Korea’s avid drinkers and smokers offer a market opportunity – but not without risks
Heading a foreign business association can be a routine, even dreary task. Not for Jeffrey Jones. The president of the American Chamber of Commerce in Korea (AmCham) recently starred in a TV ad warning against the demon drink: specifically poktanju (boilermaker), a potent cocktail of whisky and beer, made more so by the custom of knocking it back in one and instant refills. Poktanju’s victims include a senior prosecutor who in 1999 after several too many – for lunch – boasted of entrapping a union in a strike and implicated the justice minister. Both were sacked. This year, a female ruling party MP blamed the brew for her uttering unladylike obscenities.
Koreans tend to bridle at lectures from foreigners, as when told not to eat dogs – which few in fact do – by the likes of Brigitte Bardot and FIFA’s Sepp Blatter. But Jones is different. Long resident in Seoul, he has changed AmCham’s approach – without compromising on the issues – from confrontation to partnership. Married to a Korean and fluent in the language (a rarity that goes down well), ready to praise as well as blame, he is seen as “one of us”. The 45-second ad, carefully conceived, portrays poktanju as letting the side down, even disgracing the ancestors.
That may be better PR than history. Most early foreign contacts with the hermit kingdom noted that even then Koreans liked a drink – and a smoke. Today, foreign businesses must still brace themselves for the rigours (and prodigious cost) of their Korean peers’ idea of a good night out. One who passed the poktanju test – Wilfred Horie, till recently CEO of Korea First Bank (KFB) – credited his US Special Forces survival training: “As long as you don’t have more than five, you should be OK”. (A theory on Horie’s sudden departure is that Newbridge Capital, who own KFB, feared that the Japanese-American, initially controversial, had become too Korean.)
But one person’s headache is another’s market. Statistics confirm that South Koreans are world-class drinkers. In 1999 they put away 64 litres per head; the true average is higher, allowing for women – who drink less, but are catching up – and children. But they are particular about what they imbibe. According to the Korea Alcohol and Liquor Industry Association (KALIA), this comprised 72 bottles (500ml) of beer, 64 bottles (360ml) of soju (the local white spirit), 0.37 bottles (750ml) of whisky, and 5.2 bottles (750ml) of makkoli (traditional rice wine). KALIA does not even keep figures for grape wines, which account for under 1% of all alcohols sold.
Last year’s figures show slightly less consumption and a shifting balance. In 2000 46m Koreans downed 2.9bn litres, for an average of 63 litres. This time the breakdown was 81 bottles of beer (more), 52 of soju (less), 4.9 of makkoli (slightly less), and 0.67 of whisky (almost double). The figure for whisky – other estimates are higher – is set to rise further. South Korea is the world’s fifth largest market for Scotch. Imports in the first half of 2001 were 40% up on last year, and total whisky sales (both local and imported) may double this year to reach Won1.2trn ($923m).
In Korea, any cocktail mixing excess with a foreign dimension produces predictable hysteria. With fur coats and golf clubs, liquor is a staple of the commerce ministry MOCIE’s moralistic press releases deploring “luxury” imports. Admittedly it is striking on both counts to learn that last April South Korea imported more alcohol ($25m) than cars ($20m). In similar vein, linking rising whisky sales to poktanju, the Korea Times wonders “if our culture is being duped by the global liquor industry”. In truth, it is hard to imagine the makers of Ballantine’s 17 Year Old – the brand of choice: Korea is its top market worldwide – being any happier at seeing it blended with beer, than French vintners are at the Chinese habit of adding sugar to vintage red wine.
But a market is a market; and as ever, the distinction between local and foreign is blurry. Jinro Ballantines, who make the best-seller, is as its name suggests a joint venture. In that sense most whisky consumed by Koreans is made in Korea, and adapted to Korean tastes. Whisky as such has long been the most popular western spirit in Korea. Poktanju seems to date from the 1980s, while premium brands ironically took off in the 1997 financial crisis. The top end is booming, and the sky is the limit. In April Macallan introduced a 52-year old brand, priced at a modest W5m ($3,760) a bottle. Seven bottles were sold even before the launch: the annual target is 50.
