including microbrew pubs, food courts, coffee shops, bakery
shops and premium gourmet restaurants. Although the role played by
hotels in the food service market is on a gradual decline due to the
growth of restaurants on the street, it is likely that the sector will
remain the leading distribution channel for premium, high-quality
imported food and beverage items.

**2. Restaurant Segment**

**Table 4: A Brief History of the Restaurant** Industry in Korea

+-------+--------+-----------------------------------------------------+
| Year  | GNP\*  | Major Events                                        |
+-------+--------+-----------------------------------------------------+
| 1     | N/A    | ● Birth of modern commercial restaurant industry.   |
| 900 - |        |                                                     |
| 19    |        | ● A total of 166 restaurants in business in 1945.   |
| 50\'s |        |                                                     |
+-------+--------+-----------------------------------------------------+
| 19    | \$100  | ● Most consumers had very low income and limited    |
| 60\'s | -\$210 | food supply.                                        |
|       |        |                                                     |
|       |        | ● Western foods, mainly wheat flour and dried milk, |
|       |        | first introduced to the mass public through the     |
|       |        | food aid by the UN and U.S.                         |
+-------+--------+-----------------------------------------------------+
| 19    | \$248  | ● A large number of small mom-and-pop restaurants   |
| 70\'s | -      | opened in metropolitan cities.                      |
|       |        |                                                     |
|       | \      | ● Rapid improvement in the diet of the general      |
|       | $1,644 | public due to economic development.                 |
|       |        |                                                     |
|       |        | ● Opening of the first franchise restaurant chain,  |
|       |        | Nandarang (1979) and the first fast food restaurant |
|       |        | chain, Lotteria (1979).                             |
|       |        |                                                     |
|       |        | ● Imported foods become available commercially to   |
|       |        | hotels with the establishment of the Korea Tourist  |
|       |        | Supply Center Co. (KTSC), a monopoly import agency  |
|       |        | (1978)                                              |
+-------+--------+-----------------------------------------------------+
| 1980  | \      | ● Western menus, with limited variety, penetrated   |
| -     | $1,592 | to the general public.                              |
|       | -      |                                                     |
| 1985  |        | ● Rapid expansion of franchise restaurants (mainly  |
|       | \      | hamburger, noodle, fried chicken, and draft beer    |
|       | $2,158 | pubs).                                              |
|       |        |                                                     |
|       |        | ● The first wave of international restaurant chains |
|       |        | entered the market: Americana (1980), Burger King   |
|       |        | (1982), Wendy's (1984), KFC (1984), Pizza Hut       |
|       |        | (1984), Baskin Robbin's (1985).                     |
+-------+--------+-----------------------------------------------------+
| 1986  | \      | ● The Asian Games in 1986 and the Olympic Games in  |
| -     | $2,194 | 1988, both held in Seoul, introduced a wide variety |
|       | -      | of international recipes to the market.             |
| 1990  |        |                                                     |
|       | \      | ● Rapid increase of restaurants and drinking places |
|       | $4,197 | with western theme.                                 |
|       |        |                                                     |
|       |        | ● Introduction of institutional food service        |
|       |        | business: Seoul Catering (1989), Our Home/LG Mart   |
|       |        | (1989).                                             |
|       |        |                                                     |
|       |        | ● More international restaurants entered:           |
|       |        | McDonald's (1986), Denny's (1987), Pizza Inn        |
|       |        | (1988), Cocos (1988), Crown Bakery (1988), Chicago  |
|       |        | Pizza (1988), Domino's Pizza (1989).                |
+-------+--------+-----------------------------------------------------+
| 19    | \      | ● Conglomerates were allowed to enter the food      |
| 90\'s | $5,883 | service industry.                                   |
|       | -      |                                                     |
|       |        | ● Diversification of food service industry with new |
|       | \$     | formats and menus.                                  |
|       | 10,076 |                                                     |
|       |        | ● Hardies (1990), TGIF (1991), Hagendaaz (1991),    |
|       |        | Subway (1992), Ponderosa (1992), Sizzler (1993),    |
|       |        | Mister Pizza (1993), Sky Lark (1994), Kenny Rogers  |
|       |        | (1994), Popeye's (1994), LA Farms (1994),           |
|       |        | Bennigan's (1995), Tony Roma's (1995), Planet       |
|       |        | Hollywood (1995), Marché (1996), Hard Rock Café     |
|       |        | (1996), Outback Steak (1997), Chili's (1997).       |
+-------+--------+-----------------------------------------------------+
| Early | \$10   | ● Restaurants under chain or franchise management   |
| 20    | ,000 - | led the growth of the sector, while increasing      |
| 00\'s | ?      | competitive pressure resulted in shrinking of       |
|       |        | mom-and-pop independent restaurants.                |
|       |        |                                                     |
|       |        | ● Rapid growth of broad-line food service           |
|       |        | distribution.                                       |
|       |        |                                                     |
|       |        | ● Further diversification in restaurant formats and |
|       |        | menus, including take-out, food court, fusion       |
|       |        | cuisine, foreign indigenous cuisine, and wine.      |
+-------+--------+-----------------------------------------------------+

