The Korean Distribution System:

An Overview with Implications

for Korean Market Entry
Hokey Min

ABSTRACT. As South Korea (hereafter, Korea) emerges as one of the

largest markets for U.S.- and European-made goods, a growing number
of U.S. and European firms have expressed keen interest in penetrating
the lucrative Korean market. Despite the enthusiasm of U.S. and Euro-
pean firms, they are faced with an array of invisible market barriers that
makes it difficult for them to sell their products in Korea. The Korean
distribution system is often symbolic of such barriers. In general, the Ko-
rean distribution system is characterized as closed and multifarious with
the co-existence of manufacturer-controlled distributors and an exces-
sively large number of small-scale “mom-and-pop” retail stores. Due to
its unique structure, the Korean distribution system has been generally
misunderstood by many Westerners and subsequently this misunder-
standing has created an unnecessary strain on trade relations with Korea.
In this paper, we provide an overview of the Korean distribution system
and then formulate proactive distribution/marketing strategies for the
successful penetration of the Korean market. [Article copies available for a
fee from The Haworth Document Delivery Service: 1-800-HAWORTH. E-mail ad-
dress: <docdelivery@haworthpress.com> Website: <http://www.HaworthPress.com>
© 2004 by The Haworth Press, Inc. All rights reserved.]

Hokey Min is Distinguished University Scholar and Director, UPS Center for
World Wide Supply Chain Management, Suite LL 23, Burhans Hall-Shelby, Univer-
sity of Louisville, Louisville, KY 40292 (E-mail: homin001@gwise.louisville.edu).
The author would like to express sincere gratitude to the UPS Foundation for partly
funding this research.
Journal of Marketing Channels, Vol. 12(2) 2004
Available online at http://www.haworthpress.com/web/JMC
© 2004 by The Haworth Press, Inc. All rights reserved.
doi:10.1300/J049v12n02_02 5
6 JOURNAL OF MARKETING CHANNELS

KEYWORDS. Korean distribution channel, market entry, trade barriers

INTRODUCTION

As of 2003, South Korea (hereafter, Korea) imported $24.8 billion

worth of U.S. products (Korea International Trade Association, 2004).
In the peak year of 1995, Korea purchased $30.4 billion worth of U.S.
products (National Statistics Office Republic of Korea, 1996). In fact,
Korea is one of the leading foreign markets (the fifth largest importing
country in the world) for U.S. products (WTO International Trade Sta-
tistics, 2003). During the period of 2001 and 2003, U.S. has been the
second largest sources of Korean imports, being trailed only by Japan.
Korea also has relatively strong purchasing power with per capita
growth domestic product (GDP) of $17,000 (National Accounts of
OECD countries, 2003). Bankers Trust Company’s fund managers have
ranked the Korean market one of the fastest growing markets in Asia in
terms of growth, politics, liquidity, and other factors. For example, eco-
nomic growth in Korea still remains strong with an annual GDP growth
rate of 6.2% in 2002 (CIA-World Fact Book, 2004). The rating of the
Korean market was 48% higher than that of the U.S. market (Glasgall et
al., 1995). Despite the recent slowdown of the Korean economy, Korea
is still the hot market and will remain so for some time to come. None-
theless, a prevailing thought among Westerners is that the Korean mar-
ket (so-called “Hermit Kingdom”) is closed to U.S. products, whereas
the U.S. market is open to their products.
This misconception led the U.S. government to develop tough mea-
sures against numerous Korean trade practices, business customs, and
government policies through the threat of trade sanctions against Ko-
rean products. For example, believing that Korea continues to maintain
an array of discriminatory trade barriers against U.S.-made automobiles
and wines, U.S. trade representatives delivered an ultimatum that would
lead to Super 301 trade sanctions against Korean goods and a formal
complaint on unfair trade practices with the new World Trade Organi-
zation (WTO) (Carbaugh, 2002). Such measures, however, can backfire
because they not only result in higher prices and fewer choices for
American consumers, but they also increase anti-U.S. sentiment among
Korean consumers. Jwa (1995) contends that the greater the pressure
the U.S. government puts on the Korean government to open the Ko-
rean market, the greater the resistance will be by the Korean govern-
ment to keep the market closed. Furthermore, the U.S. government
 Hokey Min 7