Save our spirits
Such conspicuous consumption (or investment) apart, soaring sales are a mix of rising incomes, changing taste patterns – and globalization. Until two years ago imported spirits faced a 100% tariff, while soju was taxed at only 35%. The EU complained, and the WTO ruled this illegal. From January 2000 taxes were equalized at 72%, raising the price of soju 27% to W890 a bottle while whisky fell 13% to W29,000 on average. That still vast differential gave nationalist protests a populist edge: soju being seen as everyman’s drink, while whisky is for the wealthy.
In the event, fears for the demise of soju proved overdone. Though sales fell in 2000, this was more a shift to beer, on which tax rates were cut from 130% to 100%. Now soju is bouncing back. Sales rose 22% in the first half, after the main maker – Jinro, once again: it has over 50% of the market, with a clutch of mainly regional firms sharing the rest – introduced an upmarket mild brand with lower alcohol content. (A similar strategy has paid off for cigarettes: see box.)
A tale of two chaebol
But while soju remains in Korean hands, the rest of the sector has indeed undergone a foreign invasion – due mainly to the vicissitudes of the two second-tier chaebol who used to dominate the market. Jinro (pronounced “Chillo”) declared bankruptcy in 1997 with debts of W1.4trn, and remains technically under “workout” status. Allied Domecq saw its chance, and in 1999 paid $120m for 70% of Jinro’s whisky business, then as now the market leader. Jinro also sold its beer interests for W480bn, as well as other assets including Seoul’s inter-city bus terminal.
For Doosan, the 11th largest chaebol, divestiture has been even more thorough – and somewhat more voluntary. Doosan is in some ways a very traditional Korean firm: being both the oldest (founded in 1896) and the first to hand control on to a fourth generation of its family owners, when Park Jeong-won at 39 succeeded his father as group president in October. Yet it has also been one of the boldest restructurers, selling even crown jewels – and before necessity dictated.
Only here for the beer
Thus in 1998 Doosan sold the whole of its share in its joint venture whisky business, which had 41% of the local market, to its partner Seagram. Even more radically, for a group which until 1998 went by the name of its best known brand, OB (Oriental Breweries), Doosan is getting out of beer. In 1998 it sold half of OB, which has 47% of the local market, to Belgium’s Interbrew. A year later, though, it acquired Jinro’s former joint venture with Coors; after an auction which prompted the US firm to allege malpractice and pull out of Korea. But then in June this year Doosan sold 45% of OB to Hops Cooperatieve, a Dutch investment firm, for W560bn; keeping just 5% and its status as Interbrew’s Korean partner. All this reflects a desire to cut debt, shed what are now non-core businesses, and focus on – power generation. Last year Doosan bought Hanjung, a state-owned power plant manufacturer, and it is now eyeing various bits of Kepco. But chaebol habits die hard: Doosan insists it plans to stay in soju, where it ranks at no. 3.
By contrast, Hite, the other big player in South Korea’s W2trn beer market – growing at 10% a year – focuses solely (“sorely”, according to its website) on this sector. With expected sales of W700bn this year and a debt-equity ratio well under the official 200% target, Hite stresses both its business and nationalist credentials. Yet in 1999 Carlsberg paid $100m to take a 16% stake, while Hite’s shares are a blue chip favourite of foreign equity investors.
Wine and dine
Overall, despite high consumption and a strong foreign presence, the Korean drinks market still has further potential. In spirits the challenge is to extend tastes beyond whisky, and get people to drink at home: only 20% of whisky is bought by households. In beer too, it would be good to widen the available range: the best sellers are all bland US-style lagers, which it is feared will disappoint (but hardly inebriate) the hordes of football fans arriving next summer. Remaining barriers to trade include a bizarre ban on microbreweries, which the EU chamber of commerce hopes to see lifted in time for the World Cup. And in wine, a whole market waits to be created.