> \* Note: GNP, Gross National Production, Per Capita
>
> Source: Na, J.K., [Understanding Food Service Industry]{.underline},
> 1998.

● Although declining in number due to the rapid growth of restaurants
serving international cuisines, traditional Korean food restaurants are
still the most popular. It is, however, becoming more difficult to
distinguish Korean menus from foreign ones, as more diverse recipe ideas
and food styles are introduced, fusing traditional menus with
new-to-market recipes and ingredients. At the same time, foreign dishes
served in restaurants in Korea are somewhat 'Koreanized' in terms of the
taste, ingredient, and cooking style. In particular, local consumers
prefer less salt, fat and oil, while eating more hot spices, vegetables,
seafood and soup.

● Due to the high population density, delivery service is quite common
in metropolitan areas of Korea. For example, Pizza Hut chain is
realizing 70 percent of its sales from home delivery. The high cost of
real estate and rent is also making more small-scale restaurants focus
on the home-delivery market.

● Changing consumer tastes and increasing competition are forcing the
following changes in the restaurant segment.

-   Reducing operation cost by using more part-time employees, adopting
    a central kitchen facility, standardization of recipes, and
    utilizing Information Technology solutions such as POS (Point Of
    Sales) inventory system.

-   Maintaining a smaller stable inventory of quality products at lower
    cost by switching to broad-line suppliers and introducing further
    processed products.

-   Developing new menus with diverse foreign indigenous cuisines and
    new restaurant designs incorporating trendy concepts or themes.

-   Greater focus on health and food safety by introducing functional
    and organic ingredients, HACCP certification, and responding quickly
    to food scares in the market.

-   Marketing more creatively by conducting cross-promotions with
    non-food businesses and menu promotions targeting seasonal markets.

● It is notable that Korea has an exceptionally high number of bars and
pubs. The newest trends in the bar and pub segment include the
introduction of micro-brew pubs and the growth of bars under franchise
management. Although decreasing among the health-conscious older
generation and young professionals, drinking is still considered a very
important part of Korean business and social life. According to
government statistics, each Korean adult over the age of 19 consumed 26
liters of Soju (local hard liquor) and 53 liters of beer in 2003, up 5
percent and 81 percent respectively from ten years before. The rapid
growth of wine and other low-alcohol beverages has come at the expense
of hard liquors. Recently, the number of expensive drinking saloons and
the consumption of premium whisky has significantly declined as a result
of a new government regulation reducing the tax deduction for corporate
entertainment spending.

**Table 5: Break Down of Restaurant Industry by Type of Restaurant (Year
2001**\*)

  ------------------------- --------------- ---------------- -------------
  Type of Restaurant        No. of          Annual Sales     No. of
                            Restaurants                      Employees

  Full Svc Korean           45.3%           43.1%            44.6%
  Restaurants                                                

  Full Svc Chinese          4.8%            4.5%             5.3%
  Restaurants                                                

  Full Svc Japanese         1.0%            2.8%             1.9%
  Restaurants                                                

  Full Svc Western          2.6%            4.9%             4.0%
  Restaurants                                                

  Institutional Feeding     0.5%            2.4%             1.7%
  Restaurants                                                

  Quick Svc Western         4.8%            7.9%             6.0%
  Restaurants                                                

  Quick Svc Korean          9.8%            5.4%             7.2%
  Restaurants                                                

  Bars and Pubs             21.5%           19.6%            20.1%

  Bakery Shops              1.7%            2.2%             1.8%

  Tea & Coffee Shops        6.7%            4.6%             5.9%

  Total                     505,241         ~~W~~ 34,245,594 1,341,528
                                            mil              
  ------------------------- --------------- ---------------- -------------

