Korea has a developed eCommerce market and attracts more attention from overseas sellers. Having a healthy population growth and a promising economic outlook, the Korean population shows an increased appetite for foreign brands.
Doing business in Korea is transparent, even if some complain about bureaucratic red tape.
Having said that, the market is also competitive and it’s crucial that you perform market analysis beforehand. In this article, I cover the main topics and review what you should consider if you plan for a Korean market entry.
- Market Entry Strategy
- Korea Market Entry Obstacles
- Market Entry Research
Market Entry Strategy
Entering a new market requires thorough research and sometimes initial branding activities are needed.
Besides, the sales channels you choose affect the market entry strategy. As a result, market entry strategies can be divided into different segments, depending on your goals and level of commitment.
Let’s review different strategies and what sets these apart.
Initial Marketing Campaigns
Foreign brands with little local brand awareness often focus on initial marketing campaigns. These campaigns can be managed offline, online, and sometimes with the help of key-opinion-leaders (KOLs).
For instance, recently I saw Rio Ferdinand, the English football player, participating in advertisements for a Southeast Asian beer brand called Tiger. A few days later, I also saw DJ Tiesto in an advertisement for Heineken beer.
Initial marketing campaigns help you to create trust and awareness of your brand and are often crucial before brands list their products on local eCommerce marketplaces.
Along with globalization and digitization, we see a rapid increase of cross-border eCommerce around the world. This is particularly the case in China whilst Japanese consumers prefer to buy from local brands.
The value of purchases from foreign retail sites is more than USD 3 billion and almost 50% comes from US online retailers. Having said that, both China and the EU expand rapidly in the market as well.
By comparison to China, there aren’t as many cross-border eCommerce sites available in Korea, like Tmall Global.
Korean buyers predominantly buy goods from foreign marketplaces in the cross-border market. While Amazon doesn’t have a branch in Korea, like in Japan, Koreans still buy from Amazon.com.
In addition, Coupang, one of the most popular eCommerce marketplaces, focuses increasingly more on sourcing goods directly from the US, as well as China.
Benefits of selling cross-border:
- Less regulatory hurdles to enter markets
- Sometimes tax exemptions
- A good option to test markets
Domestic eCommerce Operation
Selling on domestic eCommerce marketplaces is sometimes the preferred choice for brands that want a deeper market penetration.
By importing the products first and storing them in-country, you can sell the products in offline (bricks & mortars) stores and online.
As a result, you can shorten delivery lead times, costs, and sell on multiple channels.
In Japan, as many as 90% buy from local sellers. In Southeast Asia, buyers also predominantly prefer local sellers. Importing and selling products through a distributor or on your own can therefore increase sales significantly.
With that said, you can sell both cross-border and locally at the same time. You don’t have to go for one option only but can tailor the setup according to the products and marketplaces used.
By selling locally, you either have to work with a local partner such as a partner or incorporate in Korea, to import the products. This alone brings additional costs, something that I will explain more about later.
Korea Market Entry Obstacles
Entering the Korean market comes with obstacles, sometimes foreseen but also unplanned. Below I’ve listed some notable foreseen obstacles that you should beware of before entering the market.
The value-added tax (VAT) rate is 10% and relevant import duties and the customs value have to be included.
A national excise tax of 10 to 20% is also charged for the importation of certain luxury items and durable consumer goods.
Keep in mind that Korea currently has Free Trade Agreements with:
- Central America (Partial)
- New Zealand
- The European Union
For instance, as of January 1, 2020, 98.8% of U.S. products enter Korea duty-free. This relieves the tax burden for exporters.
Korea also has European Free Trade Associations with Norway, Switzerland, Iceland, and Liechtenstein.
Exporters that set up local entities also have to pay relevant setup and running costs to manage the companies. I will cover this in greater detail below.
Product Standards & Labeling Requirements
Korea has, like most other countries, local labeling and certification requirements that are somewhat similar to ISO standards. In short, harmonization among standards is the standard to minimize entry barriers for imported goods.
While China uses the CCC-mark for a vast range of products such as electronics and safety gear, Korea has an equivalent mark called the KC mark. The process to get the KC mark can seem rigorous and typically involves the following steps:
- Certificate of registration
- Factory inspection
- Product testing
- EMC testing
- Post-certification surveillance
In addition to the CCC mark, Korea also has various national acts. The Ministry of Food and Drug Safety is responsible for the issuance of the acts. Examples are listed below.