worries that their efforts to open up the Korean auto market will only
benefit their competitors such as German and Japanese automakers who
are better adapted to Korean business practices (Lee, 1995). Thus, a
more effective way of enhancing the ability of U.S. firms to penetrate
the Korean market is to study local business customs and practices that
Koreans have adopted over the centuries.
As with the Japanese market, one of the major stumbling blocks for
Western businesses trying to enter the Korean market is its structure
(Manifold, 1993; Min, 1996). The indigenous form of the Korean distri-
bution system often disfavors foreign firms because of government regu-
lations and the channel member’s “locked-up” relationship with Korean
firms. Despite its significance to Korean market access, the Korean dis-
tribution system is often overlooked or misunderstood by Westerners.
This lack of understanding is due to the complex and idiosyncratic na-
ture of Korean distribution practices that have evolved from the archaic,
self-contained business culture. To help U.S. businesses adapt to the lu-
crative Korean market and ease unnecessary trade conflicts with Korea,
we herein unveil the facts and fallacies of Korean distribution channels
and explore strategic weapons that may prove essential to the successful
penetration of the Korean market.

AN OVERVIEW OF KOREAN DISTRIBUTION

CHANNEL STRUCTURES

In contrast to the typical U.S. distribution channel which is open, in-

dependent, and margin-driven, the Korean distribution channel is often
characterized as an archaic, complicated network of relation-driven re-
tailers of various size who are often controlled by manufacturers, trad-
ing companies, and government. The Korean distribution channel differ
from its Japanese counterpart in that the former has the relatively short
but industry-specific distribution channel controlled by manufacturers,
whereas the latter has as many as four layers of wholesalers who play
dominant roles in their distribution channel (Lim, 1992; Min, 1996).
Such a characteristic of the Korean distribution channel is deeply rooted
in Korean culture and socio-economic tradition which underlies Korean
business customs. In the following subsections, we will highlight the
unique aspects of the Korean distribution channel and explain from
where these unique structures evolved.
8 JOURNAL OF MARKETING CHANNELS

Manufacturer Controlled Distribution Channel

For decades, the manufacturing sector has driven the growth of the
Korean economy. In 1992, this sector accounted for 26.8% of GDP
(Hinkelman, 1994). From 1963 to 1975, manufacturing employment in
Korea grew 10.7% per year (Carbaugh, 2002). Reflecting their heavy
influence, manufacturers have long controlled the Korean distribution
channel through exclusive sales networks, vertical integration of supply
chain, and reciprocity dealings. For products like automobiles there is
no distribution or sales outlet other than auto dealerships entirely estab-
lished by manufacturers. Likewise, half of the sales outlets for clothing
do not offer consumers products by more than one maker. Exclusive
sales outlets, such as franchises, distribute 40% of the nation’s elec-
tronic products (Lim, 1992). As of 1991, Sohn (1991) reported that
there were 3,950 exclusive sales outlets for the three major Korean elec-
tronics manufacturers: Samsung Electronics, Goldstar Co., and Daewoo
Electronics. In the furniture industry, 69.2% of the wholesale channel
was controlled by furniture manufacturers (Lim, 1992). This pattern of
manufacturer-controlled distribution creates few distribution opportu-
nities for outsiders. Thus, most of the undercapitalized retailers operat-
ing in Korea are heavily dependent on the Korean manufacturers in
distributing their products to Korean consumers. It is common that
through so-called “chaebol” franchising connections, all the distribu-
tion channel members, including manufacturers and retailers, are finan-
cially tied by reciprocal trade obligations. Consequently, those connections
control product distribution/sales from “factory doors to retail outlets.”
The dominance of manufacturers in the Korean distribution channel
is a byproduct of the longstanding government policy that bolsters the
manufacturing-oriented mass production system while weakening the
service-oriented wholesale industry. For example, to prioritize the fi-
nancing of manufacturers, the Korean government obligates local banks
to direct 55% of their loans to manufacturers (Euromoney, 1992). Such
a disparity can backfire because manufacturers often abuse their exclu-
sive retailers by making payments with promissory notes upon delivery
of product and by forcing retailers to take unpopular products (Business
Korea, 1991).
Due to lack of access to local distribution/sales operations, distribution
activities controlled by Korean manufacturers have become one of the
major invisible barriers for foreign firms entering the Korean market.
Nevertheless, with a slow pace of structural changes in Korean distribu-
tion, an establishment of the “non-captive,” “unofficial” distribution
 Hokey Min 9

channel can be a viable option for many foreign firms which would like to
enter the Korean market.