> \* Year 2001 is the most recent data available
>
> Source: Korean government statistics 2004

● The growth of quick service (fast food) restaurants has stagnated in
recent years due initially to the on-going economic slowdown and
consumers being increasingly concerned about healthy eating. This was
followed more recently by concerns about beef, due to BSE, and chicken,
due to avian influenza, which further reduced consumer confidence in
fast food. As a result, many quick service restaurants are in serious
financial difficulty and some have and are going out of business, such
as Wendy's and BHC fried chicken fast food chain. Lowering prices and
introducing new, healthier menus are the two major counter measures
being implemented by the leading fast food companies. In spite of the
challenges facing the fast food industry, new restaurants with new
recipes, mostly under franchise management, are continually entering the
market, reflecting the strong consumer demand for more diverse menus
with the quick service format. A good example is the late 2004 launching
of the Krispy Kreme Doughnut chain by Lotte . According to a Korean
government survey, 135,000 consumers, which is 0.27 percent of the
population, eat fast food at least once a day. Another survey shows that
2.6 percent of Korean children eat fast food at least once a day.

**Table 6: Profile of Major Quick Service Western Restaurant Chains**
(Year 2002)

  ---------------- ------------- ------------- ------------- -------------
  Company          Brand         Annual Sales  No. of        Change in
                                               Outlets       2002

  Lotteria         Lotteria      ~~W~~530      850           +100
                                 billion                     

  Shinmac          McDonald's    ~~W~~280      361           +40
                                 billion                     

  Genesis          BBQ           ~~W~~310      1,350         -50
                                 billion                     

  Doosan           KFC           ~~W~~250      226           -10
                                 billion                     

                   Burger King   ~~W~~93       114           +1
                                 billion                     

  TS Haemaro       Popeye's      ~~W~~130      211           +26
                                 billion                     
  ---------------- ------------- ------------- ------------- -------------

> Source: Korea Food Distribution Yearbook 2004

**Table 7: Profile of Major Family Restaurant Chains** (Year 2002)

  ---------------- ------------- ------------- ------------- -------------
  Company          Brand         Annual Sales  No. of        Change in
                                               Outlets       2002

  Lotte            TGIF          ~~W~~75       20            +1
                                 billion                     

  Rise On          Bennigan's    ~~W~~70       15            +3
                                 billion.                    

  Amoje            Marché        ~~W~~60       15            +3
                                 billion                     

  CJ Foodvill      Sky Lark      ~~W~~41       46            +24
                                 billion                     

                   VIPS          ~~W~~37       11            +3
                                 billion                     

  Ojijung          Outback Steak ~~W~~60       23            +7
                                 billion                     

  Sunat Food       Tony Romas    ~~W~~14       6             +1
                                 billion                     

  Barons           Sizzler       ~~W~~12       4             +1
                                 billion                     
  ---------------- ------------- ------------- ------------- -------------

> Source: Korea Food Distribution Yearbook 2004

**Table 8: Profile of Major Pizza Restaurant Chains** (Year 2002)

  ---------------- ------------- ------------- ------------- -------------
  Company          Brand         Annual Sales  No. of        Change in
                                               Outlets       2002

  Pizza Hut Korea. Pizza Hut     ~~W~~300      300           +50
                                 billion                     

  Mister Pizza     Mister Pizza  ~~W~~10       177           +17
  Korea                          billion\*                   

  DPK              Domino's      ~~W~~80       196           +35
  International    Pizza         billion                     
  ---------------- ------------- ------------- ------------- -------------

> \* Note: Sales from the 20 outlets owned by the franchise
>
> Source: Korea Food Distribution Yearbook 2004

Table 9: Profile of Major Coffee Shop Chains (Year 2004)

  ---------------- ------------- ------------- ------------- -------------
  Company          Brand         Annual Sales  No. of        Change in
                                               Outlets       2002

  Starbuck's Korea Starbuck's    ~~W~~44       58            +24
                                 billion                     

