South Korea’s status as the trendsetter for Asia is under threat from a vast drop-off in Chinese tourists and the fading glory of K-beauty, but luxury brands from Louis Vuitton to Mulberry are betting the country will recover faster than most.
Only 1.2 million inbound Chinese travellers are predicted for 2020, an 80 per cent decline, according to Fitch Solutions, the emerging market analysis firm. Any recovery will be very gradual, and won’t reach 2019 levels until after 2024, Fitch Solutions forecasts. South Korea’s luxury goods market is expected to climb 0.1 per cent to $12.7 million in 2020, per Euromonitor.
South Korea has long held a potent mix for luxury brands as an influential trendsetter nation thanks to an endless fascination with K-pop stars and Korean popular culture across Asia, high local and tourist demand and government backing for foreign operators. Despite being dwarfed by neighbouring Japan and China, it’s become a popular destination, but a longer-term dip in Chinese tourism is putting that at risk, especially as Chinese consumers look to new countries for trips.
“The impact of Covid-19 on Chinese travel to South Korea is short-term, but Chinese tourists are less interested in travelling to South Korea, and the change of spending power of Chinese tourists to South Korea from strong to weak is long-term,” says Meng Shen, the founder of boutique investment banking firm Chanson & Co in Beijing.
Chinese tourist numbers to South Korea “will definitely take a hit in 2020 due to Covid-19 directly translating into lower sales”, says Suresh Sunkara, retail analyst at GlobalData.
South Korea was “a relatively unexplored market” for international brands compared to its larger Asian peers like Japan and China until recently, he says. Brands are looking to the country as a launchpad for direct operations in Asia, as “a large volume of Chinese travellers to the country and the high spending capacity of these travellers gives an additional advantage to luxury growth”, he says.
Often brands use South Korea as a test bed for entering Asia because of “the rapid adoption of new brands and new trends”, says Dr Henry Chin, head of research at CBRE.
Mulberry’s new shop at the Hyundai department store in Seoul.
© Mulberry
In the backdrop is President Moon Jae-in’s new five-year policy to shift South Korea’s economy to an “income-led growth” system, which includes reducing the administrative burdens faced by foreign companies, boosting its appeal compared to countries like China, whose landscape — dominated by domestic firms operating in a tight matrix of political influence — makes it difficult for foreign companies to break in, says Brice Dunlop, a research analyst at Fitch Solutions.
President Moon Jae-in, has also taken a hard stance against chaebols since his arrival in May 2017. Chaebols, or Korean conglomerates like Lotte, Hyundai, Shinsegae, LG LF and Samsung, dominate the market due to their strong financial capability and large distribution network, says Chin. They know the local market and assist in passing import and distribution agreements, says Dunlop, of Fitch Solutions. “It’s a sound entry strategy.” They also help global brands secure a “nice location” for their stores, because of their power to negotiate, says Hosung Nam, Samsung C&T’s manager, who manages Lemaire and Ami.
But going it alone, gives more control and profitability for brands than local partnerships. Mulberry, which entered South Korea in 2006 with local franchise partner Shinhwa Korea, now has 20 stores across the country, making it the brand’s biggest retail market in Asia. Shinhwa Korea was a good fit, because “they understood and respected our DNA when building the brand in the region”, says Mulberry CEO Thierry Andretta. But in July, it took back full ownership to harness the potential of its second biggest market outside of the UK. Asian sales showed double-digit growth in 2019 (it does not break out revenue by country). It was time to “employ a dedicated team to lead the next stage of growth in the market”.
Seoul’s position as a trendsetting country isn’t going away, commentators suggest. “Its energy and creativity, particularly in film, pop music and fashion, has made it a beacon in Asia and the rest of the world,” says Alvin Chan, global executive creative director for integrated retail and e-commerce at Cheil Worldwide, Samsung’s marketing arm. “Even China and Japan look to Korea for inspiration. Many luxury brands also see it as a trendy ‘influencer’ country and that has a halo effect for the region.”
French contemporary brand Ami opened a store in a luxury mall in South Korea in April, and despite the slowdown plans to open another August. Last month, British fashion label JW Anderson opened its second-ever store, a Seoul boutique, and leather-goods company Mulberry continued with its twentieth store in the country. Late last year, Louis Vuitton opened a new flagship designed by architect Frank Gehry in the Gangnam district.
Reaching a digitally savvy market
There’s also huge potential in e-commerce. Even prior to Covid-19, South Korean consumers did most of their shopping online, says Sunkara. Korea is the world’s fifth-largest e-commerce market and is forecast to become the third-largest after China and the US within five years, according to Euromonitor International. But global brands must invest in local social and search strategies in order to reach one of the world’s most digitally savvy consumers.
SEO on local platforms like Naver, which consolidates searches and also facilitates payments, is key. Google isn’t widely used. “The average South Korean will only trust your brand if it’s listed on Naver,” says Chan.
JW Anderson’s new store at The Galleria in Seoul.
© JW Anderson
Kakao — South Korea’s largest mobile messaging app, with almost 50 million global monthly active users — lets users create dedicated pages on its platform, similar to WeChat, and is also an important channel for brands. Brands can either add a post to their page for free, or send a direct message to their followers (the cost varies depending on the number of followers, but it can cost about $9,000 to push one message to 125,000 followers).
Chanel has amassed 759,400 followers on Kakao. Other luxury brands, like Hermès and Louis Vuitton, have held off, given doubts over the lack of exclusivity. The app’s value for luxury brands is to manage the customer relationship and integrate the online and offline experience, Nam says.
“These social media platforms are key [for brands] as they act as a place for millennials and Gen Z to ‘flex’ their luxury purchases,” adds Dunlop. However, it’s difficult to entice luxury players unless there are luxury-specific services, which is why China’s Alibaba and JD.com launched the Luxury Pavilion and Toplife, respectively. These platforms also provide Chinese consumers with a one-stop shop for Korean products.
While South Korea might be a long game for luxury brands investing in direct operations and new digital channels, some experts believe investment in the region will pay off. South Korea and the broader Asian market is forecast to experience a stronger recovery thanks to demand from the Chinese middle class, an increased appetite for luxury goods among millennials and Generation Z, and the digital channel’s continued maturation, Dunlop says. Its reputation as a tastemaker helps.