Multifarious Distribution Channels

As shown in Figure 1, there are at least six different types of interme-

diaries in the Korean distribution channel: trading companies, wholesal-
ers, brokers, distribution vendors, franchisers, and discounters. Trading
companies are often owned by large Korean conglomerates called
“chaebols” which integrate the entire supply chain horizontally and ver-
tically. The basic functions of trading companies include trade promo-
tion, foreign brand licensing, government lobbying, market integration,
customs clearance, information exchange, and technology transfer.
Depending on industry need or the chaebol connection, additional
distribution layers may be involved in matching trading companies to
retailers or industry buyers with a variety of products. These layers are
either “distribution vendors” or franchising stores. Distribution vendors
are large wholesale intermediaries which distribute a wide spectrum of
products from various importers (e.g., trading companies) and manu-
facturers to retailers of different types such as convenience stores, su-
permarkets, and department stores. According to the 2000 yearbook of
Korean distribution industry (Korean Super Chain Store Association,
2000), there will be an increasing usage of distribution vendors in the
future for two reasons. First, most of these distribution vendors are ca-
pable of delivering a wide assortment of goods in small quantities

FIGURE 1. A Generic Framework of the Korean Distribution Channel

Manufacturer

Wholesaler Trading Company

(“Chaebol”)

Chain or Franchising Discounter or Cash-

Distribution Vender Store and-Carry Wholesaler

Broker

Retailer or Industry Buyer

10 JOURNAL OF MARKETING CHANNELS

just-in-time to “mom-and-pop” stores thanks to their point-of-sale (POS)

systems. Second, in an effort to improve distribution efficiency, the Ko-
rean government has begun to support these vendors with tax breaks
and preferential loans. On the other hand, franchise or chain stores often
purchase one brand of merchandise exclusively from either a trading
company or manufacturer and then sell the merchandise to retailers or
consumers on their own.
In a more traditional route of distribution, the wholesaler consoli-
dates a variety of goods from manufacturers and diffuses the merchan-
dise to either brokers or retailers. In certain industries such as the
pharmaceutical, the wholesaler can contract out to brokers to get phar-
maceutical products to pharmacies and hospitals. Another traditional
and unique form of Korean distribution is periodic trading (so-called
“jang”) which still takes place in many rural areas and the suburban
neighborhood of huge apartment complexes. In periodic (e.g., weekly)
trading, a group of street vendors sell fresh agricultural produce and
seafood. These vendors often bypass the wholesale channel.
The non-traditional, alternative form of distribution which is gaining
increasing popularity in Korea is the direct sales via discounters and
membership-only cash and carry style wholesalers. In 1996, discount-
ers accounted for 10.7% of retail market shares, but their annual market
growth rate reached the 150% level in 1997 (Kim, 1996). The popular-
ity of discounters is due in part to ongoing recession in Korea which
makes Korean consumers more price conscious than ever before.
Given the multifarious channels of distribution described above, the
role of traditional wholesalers has gradually diminished over the years.
Consequently, manufacturers have dictated the Korean distribution
channel through exclusive dealings and have had control over retail
price settings for the Korean consumer. Many Korean distribution ex-
perts (Kim, 1990; Im, 1992; Management and Marketing, 1992) believe
that the multifarious distribution channel in Korea is the main cause of
distribution inefficiency and inordinately high retail prices.

Unusually Large Number of Small Retail Stores

As of 1994, there were 171 retail stores for every 10,000 Korean peo-
ple and a total of 758,953 retail stores in Korea (National Statistical Of-
fice Republic of Korea, 1996). Considering that the U.S. has 66 retail
establishments and Japan has 132 retail stores per 10,000 residents, Ko-
rea has unusually large numbers of retail stores (Sohn, 1991; Min, 1996).
In particular, small retail stores of less than two employees account for
 Hokey Min 11