  Rosebud          Rosebud       ~~W~~10       203           +73
                                 billion                     

  Coffeebean Korea Coffeebean    N/A           20            +14
  ---------------- ------------- ------------- ------------- -------------

> Source: Korea Food Distribution Yearbook 2004

**3. Institutional Food Service Segment**

**Table 10: Profile of Major Institutional Food Service Companies**
(Year 2003)

  ------------------- -------------- ------------ ---------- -------------
  Name of Company     Annual Sales   No. of       Change in  No. of Meals
                                     Outlets      2003       Serving Daily

  Our Home            ~~W~~300       500          +82        500,000
                      billion                                

  Samsung Everland    ~~W~~340       450          +50        450,000
                      billion                                

  CJ Food System      ~~W~~218       629          -30        420,000
                      billion                                

  G-Net (Hyundai)     ~~W~~180       300          +50        180,000
                      billion                                

  Shinsegae Food      ~~W~~125       350          +90        150,000
  System              billion                                

  Arakor              ~~W~~75        270          +50        250,000
                      billion                                

  ECMD                ~~W~~81        250          +30        18,000
                      billion                                

  Hanwha Development  ~~W~~119       205          +18        160,000
                      billion                                
  ------------------- -------------- ------------ ---------- -------------

> Source: Monthly Food Journal (Dec. 2004 Issue)

● Institutional food service restaurants are growing, as more office
workers and students, seeking cheaper meal options, are switching to
in-house contract feeding restaurants for their lunches and dinners. The
cash register sales for 2004 were estimated at ~~W~~5.8 trillion, about
50 percent of which was taken in by third-party commercial institutional
food service providers. Another half of the market was taken by
restaurants directly operated by the company or school. Commercial
institutional food service providers are expected to further increase
their market shares in the coming years, as more organizations seek
cheaper and more efficient way to provide quality meals for their
employees and students.

● In general, the rapid growth of the institutional feeding restaurant
segment is mainly led by a handful of players, all of them subsidiary
businesses of local conglomerates. Focusing on big volume clients to
gain economy-of-scale, the leading players are closing down their
small-scale outlets, leaving behind room for smaller competitors to
enter and grow. Especially schools and hospitals are changing to smaller
institutional providers.

● Most of the leading institutional feeding companies have also
diversified to encompass regular restaurant businesses, including food
courts, cafeterias, bars, coffee shops, bakery shops, and premium
restaurants. In addition, the leaders have also entered the food service
distribution business, serving outside restaurants in an effort to
achieve greater buying power. However, products distributed by these
companies are often limited to those that they themselves use in large
volumes. It is anticipated that the distribution arms of these companies
will someday themselves evolve into separate broad-line food service
distribution subsidiary companies handling wider variety of products.

● The cost of food products comprises about 60 percent of the total
operation cost in an institutional food service business, which is much
higher than in a regular restaurant (about 30 percent). Consequently,
companies in this segment are interested mainly in products with low
price, value and stable supply. Imported products, therefore, are mainly
from China, Australia and South Asian countries. Leading companies are
also currently trying to incorporate more further-processed products in
an effort to reduce labor and overhead costs.

**III. Competition**

● Domestic products offer stiff competition for many U.S. products.
Although limited in variety, Korea produces considerable amount of raw
agricultural products, including rice, fresh vegetables, fruits,
seafood, pork, chicken, egg and fluid milk. In addition, Korea has a
strong processed food industry that manufactures a wide variety of
products from processed meat and seafood to sauces and oils to beverages
and cookies. For raw agricultural products and input ingredients for the
local processing industry not grown or manufactured in Korea, U.S.
products face increasing competition from imports from other countries.
Products from competitor countries, including China, Australia, Chile,
and Thailand, in general have lower prices than U.S. products and, thus,
are quickly building up their market shares. China, for example, has
become the leading supplier of fresh and processed vegetables, sauces
and spices, seafood, and grains to the Korean food service sector. In
addition, increased demand for more diverse international cuisines and
recipes are translated into growing demand for imported products from
more diverse origins, including European and South Asian countries.

