Cracking the Korean market
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Korea is the fourth-largest economy in Asia and was the sixth-largest export destination for New Zealand, importing goods worth nearly NZ$1.4 billion in 2008.
With negotiations for the Korea-New Zealand free trade agreement (FTA) due to begin in June and predicted to reach completion sometime in 2010, many more New Zealand companies are likely to tap into the new opportunities offered by a freer Korean market. According to a joint study by independent research institutes in Korea and New Zealand, with the FTA in place bilateral trade will grow significantly, with expected gains to real GDP of US$4.5 billion for New Zealand and US$5.9 billion for Korea.
The Korean market has often been referred to as “Fortress Korea” because of its very high tariff rates on certain imports and its nationalistic consumers. “We’ve experienced more protectionism in Korea than any other markets we’re dealing with,” says Chris Berryman from Shop New Zealand, an online retailer of healthcare products.
However, while tariff reduction will no doubt particularly help New Zealand exporters of agricultural products, understanding Korea’s business environment and the way Korean consumers think will do more to increase the likelihood of New Zealand companies succeeding there, according to the managers of several companies exporting to Korea.
Beyond high tariffs, another challenge lies in the form of consumer movements in a market where consumers have been known to be easily spooked by media-driven health scares with dire consequences for food and beverage companies. In 2003 negative publicity on the dental effects of cola-based soft drinks led to a dramatic reduction in consumption of those products. A more recent example is the 2008 ‘beef protest’, when millions of ordinary Koreans took to the streets against the importation of American beef.
Soo Hyun Choi, president of Ottogi New Zealand Ltd, a Korean-owned beef-extracts exporting company, points out that “the protest was about the origin of the product as the public was anxious about mad cow disease.”
But because Ottogi Corporation, a major food manufacturer in Korea, was importing its beef extract products from New Zealand, the company experienced little negative impact on sales, compared to other major food manufacturers. Mr. Choi feels such consumer characteristics can be seen in a positive light, as opportunities rather than risks for businesses with quality products.
David Kim of Velexco Korea, a deer velvet exporting company, agrees. “Consumers are extremely volatile and yet Koreans tend to be rather conservative. For products with powerful brands and high quality, consumers would undoubtedly develop a fixed mindset towards a particular product based on first impressions.”
Ottogi Corporation determined it could gain a strategic advantage by establishing a base in New Zealand for supplying beef to the Korean market. After visiting various countries, including China and the United States, the decision was taken to open a processing plant in New Zealand because of an abundance of available resources and high quality standards.
In the late 1990s, Ottogi Corporation, decided to launch a factory outside Korea to satisfy its demand for beef products. Employing 12 people in Auckland and with an annual turnover of around NZ$4 million, Ottogi manufactures and supplies natural ingredients to the food processing and service industries in Korea.
Mr Choi believes this decision allowed them to maintain a strong market position with an optimal quality-to-price ratio. “We have managed to keep the costs very competitive through maintaining good relationships with local farmers and enhancing our production technologies. Wholesale prices of our beef extract per kilo are only a few cents more than inexpensive Chinese products, and 30 percent less against the Australian products.”
Mr Choi says New Zealand beef has a higher value for processing, due to its higher quality and inherent characteristics, than for selling as fresh meat. “Generally Koreans find New Zealand lean beef a little less tasty than marbled beef from other countries. But our beef extract products make perfect ingredients for processing because of the low fat content.”
The parent company was careful to leverage off ‘Brand New Zealand’ for its own brand-building purposes. After launching its New Zealand subsidiary, Ottogi Corporation ran national TV advertisements that featured free-range cattle for broiled beef-bone soup product, followed by new packaging with a silver fern logo for the pre-cooked food range. Consumer feedback on these ‘made in New Zealand’ campaigns was very positive, according to Mr Choi. “There’s a perception that New Zealand-sourced raw materials are the safest, and we could earn the trust of consumers that our products are very reliable as they are made from grass-fed beef.”
By contrast, New Zealand’s Velexco Cooperative Group has found it more difficult to develop a profitable operation. It experienced several setbacks when they first entered the deer velvet market in Korea four years ago as it struggled to leverage off the national brand. “In Korean traditional medicine, Russian deer velvet is highly regarded because there’s a belief that deer in cold regions produce better antlers. Koreans are not aware that the South Island [where Velexco breeds deer] in New Zealand can also be very cold, because they only have this ‘clean green’ image about the country,” explains Mr Kim, Velexco Korea’s General Manager.
Another challenge his Kiwi predecessor experienced lay in language and cultural barriers, according to Kim. “Koreans have a strong tendency to do business with Koreans only. Many foreign representatives find it difficult to market their products as only a few local buyers speak English.”
When Mr Kim joined the company in 2007, however, he used his personal contacts and networks gained from his previous trading experience. The company’s Seoul-based manager, who has been an oriental medicine trader since 1995, says using these informal groups has significantly increased sales over the last two years. Today, Velexco exports 40 tonnes of antlers annually to Korea.
“The most efficient way for New Zealand business to enter an existing network in Korea is to find someone who is in the sector already,” advises Mr Kim. “Usually exporters try to deal with middlemen such as brokers or processors, leaving end-users out of the picture. I had direct access to oriental medicine practitioners, who themselves use the product, and it helped us to broaden our sales channels and awareness of our band,” says Mr Kim.
A more direct approach to reaching Korean customers was taken by Shop New Zealand, a retailer selling and delivering New Zealand made products. To enter Korea’s health supplement market, the company used its retail websites as a main sales channel, optimising them with popular healthcare keywords to make them search engine friendly. As a result, the vast majority of their Korean customers now come from Korean search engines such as Naver and Daum.
Mr Berryman, the company’s managing director, believes that developing online sales strategies and using effective communication tools can offer a good starting point for many New Zealand businesses in a trade or retail sector, who want to establish their presence rapidly in the market. “Korea has one of the highest penetrations of e-commerce activities in the world. In addition, I find Koreans prefer immediate responses. To cater to this, we have a free phone number and online-chat support from Korean customer service representatives.”
He thinks there is a big opportunity for New Zealand businesses to tap into the Korean health products sector. “Koreans are generally very health-conscious, and place great importance on maintaining a healthy lifestyle by consuming health supplements.” Now well established in this market, Mr Berryman says the company is taking the next step of launching its own brand of healthcare products. “Trust is an important issue when it comes to purchasing health-related products. Consumers want that sense of assurance when they purchase our health products. We are now trying to create and establish our brand position among Korean users, who are also very brand-conscious”, says Mr Berryman.
by Brandon Lee
Brandon Lee is a freelance correspondent for Korean news services and lives in Auckland.
Images supplied. Main image: A protest banner, hung at a subway station in Seoul in June 2008, urges against American beef imports.