89.7% of total retail establishments as compared with 54% for the Japan
(Kim, 1992). These small retail (mom-and-pop) stores having fewer
than five employees accounted for 80% of Korea’s $116 billion retail
market in 1996 (Kim and Kim, 2000). A majority of these retail stores
have size smaller than 165 square meters (1,776 square feet). Similar to
the Japanese retail industry, these statistics clearly suggest that the Ko-
rean retail industry is highly fragmented and dominated by small retail-
ers which are often undercapitalized, but conveniently located in the
back of residential neighborhoods. Such a fragmentation may have con-
tributed to distribution inefficiency and low labor productivity in the
distribution sector. Kim and Kim (2000) reported that the labor produc-
tivity in the Korean distribution sector was less than one-fifth of the
U.S. counterpart. The Korean retail industry has so many small retail
stores for the following reasons:
An Alternative Form of Social Welfare. As of 1994, 1,548,297 Kore-
ans were employed on a full time basis by the retail sector (National Sta-
tistical Office Republic of Korea, 1996). Thus, a labor-force-participation
ratio for the small retail stores is relatively high in Korea. Especially,
many retail stores were established and operated by early retirees and
women who have been isolated traditionally from the mainstream job
sector. For instance, in the typical Korean retail sector, female workforce
outnumbers male workforce by a ratio of 1.42 (National Statistical Office
Republic of Korea, 1996). Regardless of economic inefficiency, many
small retailers have provided secure jobs and a source of income for a
large segment of Korean society who, otherwise, would have been ne-
glected by the government and large conglomerates. In other words, in
the absence of an advanced social welfare system like the one employed
by the U.S., small retail stores provide an alternative employment oppor-
tunity for many Koreans.
Korean Shopping Behavior. Due to notorious traffic congestion and
preference for fresh groceries such as “kimchi,” “namul” and vegeta-
bles, Korean consumers tend to shop in the immediate vicinity of their
homes. Like the Japanese, they have a penchant for high levels of ser-
vice. Services that they normally expect to receive from retailers in-
clude free-of-charge delivery, installments, purchase on credit, cash on
delivery, off-hour handling, and aid in product selection. Since mom-
and-pop stores usually provide such services–going beyond the act of
simply offering goods for sale–the abundance of small-scale mom-
and-pop stores is an inevitable phenomenon in Korea.
Among various forms of retailers shown in Figure 2 (a) and Fig-
ure 2 (b), grocery stores and food markets comprise 37.5% of retailers
12 JOURNAL OF MARKETING CHANNELS

FIGURE 2 (a). Various Forms of Korean Corporate Retailing

KOREAN CORPORATE RETAILING

Department General Non-Store Franchising Super Speciality

Merchandising Merchandising Chain Stores Markets
Stores Stores Shopping

Internet Catalogue Home TV Home

Visitation
Shopping Ordering Shopping Sales

FIGURE 2 (b). Various Forms of Korean Independent Retailing

KOREAN INDEPENDENT RETAILING

“Mom-and- Street Government Periodic Permanent

Pop” (so called Retailers Sponsored Trading Trading
“Hole”) Stores Agriculture and Markets Markets
Fishery
Cooperative (“Jang”) (“Shijang”)
Associations

(Chain Store Editorial Office, 1996). This suggests that Korean con-
sumers tend to prefer grocery shopping in local retail stores. According
to the 1993 survey of the Korean consumer protection institute (Chain
Store Editorial Office, 1996), the important reasons that Koreans
choose their local grocery or food markets are proximity, price, and pa-
tronage. As such, many small retailers are territorial and have focused
on “niche” marketing by carrying locally produced specialty items
which are too uneconomic for large retail stores to include as part of
their product lines.
Government Restrictions on Land Speculation. As of 1996, the popu-
lation density in Korea was 455 residents per square kilometer (0.386
square mile) (National Statistical Office Republic of Korea). Due to
high population density, real estate prices in Korea are some of the high-
est in Asia. Relative to GNP, real estate price in Korea is twice as high
as that of Japan (Kang, 1997). To prevent any possibility of land specu-
lation, the Korean government has imposed restrictions on the number
and size of retail establishments. For example, the government has reg-
ulated the amount of floor space an independent retail store can have
when opening or expanding. Floor space is not to exceed 3,000 square
 Hokey Min 13