● The lifting of import barriers directly affect competition in the
Korean market. Many local agricultural products lose price and
availability competitiveness when protective import tariffs and quotas
are removed. With that trend, however, food safety issues are becoming
more important factors negatively impacting the accessibility of
imported products to Korean buyers. In an effort to maintain stable
supply, therefore, food service distributors frequently work with more
than two different countries for major items, such as chicken meat and
beef.

**IV. Best Product Prospects for U.S. Exporters**

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

1\. Pork meat (chilled and frozen belly cut): Due to the import ban on
U.S. beef since December 2003, many beef restaurants have switched to
pork menus, resulting in a strong demand for additional imports.
Although Korea has a large domestic supply of pork meat, highly
concentrated demand for the belly cut has resulted in a strong need for
imports. It is interesting to note that much of the meat is distributed
frozen, as restaurants generally want longer shelf life. During 2004
(January-November), total pork meat imports increased 78 percent from
the previous year, to \$300 million. Imports from the U.S. also showed a
sharp increase of 165 percent to \$33 million.

2\. Processed meat (sausages and hams): Processed meats are mainly
served in bars and buffet restaurants. Among the total \$26 million of
processed meat imported in 2004 (Jan.-Nov.), U.S. products had a 33
percent market share.

3\. Chicken meat (frozen and fully cooked): Although overall demand for
chicken meat significantly declined during 2004 due to the public food
scare caused by avian influenza (AI), Korea remains an excellent market
for chicken products. Although only fully cooked U.S. poultry products
are currently exportable to Korea, technical discussions are underway to
reopen the market to uncooked, mainly frozen, U.S. poultry meat. Demand
for further processed poultry products is expected to grow quickly, as
more restaurants understand the cost savings of value-added items.
Conversely, imported fresh chicken meat rarely enters the Korean market
due to the short shelf life and the strict sanitary standard (zero
tolerance on E-coli contamination) on imported fresh meat. Pre-AI import
volumes of U.S. chicken meat were \$30-\$50 million annually.

4\. Seafood (frozen and processed): Korea is a major seafood market with
good growth potential for imported products. The domestic supply is
decreasing due to the depletion of nearby fishery resources and
increased international restrictions on deep-sea fishing. Total imports
of fishery products by Korea amounted to \$1.97 billion in 2004
(Jan.-Nov.), up 16 percent from the previous year, with imports from the
U.S. totaled \$119 million. Major species currently imported from the
U.S. include: Alaska Pollack, Pollack surimi, Pollack roes, skate,
mackerel, hagfish, halibut, scallop, cod, Pacific salmon, angler fish,
rock fish, and prepared sea cucumber. It is notable that demand for
processed products (fillet, dried, surimi, and cooked) are rising.
Processed products accounted for about 21 percent of total seafood
imported in 2004. Several major seafood importers are even interested in
establishing processing plants in the exporting countries.

5\. Processed fruits and nuts: Processed fruits and nuts are gaining
consumer popularity for their natural and healthy image. Introduction of
new recipes that require processed fruit and nut ingredients is
resulting in demand for more diverse products. Total imports of
processed fruits and nuts increased by 8 percent to \$152 million in
2004 (Jan.-Nov.), while imports from the U.S. totaled \$22.6 million, up
3 percent. Products currently imported from the U.S. include: dried,
frozen, or preserved prune, cranberry, cherry, strawberry, grape,
blueberry, walnut, almond, pistachio, and peanut. Fruit juices also have
a big market in Korea, as U.S. products, at \$31 million imports in 2004
(Jan.-Nov.), took a 33 percent import market share.

6\. Fresh fruits: Korea is an excellent market for U.S. oranges. Demand
for imported oranges is increasing in both food service and retail
sectors. Currently, U.S. and South Africa are the only two countries
allowed to export oranges to Korea. In spite of a temporary import ban
on oranges from two California counties (Tulare and Fresno) due to a
fungus problem, which has recently been lifted, orange imports from the
U.S. in 2004 (Jan.-Nov.) increased 21 percent from the previous year, to
\$133.5 million. Other major U.S. fruits currently imported into Korea
include table grape, lemon, cherry, and grapefruit.

