Lunchtime. A gaggle of students clad in their customary school uniforms enter a western fast food restaurant to be greeted by garish lighting, up-tempo music on the operation's PA system, and images of the heroes of Western popular culture from Bogart to Brando, and Dean to Demi Moore. Ordering from the overhead menu - pizzas, cheeseburgers with ketchup, a salad with mayo, ice cream or yoghurt for dessert - the behaviour of these young people does not seem significant, but what the casual observer is witnessing is a revolution in process. The enormous rise in living standards in Korea have brought about profound, western-oriented changes in the Korean diet and patterns of consumption which have created a continual demand for new food and beverage products. The multinational food corporations have respond to, and fostered these changes, investing some $1.64 billion in their industry in Korea since 1962, a figure which represents six percent of all inbound foreign investment. Maeil New Zealand Cheese Co. is a joint venture between the New Zealand Dairy Board and two Korean partners which makes cheese slices for hamburger chains, mozerella shred for pizza restaurants, and a variety of products for its smaller retail business. "Our product is carried on the back of the Western food fad - Burger King, McDonald's, the pizzerias - by the process of creating a demand for pizza which demands cheese as a component," said John Browning, Maeil New Zealand Cheese's Technical Manager. The company previously manufactured from milk gathered locally prior to trade barriers on the import of cheese coming down in 1995 as part of the Uruguay round of the GATT. Natural cheese is now imported from New Zealand and converted to processed form at the company's original plant in Kwangju. "Our company is a marketing vehicle for converting cheese and selling it into the marketplace, in which capacity we work with our JV partners to supply the retail market," said Mr. Browning. He notes that while cheese is a major market and valued in the food service sector for its flavor, future demand will depend on changing perceptions. "In regard to the retail market it's seen as a source of nutrition for children, but over time there'll be more awareness of cheese," said Mr. Browning. "I think it's children who generate demand. It's a generational approach, measured over 20 to 40 years." Since the dairy industry is relatively young in Asia as a whole, and because in Korea in particular dairy products are viewed as a luxury, multinationals have given particular attention to enhancing product recognition and access. Philip Morris company Kraft established Kraft Korea Inc. in the early 1990s as part of a long-term strategy to establish the company's brand name and develop its cheese, confectionery and grocery businesses. Kraft Foods International was one of the first American food multinationals to establish a presence in Korea, forming a joint venture called Dong Suh Foods with Dong Suh Companies, and other Korean shareholders in 1970 chiefly to sell its Maxim, Maxwell, and most recently, its Maxwell House brand of coffees. The company is credited with the acceptance and growth of coffee consumption in what was previously a tea-drinking nation. Besides its coffee brands, its major products are Frima, a non-dairy creamer, and Post cereals. With 1,600 employees, the joint venture ranks as one of the largest in Korea. "We started the coffee market," said Robert L. Oddy, Dong Suh Foods' Vice President and Representative Director. He points out Maxim, a freeze-dried brand, was originally launched in Europe and the United States without success before finding favor with Asian consumers. The company's retail-oriented cheese products don't enjoy the same awareness as its coffee and cereal products and consumption is low, although they are becoming more familiar to young people. "The cheese habit is growing," said Mr. Oddy. "As a general observation, most Western foods are picked up by the younger generation. However, we don't only cater for them." When expansion at the company's original, greenfield, plant at Bupyong, near Inchon, proved impossible because the growth of the city around it, Dong Suh built two other plants: one at Changwon, near Pusan where coffee is produced: and the other at Chinchun, 120 kilometers south of Seoul, which produces cereals and tea products. "They are two of the most modern facilities of their kind in the world," said Mr. Oddy."They're very high-tech. The quality is very high." Produce from the plants is also exported to several, other, Asian countries, as well as coffee to Europe. The plants also support other Kraft affiliates around the world. "We're quite keen to use our facilities in this regard," said Mr. Oddy. Distribution has historically been a major challenge to food multinationals in Korea. The country's highly-fragmented retail network which the larger companies service with their own distribution system has heavily influenced multinational investment strategy. "One of the biggest barriers [to entry in the food business] is the distribution system," said Mr. Oddy. "It's not particularly effective or well-established. That's one of the contributions we have made to the Korean economy. We have a first-class distribution system - it's one of our strengths." Said John W. Elliot, President and Representative