meters (32,400 square feet) (Lee, 1994). Also, the government has im-
posed additional restrictions on the ownership of land by foreign com-
panies. If land is purchased and not utilized within two years, or is used
for a purpose other than specified, the government requires land to re-
vert back to the government (Cheesman, 1993). Furthermore, the gov-
ernment limits the number of foreign retail outlets to below 10, with a
single outlet being no larger than 990 square meters (10,656 square feet)
(Sohn, 1991). The aforementioned regulations have helped sustain a
large number of small-scale retail stores in Korea. As a result, the estab-
lishment of large-scale retail stores such as department stores, was lim-
ited until 1996 when sanctions were lifted. As of 1996, only a total of 93
department stores existed in Korea (Chain Store Editorial Office, 1996).
The Korean government, however, has relaxed the law regulating the
growth of large-scale retail stores and chain stores by eliminating re-
quirements regarding the number of stores and space that can be allot-
ted. As such, store limits for foreign retailers are fully relaxed and
zoning restrictions are deregulated (Korean Chamber of Commerce and
Industry, 2004). In 1998, the Korean government abolished economic
needs tests on department stores and shopping centers and opened the
door for large-scale retail outlets such as Wal-Mart, Costco, Promodes,
and Tesco owned by foreign firms. The continual relaxation of land
property regulation would present an opportunity for foreign firms to
increase their leverage in the Korean retail sector, as evidenced by the
growing presence of Seven Eleven among convenience stores, and Levi
Strauss and Gap in the Korean apparel market.

Exclusive Distribution Network Through Chaebol Connection

Despite the gradual opening of the Korean market, a number of for-

eign firms have reported a difficulty in cracking the Korean market.
One invisible but significant market barrier may be a close-knit local
distribution network controlled by chaebol. In general, chaebol is re-
ferred to as a large family owned conglomerate of affiliates that are con-
nected through: common business interests, interlocking boards of
directors, cross-company share holdings, and debt payment guarantees.
As summarized in Table 1, chaebol was rooted in the keiretsu type of
inter-company integration and management philosophy. However, it
differs from keiretsu in three different ways. First, chaebols do not nec-
essarily own a main bank, whereas kereitsu firms are centered around a
main bank that plays a key role in financing its keiretsu member firms
(Berglof and Perotti, 1994; Ferris et al., 2003). Second, chaebol firms
14 JOURNAL OF MARKETING CHANNELS

TABLE 1. Comparison of Corporate Culture Among the Typical Chaebol, Keiretsu,

and Western (US or European) Firm

Chaebol Kereitsu Western Firm

Strategic direction Expansion (both Diversification and heavy Focus on core
horizontal and vertical) emphasis on competency
increased market share
Driving force Low wage and strong Elite workforce, team- Innovation (R&D)
government support work, and continuous
capital investment
Management control Chaebol family with Cross-shareholding, Professional managers
cross-shareholding and cross-movement of and stockholders
cross-company loan personnel, a voluntary
guarantees association of
companies with a major
bank at the core
Capital structure Heavy reliance on debts Lower credit rating Lower debt equity ratio
(bank loans and (heavy reliance on bank
government subsidies) debts) and higher use of
short-term financing
Decision authority Nepotism and seniority Bottom-round Competence and ranking
(top-down decision management
making)
Business relation base Human connection Inter-corporate network Economic well-being
Sourcing In-house oriented In-house commercial Outsourcing oriented
transactions and
cross-sourcing between
business partners

seldom rotate their managers among their internal group companies,

whereas kereitsu firms often re-assign their managers to other kereitsu
member firms (Shin and Park, 1999; Ferris et al., 2003). Third, due to
emphasis on centralized control, the executives of chaebol firms seldom
delegate their subordinates to make managerial decisions, while the
keiretsu firms often solicit input from lower-level managers and make
managerial decisions as a group.
During the rapid industrial development periods of the 60s through
the 80s, the government nurtured most of the Korean chaebols by offer-
ing them low-interest government loans and preferential tax breaks.
Thanks to the government support and protected home market, these
chaebols built huge industrial giants such as Hyundai, Samsung,
Daewoo, and Lucky-Goldstar which are among the world’s largest cor-
porations. For example, the Hyundai group boasted world-wide reve-
nue of $66 billion, and the Daewoo group generated a total revenue of
$57 billion in 1995 (Elderidge, 1996). The top 10 leading chaebols ac-
counted for 77% of the Korean gross national product (GNP) at the start
of the last decade (Lucas, 1995). In 2002, the top 20 chaebols still ac-
 Hokey Min 15