7\. Vegetables (fresh and processed): Although Korea is self-sufficient
in many categories of fresh produces, seasonal fluctuations in supply
and unfavorable growing condition for foreign varieties are resulting in
demand for imports. Although China has emerged as the leading supplier
of vegetables, both fresh and processed, there is strong demand for
high-quality U.S. products. Produce imported from the U.S. includes:
potato (\$4 million in 2004 (Jan.-Nov.)), onion (\$6 million), lettuce
(\$1 million), dried vegetables (\$25 million), frozen vegetables (\$2
million), preserved tomato (\$8.5 million), and pickled vegetables (\$48
million).

8\. Dairy Products (cheeses): More dishes with dairy ingredients have
and are being introduced to the market, resulting in increasing demand.
Imports of cheese in 2004 (Jan.-Nov.) amounted to \$108 million, up 30
percent from the previous year, while imports from the U.S. also rose by
25 percent to \$18 million. The demand is expected to expand in the near
future as increasing numbers of consumers develop tastes for specialty
cheeses.

9\. Alcohol Beverages (wine, beer, and hard liquors): With the large
number of bars and pubs, imported alcohol beverages have a good
opportunity in the food service sector. Especially as the demand for
products with health benefits and lower alcohol content is rapidly
growing. Wine imports increased 35 percent in 2004 (Jan.-Nov.) to a
record-high \$52 million. Imports from the U.S. also set a new high at
\$7.3 million, up 20 percent. Among the \$13.4 million of beers imported
in 2004 (Jan.-Nov.), U.S. brands, at \$3.3 million, took 24 percent of
the import market share. Imports of U.S. whiskies totaled \$2.4 million
in 2004, which was only 1.1 percent of total hard liquor imports.

10\. Roasted Coffee: A large number of franchise coffee shops opened in
recent years, resulting in an increased demand for imported coffee.
Imports of roasted coffee beans increased 34 percent during 2004
(Jan.-Nov.) to \$8.6 million, while imports from the U.S. increased by
14 percent, to \$4.4 million.

11\. Sauces and Condiments: With the introduction of more foreign
recipes, the demand for imported sauces and condiments is rising.
Imports from the U.S. in 2004 (Jan.-Nov.) totaled \$11.4 million, while
total imports increased by 10 percent, to \$81.9 million.

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

1\. Beef meat and edible offal: Before the import ban, annual export of
U.S. beef products to Korea amounted to around \$900 million. It is
expected, once the market is reopened, that U.S. beef products will
recover export volume and market share.

2\. Lamb meat: More consumers are becoming familiar with lamb meat.

3\. Processed turkey meat: An increasing number of sandwich shops are
serving turkey sandwiches.

4\. Premium seafood: Products such as lobster, crab (King, Snow, and
Dungeness), black cod, and Sockeye salmon have good potential in Korea,
due to increased demand from affluent consumer group who seek new
healthier meal alternatives.

5\. Processed eggs (fluid, frozen, and flour): More restaurants are
expected to switch to processed eggs products from shelled eggs in the
near future.

6\. Fresh coffee beans: Imports of fresh coffee beans increased by 10
percent during 2004 (Jan.-Nov.) to a record-high \$78.5 million.
Unfortunately, most beans are from South American and Asian countries,
while U.S. products currently take a very small portion of the market.
With diversifying consumer tastes, U.S. products, especially from
Hawaii, are expected to gain future market share.

7\. Prepared processed food: Demand for prepared products, such as
frozen soups and fully cooked chicken meat, is gradually picking up. As
more restaurants understand the benefit and quality of prepared
products, interest in U.S. products is likely to increase.

8\. Ingredients for micro-brew beer: Demand for ingredients for
micro-brew beer is likely to increase with the addition of more
micro-brewery restaurants, which are gaining in popularity.

9\. Organic products: The demand for organic products is increasing due
to the strong interest from affluent consumer groups and young mothers.
However, imports of fresh organic produce is unlikely in any near future
due to the mandatory fumigation treatment required for imported fresh
vegetables and fruits infested with bugs.

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

Imports of many U.S. fresh fruits, including apples, fresh berries,
pomegranates, and mangos, are prohibited as there is no bilateral
quarantine treaty between the U.S. and Korea. Other products, including
rice, honey, fresh potatoes, fresh onions, and pop-corn, are subject to
import quota barrier that restricts volume and access to the market.

