Consumption trend: the consumer sentiment index, which fell below 100 in the wake of the MERS outbreak, recovered to 100 in January 2016. However, household consumption has remained sluggish amidst slow economic growth, the high level of household debt which reached KRW 1,200 trillion (84% of GDP), and the increase in pension and insurance premiums and taxes, as well as rising unemployment for those in their 20s and early 30s. The expenditure-to-income ratio declined from 77% in 2010 to 72% in 2015, showing a conservative spending pattern as the household economy directly affects consumption patterns.

Sales by retail channel

Department stores

Department store sales have decreased but the average purchase amount of VIP customers increased, revealing a polarisation in consumption. The factors behind this decrease in department store sales are economic recession, change in consumption patterns, increase in direct purchases from overseas Internet sites, market saturation and competition with outlet stores. Department stores have strived to improve their drawing power through premium grocery section launches and the expansion of trendy F&B brands and multi-brand fashion shops. In addition, to offer further convenience to customers, department stores have reinforced omni-channel systems, which integrate online and offline stores for shopping.

Large discount stores

Large discount stores are facing a limit on sales growth due to the increasing number of small-sized households, resulting in a rise in short-distance shopping and smaller purchases. They are also affected by restrictions on store operation on weekends as well as competition with social commerce/online marketplaces. However, they are seeking measures to enhance competitiveness and differentiate themselves through the development of private brand (PB) products and the expansion of product sourcing from overseas. In addition, in consideration of the competition coming from social commerce providers, efforts are being made to provide fast and convenient delivery services by establishing an online shopping system.

Duty free shops

Domestic duty free shops, which depend on foreign tourists (especially from China) for 66% of their sales, posted a compound annual sales growth rate of 16% between 2010 and 2015. With the expiry of Seoul duty free store licenses in 2015, conglomerate retailers aggressively bid for licenses in the fast-growing duty free store business. The new license winners included HDC Shilla Duty Free, Hanwha Galleria Timeworld, Shinsegae DF, Doosan Duty Free and SM Duty Free. The areas where these new duty free shops are located are expected to see some change in the surrounding retail areas, with an increased inflow of tourists. Meanwhile, the Chinese government announced that it would lower tariffs on imported necessities from 2016 to boost domestic consumption and expand duty free shops at Chinese airports.

Non-store retailers

The volume of online shopping has continued to grow due to the development of IT technologies, expansion of the online shopping system by distributors and the introduction of social commerce. In 2015, the total sales of online shopping rose by 19% from the previous year. PC shopping accounted for 55% of all online shopping sales, and mobile shopping 45%. In terms of sales growth rate, PC shopping decreased by 3% from the previous year, while mobile shopping rose by 64%. With the simplification of the payment system, the volume of mobile shopping is likely to continue to grow. The three major social commerce providers, which have led the expansion of mobile shopping, are engaged in a competition to secure customers and are focusing on enhancing competitiveness by using their own logistics facilities and improving delivery services. Social commerce, which deals in daily necessities, clothing and home appliances, is equipped with low-price and fast-delivery systems, directly competing with not only online marketplaces but also existing distribution channels, such as large discount stores.

See the full report on Savills Korea here.