counted for 38.6% of the total sales of Korea’s non-financial companies

(Moon, 2003). As of 2002, Samsung Electronics alone accounted for
23% of Korea’s total exports (Choi, 2003). Likewise, Hyundai Motors
accounted for almost 58% of cars exported by Korea (Kim and Lee,
2001). In 1994, the Korean Fair Trade Commission reported that the top
30 chaebols have a total of 626 subsidiaries; that is, an average chaebol
is engaged in 21 different businesses (Business Korea, 1994a). How-
ever, chaebols’ investment portfolios heavily relied on their increased
equity bases (i.e., debts), making their debt-to-equity ratio dangerously
high. As a matter of fact, their average debt-to-equity ratio was bal-
looned to 352% at the end of 1998 (Moon, 2000b). By 1999, cross-hold-
ing within the top 30 chaebols reached $32 billion (Moon, 2000b). In
2000, cross-subsidiary transactions accounted for more than 30% of to-
tal sales at top 20 leading chaebols. For example, 41.7% of total sales of
Samsung came from its own intra-chaebol subsidiary transactions (Lee,
2000). Despite the recent government’s effort to dismantle chaebols as
a payoff for receiving a $57 billion bailout by the International
Monetary Fund (IMF), their dominance in the distribution industry is
without exception.
Many of the top 30 chaebols have already established their affiliates
in the distribution industry and their involvement in the distribution in-
dustry is expected to grow. These chaebols include Hyundai, Lucky-
Goldstar, Sunkyung, Lotte, and Newcore. Since the chaebol resembles a
cartel, in that they both tend to restrict business interactions with non-
chaebol companies, it has been sharply criticized by many Korean po-
litical leaders and the general public. Unlike the U.S. government, the
Korean government still loosely enforces its anti-trust and fair trade
laws, and consequently a number of chaebol affiliates have successfully
built closed-loop supply/distribution systems through vertical integra-
tion along a supply chain. In addition, a chaebol’s horizontal expansion
helps to bail out any financial troubles for its member firms. For in-
stance, SK Corp (Korea’s largest oil refiner) under the Sunkyung Group
recently bailed out $168 million debt of its affiliate, SK Shipping. Simi-
larly, Hyundai Securities Inc. transferred its $414 million to its chaebol
affiliates to continue to keep them afloat. The shift of wealth from prof-
itable chaebol companies to weaker ones in need of cash is common
among top conglomerates in Korea. To take advantage of risk sharing
opportunities among horizontally-expanded chaebol’s, other chaebol
firms such as Samsung Electronics and LG Telecom have begun to
make sizable investment in new high-tech venture firms (e.g., Internet
firm called SDS and telephone service provider called Dacom).
16 JOURNAL OF MARKETING CHANNELS

While chaebol affiliates have interlocking interests in their upstream

suppliers and trading companies, they develop a web of exclusive busi-
ness relationships with their downstream distributors and retail outlets.
As such, chaebol affiliated manufacturers or trading companies can as-
sure their downstream distributors and retailers a constant supply of the
needed merchandise. This merchandise often includes more reliable
brand name products that many brand-conscious Korean consumers
tend to favor over the unknown, unproven quality of obscure brand
name products. In 1994, for instance, 75% of the top 122 brand items
were produced by chaebol-affiliated manufacturers (Montagu-Pollock,
1995). In addition to the long-term stability and security, chaebol affili-
ates often supply advanced retail support involving computerized on-
line data processing systems that provide retailers point-of-sale (POS)
information about consumer behavior, per capita sales, and customer
credit. That is to say, chaebol connections bring enormous benefits.

KOREAN MARKET PENETRATION STRATEGIES

In 2002, Korea had a GDP of $810.6 billion, making it the 11th larg-
est economy in the world (Korean Trade and Investment and Promotion
Agency, 2003). Due to Korea’s economic power and booming demand
for various U.S.-made products, Korea remains as one of the top five
importers of U.S.-made products in 2003 (Korea International Trade
Association, 2004). The attractiveness of the Korean market as an im-
porter has dramatically improved with the gradual elimination of “ad-
justment tariffs” that used to protect domestic production (Kirby, 2002).
In contrast with what many Americans allegedly believe, this fact indi-
cates that the Korean market is not closed to U.S. products. In 2000, Ko-
rea attracted $15 billion direct foreign investment, while drawing $60
billion indirect foreign investment through securities markets (Lee,
2000). The business sectors that are still restricted against foreign firms
include air transport, telecommunications, wholesale meats, and cable
broadcasting (Korean Ministry of Commerce, 2000). Although govern-
ment interference is still not uncommon within the Korean economy,
the Korean government has made a conscious effort to meet the de-
mands of its trading partners such as the U.S. and the European Union
(EU), in the wake of its participation in the Organization for Economic
Cooperation and Development (OECD). Under World Trade Organiza-
tion (WTO) “zero- to-zero” initiatives, for example, the Korean govern-
ment is in the process of reducing tariffs to zero on most or all products
 Hokey Min 17