Meanwhile, BA’s correspondent – who has researched this article exhaustively over many years – will happily stick to cheap and cheerful soju, and sends seasonal greetings to all our readers.
As with booze, so for fags. Tireless rankers as they are, one statistic Koreans could do without is being the world’s top smokers. In 1997, according to WHO, 68% of South Korean men lit up. Despite desultory health campaigns, the figure has hardly sunk since – and women are smoking more. Last year the health ministry reported another dubious global record: 42% of male high school students smoke, way ahead of the US (28%) and Japan (26%). At about W7trn annually, South Korea’s market is the world’s ninth largest – and one of the few in OECD still growing.
Even more so than alcohol, not only was tobacco for decades a protected sector in South Korea, but the state ran it. The quaintly if accurately named Office of Monopoly begat Korea Tobacco and Ginseng Corporation (KTG). Now in process of privatization, KTG still dominates the field – but it is no longer a chasse gardee. The market has been open for a decade, yet at first foreign brands were deemed unpatriotic. But in recent years penetration has risen sharply: from 4.9% in 1998 to 6.5% in 1999, 9.4% in 2000, 14.6% in the first half of 2001, and 15.2% as of October. KTG attributes this to young smokers’ view that local equals cheap and nasty; it has launched an upmarket milder brand called Cima, to compete with the likes of Dunhill and Mild Seven.
Get in there
A new trend is a shift from imports to direct investment, On November 26th, British American Tobacco (BAT) broke ground on Korea’s first foreign-owned cigarette factory. With an initial investment of W100bn, rising to W1.4trn (over $1bn) during the next decade, it plans at first to produce 400m packs or 8bn cigarettes a year by 2004, as against the 6bn it currently sells. Its competitors are not far behind. Philip Morris, with 6.6% of the market to BAT’s 4.4%, will choose a site soon. Japan Tobacco International, makers of Mild Seven, is expected to follow.
There are two reasons for this rush (besides the lure of all those puffing schoolboys). Foreign cigarette plants, banned until as recently as last July, have suddenly become compulsory for all serious market players. As a quid pro quo for unbanning FDI, a 10% tariff on foreign cigarettes was imposed from July, which will rise in stages to 40% by 2004. The original plan to slap on the full 40% right away was deferred, in the hope of avoiding trade friction – but the USTR, which in the Clinton era fought shy of defending US tobacco firms, is complaining anyway.
KTG: seeking a suitor?
Meanwhile KTG’s privatization is moving forward faster than most in Seoul. Over the past two years it has spun off its ginseng business (but kept the name), and released successive tranches of equity to both local and overseas buyers. In October Seoul sold off a further 20% of its 53% stake for $550m: $310m in global depository receipts (GDRs), and $240m in exchangeable bonds (EBs). Current plans are for the three state-owned banks which own the remaining 33% – the main shareholder is Industrial Bank of Korea, with 19% – to divest locally by next April; but that deadline could be postponed if there is a risk of swamping the stock market.
Up to now, the privatization process had been designed to keep control firmly in Korean hands. But on November 29th, while denying press reports that it had already found a foreign partner, KTG admitted it has had talks with several candidates – and that this is its long-term aim. Long may mean soon, if it keeps on losing market share. There are pull as well as push factors. KTG has global ambitions – one export market is, or was, Afghanistan – but can hardly go it alone.
In good health?
There should be no shortage of suitors. KTG’s third quarter profits were up 58% on last year, due to better margins on pricier brands which by September comprised 49% of its sales. While turnover rose from W1.2trn to W1.3trn, net income was up from W64.7bn to W102.1bn. For the first 9 months, profits rose from W177bn to W264bn on sales up from W3.3trn to W3.5trn.
The figures are healthy enough; but what of the customers? Korean obsessions with health on other fronts – prolonged inspections of fresh food imports, sometimes passing their sell-by date, are a perennial bone of contention – that an anti-smoking backlash may be just a matter of time. When it comes, no doubt foreigners will be blamed as usual – if undeservedly. In September, an opposition MP admitted that both tar and nicotine levels were higher in Korean cigarettes.