**V. Key FAS/USDA Contacts and Further Information**

**● For further information about the Korean agricultural market, please
contact:**

**U.S. Agricultural Trade Office**

Korean Address: Room 303, Leema Building, 146-1, Susong-dong,
Chongro-ku, Seoul 110-140, Korea

U.S. Mailing Address: US Embassy Seoul, Unit 15550-ATO, APO, AP
96205-5550

Telephone: 82-2 397-4188 Fax: 82-2 720-7921

E-mail: <atoseoul@usda.gov>

Website: [www.atoseoul.com](http://www.atoseoul.com/)

**Agricultural Affairs Office**

Korean Address: U.S. Embassy, 82, Sejong-ro, Chongro-ku, Seoul, Korea

U.S. Mailing Address: US Embassy Seoul, Unit 15550-AgAff, APO, AP
96205-5550

Telephone: 82-2 397-4297 Fax: 82-2 738-7147

E-mail: <agseoul@usda.gov>

**● For more information on how you can register for USDA/FAS' Supplier
List:**

The United States Department of Agriculture's Foreign Agricultural
Service (USDA/FAS) offers information and services that can be
beneficial to both new and experienced exporters. For example, the U.S.
Suppliers Service is a searchable database of over 5,000 U.S. exporters
and their products, which is used by USDA/FAS to help facilitate
connecting potential buyers with U.S. suppliers. More than 85 USDA/FAS
offices overseas use this database to help export agents, trading
companies, importers and foreign market buyers to locate U.S. suppliers.
It is also used to recruit U.S. exporters to participate in market
development activities sponsored by USDA and federal export programs.
You can register online for this service at:
**http://www.fas.usda.gov/agexport/exporter.html**

or contact:

AgConnections Team

AgExport Services Division, Foreign Agricultural Service, Washington,
D.C.

Telephone: 202-690-4172 Fax: 202-205-2963

E-mail: <joyce.estep@usda.gov>

Website: www.fas.usda.gov/agx/agx.html

**● For further information about sanitary and phytosanitary
requirements, please contact:**

**U.S. Animal Plant and Health Inspection Service (APHIS)**

Korean Address: Room 303, Leema Building, 146-1, Susong-dong,
Chongro-ku, Seoul, Korea

U.S. Mailing Address: US Embassy Seoul, Unit 15550-APHIS, APO, AP
96205-5550

Telephone: 82-2 725-5495 Fax: 82-2 725-5496

E-mail: aphis@kornet.net

Website: www.aphis.usda.gov

**● For information about activities by** **State** **Regional Trading**
**Groups, please contact:**

**Mid-America International Agri-Trade Council (MIATCO)**

400 West Erie Street, Suite 100, Chicago, IL 60610

Telephone: 312-944-3030 Fax: 312 944-1144

E-mail: eriggs@miatoco.org

Website: [www.miatco.org](http://www.miatco.org/)

**Western United States Agricultural Trade Association (WUSATA)**

2500 Main Street, Suite 110, Vancouver, WA 98660-2697

Telephone: 360-693-3373 Fax: 360-693-3464

E-mail: <bruce@wusata.org>

Website: [www.wusata.org](http://www.wusata.org/)

**Food Export USA - Northeast Region of the United States**

150 S. Independence Mall West, 1036 Public Ledger Building

Philadelphia, PA 19106

Telephone: 215-829-9111 Fax: 215-829-9777

E-mail: <jcanono@foodexportusa.org>

Website: [www.foodexportusa.org](http://www.foodexportusa.org/)

**Southern United States Agricultural Trade Association (SUSTA)**

2 Canal Street Suite 2515, New Orleans, LA 70130

Telephone: 504-568-5986 Fax: 504-568-6010

E-mail: <jim@susta.org>

Website: [www.susta.org](http://www.susta.org/)

**● For information on the commercial and industrial products in Korea,
which includes farm machinery, cosmetic and pharmaceuticals, please
contact:**

**U.S. Commercial Service**

Korean Address: U.S. Embassy, 82, Sejong-ro, Chongro-ku, Seoul, Korea

U.S. Mailing Address: US Embassy Seoul, Unit 15550-USCS, APO, AP
96205-5550

Telephone: 82-2 397-4535 Fax: 82-2 739-1628

E-mail: <Seoul.office.box@mail.doc.gov> Homepage:
[www.buyusa.gov/korea](http://www.buyusa.gov/korea)