Example A: Food Labeling
- Article 4 and 5 of the 「Act on the Labeling and Advertising of Food, Etc.」
- Article 5(3) and 6(4) of the Enforcement rule of the same Act
Example B: Clothing Labeling
Under the Safety and Quality Labeling Requirement, leather and textile products imported into Korea must be labeled with the KC mark, in addition to the required information written in Korean
Market Entry Research
Before entering a new market, companies perform market entry research that requires both time and costs to conduct. The depth of market entry research varies, often a third party such as a consultancy firm helps with the research.
Having said that, prior to hiring third parties and going into detailed planning about entering new markets, a basic analysis can be made. Below I have listed some items that you can analyze beforehand.
Korea has a large and developed eCommerce market but with comparatively few platforms. What sets the country apart from other countries is that many marketplaces focus primarily on domestic eCommerce sales (not cross-border) and/or auctions.
First, you should confirm what sales modes that are available on the marketplaces. If you plan to sell cross-border, the websites have to support cross-border sales.
Secondly, payment options. Being able to transfer funds from Korea to your country of residence is utterly important.
The competition from similar brands and the entry barriers such as setup- and running costs are equally important to analyze. To give you a helping hand, I’ve provided a brief introduction to the leading eCommerce websites below.
G-Market is the biggest eCommerce marketplace in Korea and was launched as early as 2000. Thanks to an acquisition by eBay in 2009, G-Market expanded rapidly. Listed on NASDAQ in 2006, the company is used by 64% of the Korean population.
Buyers can primarily find the following product types available on the website:
- Fashion & Clothing
- Cosmetics and Beauty Products
- Food and Beverages
- Mom and Baby
G-Market accepts cross-border sellers and you can set up flagship stores in a similar manner as the major eCommerce platforms in China.
A few years back, it was announced that G-Market and Rakuten will start collaborating by setting up flagship stores on each others’ websites.
11Street is used in Malaysia and Korea and has become one of the most popular eCommerce platforms in the latter one. The website was the most popular one until 2016, when G-Market took over the first position.
The website launched its cross-border version in 2017. In total, you can find 200,000 sellers offering 55 million products in the following segments:
- Fashion & Clothing
- Cosmetics and Beauty Products
- Food and Beverages
- Home and Furniture
- Mom and Baby
Coupang is one of the most well-known eCommerce websites that was established in 2010. Large institutions have invested billions of dollars in the company and it excels in logistics.
To give you one example, 70% of all Koreans live just 10 minutes away from a Coupang logistics center, which speaks for itself. Coupang should also be at the top of your list if you plan to sell in Korea.
The setup costs can be considerably high when including marketing fees, third-party costs, incorporation fees, deposits, shipping costs, and more. The costs will also depend on your market entry strategy.
An initial market entry will, of course, be less costly and time-consuming in comparison to a full market entry.
Competitor Cost Analysis Research
Visiting the main eCommerce marketplaces and checking competitors’ prices is an easy option to perform a simple cost analysis. Some websites also show information about monthly sales volumes and details about shipping.
Many distribution management firms also visit supermarkets and stores to take photos of other products such as the labels and price tags.
Shipping & Logistics
The sales channel will also determine the shipping options on hand. Cross-border sellers typically stock products in Hong Kong or in bonded warehouses in Korea, for example.
Domestic sellers have the option to import the products and reduce shipping lead times and costs significantly.
A benefit of importing products is that you have access to multiple sales channels and can sell offline (bricks & mortar stores) and sometimes on cross-border channels.
This should be considered and studied well in advance before you decide to enter the market.
Many exporters decide to incorporate in Korea for more swift operations. In this section, I will briefly explain the requirements and documents needed when incorporating in Korea. Limited Liability Companies (Yuhan Hoesa) are the most common.
The common requirements for LLCs are:
- Minimum used share capital of USD 1
- At least one director and one shareholder
- Falls under FDI and a minimum investment of KRW 100 million (ca. USD 82,000)
- Typically takes 2 weeks for the company setup
- Company setup cost is around USD 10,000 – 12,000, depending on the service provider
The documents and process can seem rigorous for company formations. In total, foreign investors have to provide 15 different documents, including:
- Application form
- Articles of incorporation
- A certificate of deposit of payment for shares
- The minutes of the inaugural meeting
- The minutes of the Board of Directors
- Receipt for payment of registration tax
To learn more, I recommend you check this article for a complete overview.