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Consumer Brands & Retail Global luxury goods – Equity March 2013 abc best performing categories at Shinsegae: luxury and SPA brands. See the similar correlation at Hyundai in the chart below. National preference? On our anecdotal evidence, we find that Korean brand managers have great consumer insights and can develop products that are particularly adapted to local needs, whether it's in edgy, pricey cosmetics or more accessible brands targeted at teenagers. On a long-term view, we consider the real competition to be local brands with speed to market and local insights vs global developments. Some will consider consumers are playing the national preference. Yet, factually, insights in the automobile, smart phone, cosmetics, fashion and accessories sector have enabled local Korean brands to gain great relevance. Interviewing department store staff, anecdotally the two imported concepts that seem to work are Sk-II, a brand launched originally by P&G in the 1980s that comes across clearly as an Asian brand, and Kiehl's, the L'Oréal-owned, New York pharmacy hip lower price point brand sold to college students and well represented among men. A bit like Louis Vuitton globally or Coach in the US, the imported brands in cosmetics (Lauder, Clinique, Lancôme, Dior, etc) seem to be structurally declining from a very high market share. The number of cosmetics propositions for a nation of 50m is dumbfounding and in department stores, high-end brands from notably AmorePacific and LG H&H (AmorePacific, Sulwhasoo, Hera, O Hui, Whoo, Ohui, Su:m, etc) are gaining space from the imported brands. Free-standing concepts (Etude House, The Face shop, SkinFood "beauty food for the urban sweety" etc) are also becoming ubiquitous. There is in Korea a natural link between beauty and luxury as the desire to look good moves from cosmetics and skincare to bags and clothes. It looks like Korean brands are addressing local consumer needs more acutely than international concepts can. Platinum customers (3% of total) contributed 30% of sales in Hyundai Department Store Number of customer (thousand) 1400 1200 1000 800 600 400 200 0 2% 8% 90% 2% 8% 90% 2% 8% 90% 3% 9% 88% 2009 2010 2011 y r to aug 11 yr to aug 12 General Gold Abov e Platinum 3% 9% 88% Sales (KRWbn) 3500 3000 2500 2000 1500 1000 500 0 28% 28% 29% 22% 23% 30% 23% 29% 23% 23% 49% 50% 48% 47% 48% 2009 2010 2011 y r to aug 11 yr to aug 12 General Gold Abov e Platinum Source: Company data, HSBC calculations 31
Consumer Brands & Retail Global luxury goods – Equity March 2013 abc The duty-free opportunity A great retail duopoly Regulation has it that foreign duty-free operators have not been able to develop in the duty-free market in Korea (although a third concession will be up for grabs in 2015 in Incheon airport) and this important market is dominated by Lotte Duty Free (part of the Lotte conglomerate that owns the department stores, food retail, food products, finance, amusement parks and much more) and Hotel Shilla (part of Samsung). These two operators control about 80% of the duty-free market, meaning they make about KRW5tn in sales. About KRW1.5tn of that is made with luxury goods alone. This will put the duty-free channel at c40% of the total market as of 2013, in our view. Welcome, new stranger Duty free remains a very important market for local consumption as prices are typically 10% to 20% below the full price department store equivalent. Besides airports and downtown locations, locals can also order online (the website is Shilla's third biggest store after Incheon airport and Seoul downtown). However, the restraint on Korean consumers is to declare purchases above USD400 and to be forbidden to make purchases of items above USD3,000 (typically high-end watches), which dates from the 1988 Seoul Olympics, to cap spending on credit is still enforced. This is putting a ceiling on Korean sales in that channel. Recent monthly travel statistics show that recently the number of Japanese inbound travellers to Korea has fallen. Despite still welcoming more Japanese than Chinese tourists, the latter have already become far more relevant to luxury sales at duty free than the former as traffic and average ticket are both much higher. Shilla duty-free breakdown by nationality 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 5% 38% 38% 19% Source: Company data, HSBC estimates 6% 35% 16% 43% 2011 2013e Chinese Japanese Korean Other Looking at Shilla's split of sales by nationality; it seems that the shift has taken place in a snap. As odd as it may sound, there is a project to develop a single-digit number of locations in downtown areas for "foreigners only" to tap into the Chinese potential, counter the opening of Chinese duty free areas in China – as in China's "Hawaii" Hainan – and answer the complaint amongst foreigners (see CNN website) that Korean downtown duty free locations were crowded with too many... Korean consumers. Surprise comes full circle when the project includes the obligation to carry not 30% but 40% of Korean products. Chinese the second biggest group in terms of visitors in Korea in 2012 China 31% Japan 39% Source: Korea Tourism Organization US 8% Rest of the world 22% 32
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