Director of Seoul-Heinz, "Discount stores and supermarkets are very visible but in reality 70 to 80 percent of distribution is done through 'mom & pop' stores." The company operates two plants in Inchon: one produces margarine and cooking oil for the bakery trade while the other produces grocery items such as mayonnaise and ketchup for wholesalers. The remaining Heinz products are imported. To cope with the sharply varying nature of the distribution system, Seoul-Heinz in common with other major food producers has a two-part approach: direct delivery to big customers through its 50 trucks operating out of four branches nation-wide; and indirect delivery for other clients using major wholesaler /distributors which ship the products of a number of producers. Coca-Cola is Korea's largest producer of soft drinks. It is the oldest, and, with 4,000 employees, the largest foreign employer in the country. Faced with obstacles to effective market development since its regional network of independent bottlers lacked the resources to provide a more effective level of distribution, the company's response was to embark on a two-phase restructuring program designed to bring its product closer to its consumers and generally enhance its level of marketplace execution. For 10 years, Coca Cola felt the Korean economy and market had more potential than what its bottlers had the ability to capture due in part to their inability to invest in the things necessary to develop the market such as cold drink equipment, delivery trucks, and vending machines. Accordingly, a decision was made to acquire the businesses. Rather than renew the bottling agreements, the company allowed them to expire and offered to purchase the bottlers' bottling-related assets including their production lines and equipment, and offered employment to all Coca Cola-related employees. The company spent $460 million buying out three of its bottlers: Woosung, Honam, and Doosan, in Pusan, Cholla, and Seoul and Kyonggi Province, respectively, the facilities of which now enable Coca Cola to supply the entire national demand for its products. In April the company announced it would invest a further $200 million over the next few years in its distribution network centered on supermarkets and convenience stores to spur market development. For foreign food companies wanting to take advantage of the devalued won and
Korea's emerging M&A market in areas ranging from ice cream and bakery goods,
to health foods, the opportunity to acquire ready-made distribution systems is a
powerful draw, according to Hack Y. Pyo, president of ice cream mix and sauce
company Vita Enterprises and a member of the American Chamber of Commerce in
Korea's Food and Agricultural Products Committee. "With a very small investment
you can gain control of a company which has nation-wide distribution system,"
says Mr. Pyo, who collects information on Korean companies for potential foreign
buyers. "To develop a similar distribution system would ordinarily take years, so
for a small investment you can have control to allow you to introduce new
products, locally-made or imported." For the future, Mr. Pyo sees the trend in
distribution being dominated by major outlets such as the "Wal-Marts, the Price
Clubs, simply because of the rise of mass housing, and the consequent high
concentrations of buying power." Despite the current crisis, Mr. Elliot said, "Korea
represents a huge opportunity" and detects further evolution in Korean
consumption trends as a result. "Food is less affected than other businesses.
Koreans have moved psychologically from visible, brand-oriented consumption to
price/quality consumption, while price consumption represents the next stage," he
said. "Price/quality consumption represents a demand for value for money which I
see as positive. The amount of eating out has gone down. We are seeing more
home cooking - which in our industry is home baking - through which you can
spend less and have better ingredients." Meanwhile, Mr. Elliot sees this quest for value by the Korean consumer forcing changes in the distribution system. "I predict the discount stores and convenience stores will see growth and other outlets contract as consumers demand quality and choice and liberalization of advertising becomes education on choice." As Korean patterns of consumption continue to evolve, consumers can be sure their desire for choice will be catered to by the multinationals and their investments, whose presence in the Korean economy stands as an abiding testimony to changing taste.
Foreign investment rises steadily through first half of 1998 Following its sharp falloff in January after what was a record year for capital
inflow into Korea, foreign direct investment recovered in the first half of 1998
posting a series of steady gains throughout the whole six-month period. Korea
ended 1997 in receipt of its largest-ever volume of inbound investment. Major investments in June include Volvo's $180 million takeover of Samsung
Heavy's Construction Equipment division; Seminis Vegetable Seeds Inc.'s $95
million investment in Hungnong Seeds; Canadian Seagram's $41 million increase of
its stake in its joint venture with Doosan, Doosan Seagram; and Hewlett Packard's
buy-out of Samsung's stake in their former JV operation for $36 million.
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