Korean retailers turn to service as wage hike bites

Three months into the first leg of South Korean president Moon Jae-in’s (pictured) staggered plan to raise the minimum wage to 10,000 won by 2020, both Korean retailers and consumers are focusing on value.

Retail prices have increased before and after the 16 per cent increase in the minimum wage to 7530 won ($US6.97) this year.

The food and dining industries have been hit hard by the minimum wage rise, with snacks and meals sold at convenience stores and franchise restaurants increasing in price by 100 won to 1000 won.

Last December, the cost of eating out rose by a margin of 2.7 per cent, the largest increase in 19 months. In both January and February that margin rose by 2.8 per cent, a two-year high topped only by a 2.9 per cent rise in early 2016.

As expected, the higher prices and the government’s promise of yearly minimum wage increases have stirred up much debate among consumers. One Twitter user lamented the current economic climate while expressing apprehension over the coming future, saying, “This is only the beginning. Next year and the year after wages will rise. Prices will rise accordingly, and subsequently business will suffer, then employees will be let go while employers close shop.”

When asked about the price increases, a 37-year old office worker answered: “Nowadays, it’s harder to find a category of product that hasn’t been marked up. At a beer place, since it now costs over 40,000 won for two people to have just four beers and a side dish, it’s tough to even go out for a drink anymore.”

In this environment where frugality seems to be the new fiscal norm, consumers are going after products of guaranteed quality at reasonable prices and are finding them in the rows of private-brand goods offered by big-box retailers.

E-Mart’s “No Brand” Products (Image: Yonhap)

E-Mart’s “No Brand” Products (Image: Yonhap)

Lotte Mart disclosed that its private brand sales have increased by 12.5 per cent year on year. Broken down by category, sales of its private-brand packaged meals – products that are essentially dining out options for the home – surged by 21.7 per cent.

According to industry insiders, both large-scale retailers and convenience-store chains have raised the prices of certain household goods and manufactured products, but private-brand items are mostly being deliberately maintained at the same prices or sold cheap through sales promotions and deals.

Compared to the past when shoppers prioritised “price range”, retailers are recognising that today’s consumers are increasingly considering “best value for price” when going out to spend. And with retailers taking pains to elevate private brands’ product quality in recent years, coupled with controlled pricing methods, these in-house product lines are giving consumers the most bang for their buck.

Successful brew

Selling products that are good to possibly very good at what the locals call “kind prices” has been a formula that convenience stores, to the detriment of second tier coffee houses such as A Twosome Place and Ediya Coffee, have been perfecting in recent years with ever-greater success.

Convenience store chain CU said sales of its 1200 won Cafe Get Americanos had from February through March been the second-most sold product. In the same period last year, coffee was tenth on the list of most-sold product types.

Convenience store chain CU said sales of its 1,200 won “Cafe GET” americanos had from February through March been the second most sold product. (Image: BGF Retail)

Convenience store chain CU said sales of its 1,200 won “Cafe GET” americanos had from February through March been the second most sold product. (Image: BGF Retail)

An office worker who claimed he drinks coffee from a convenience store two to three times a day said: “Coffee sold at convenience stores is much better than to two to three years ago. When thinking about value for price, it doesn’t fall behind coffeehouses like Starbucks.”

Meanwhile, other retailers are moving in the other direction by going all-in on high-priced premium goods to take advantage of a “Veblen Effect”, which describes an increase in spending among the higher-income class even though prices rise, rather than decline.

Targeting consumers who can afford to spend and are willing to shell out for high-quality products, supermarket chain Lotte Super will open Lotte Premium Food Market stores that boast exclusivity and top-notch quality. Reportedly, 5 per cent of the 8000 types of products sold under its banner will not be sold anywhere else.

 

Reportedly, 5 percent of the 8,000 types of products sold under its banner will not be sold anywhere else. (Image: Lotte Super)

Reportedly, 5 percent of the 8,000 types of products sold under its banner will not be sold anywhere else. (Image: Lotte Super)

Explaining that trust in the quality of the products sold at these premium stores was the reason behind the large number of devoted shoppers, an industry insider explained that the number of consumers who place value in high quality products despite the concomitant high prices is continuing to grow.

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