in the industry sectors such as paper, toys, steel, furniture, semiconduc-

tors and farm equipment. Also, import duties are not going to be as-
sessed on capital goods and raw materials imported in connection with
foreign investment projects (U.S. Department of State, 2001). As such,
there is an increasing sign of hope for foreign firms who want to pene-
trate the Korean market. For example, Levi Strauss operates over 100
shops within Korea and its jeans have become the best seller in the Ko-
rean fashion market for the two consecutive years of 1994 and 1995
(Yoon, 1996). Seizing similar opportunities, other U.S. firms such as
Amway, Herbal Life, TGI Friday, Ponderosa, Sizzler, Denny’s, and Mc-
Donald’s have already entered the Korean market and achieved instant
success.
Following suit, an increasing number of U.S. retail firms including
Toys “R” Us, Wal-Mart, Sears, and Office One entered the Korean re-
tail market in 1997. The recent marketing success in Korea is not lim-
ited to U.S. firms. A good number of European and Japanese firms have
begun to attain a strong foothold in Korea by way of their brand recog-
nition and post-sale services, which are tailored for Korean consumers.
These firms include German automakers, Mercedes and BMW, the Ger-
man pharmaceutical company, Hoechst, the French cosmetic company,
Chanel, the Italian sportswear producer, Fila, the Dutch electronic
maker, Philips, and the Japanese restaurant franchise, Coco’s.
However, some foreign firms have failed miserably in the Korean
market despite the Korean consumer’s inclination for famous foreign
brands. A good example may be the upscale U.S. restaurant franchise,
Planet Hollywood. Only six months after its grand opening in Seoul,
Planet Hollywood retreated from the Korean market due to lagging
sales. The direct import of an American dining concept may have con-
tributed to its downfall. To achieve a greater amount of success in the
Korean market, foreign firms should adopt a number of proactive mar-
keting and distribution strategies as described below.

Strategic Alliances with Chaebol Affiliates

The Korean economy has been one of the most concentrated in the
world as evidenced by the Korean government’s report indicating that
21% of the country’s markets were monolithic and 56% oligopolistic
(Rohwer, 1995). In other words, the Korean economy is dominated by
chaebols. With favors bestowed by the government, chaebols often ex-
ercise monopolistic or oligopolistic power in the Korean market. Espe-
cially in mature industries, such as automobiles and electronics, most
18 JOURNAL OF MARKETING CHANNELS

chaebols have extensive interrelationships with suppliers, distributors,

and retailers. A good example is Hyundai Motors which has great ac-
cess to various complementary resources through its tight-knit network.
Under the wing of the Hyundai Business Group, its affiliates have en-
gaged in diverse business activities including basic metals, auto parts,
machinery, electronics, steel, transportation, vehicle service, financial
services and retailing which encompass the entire supply chain. Consid-
ering the chaebol’s market power and influence, it is not sensible for
new market entrants, such as foreign firms, to compete head-to-head
against them. In addition to instant linkages to the Korean supply chain,
chaebols may help their foreign partners improve brand images and ac-
cess to a local banking system for easy financing. In 1995, the top 30
chaebols accounted for 21.5% of bank loans in Korea (Chang, 1997).
Indeed, Ellis and Fausten (2002) recently observed that chaebols would
be less likely to face borrowing constraints and more likely to undertake
foreign direct investment than non-chaebol firms.
Mindful of the need to collaborate with chaebols, a growing number
of foreign firms have begun to form alliances with chaebol affiliates
through licensing or joint venture agreements. For instance, Yves Saint
Laurent, London Fog, and Slazenger have licensing agreements with
the Samsung chaebol affiliate called “Essess Fashion” to market their
garments in the Korean market. Further, Donna Karen New York is
about to sign a joint venture agreement with the Samsung affiliate. The
foreign firm’s partnership with chaebols is not limited to the fashion in-
dustry. Canon is tied up with Lotte to sell and distribute copiers in Ko-
rea. Also, Nissan made a $4.5 billion joint venture agreement with
Samsung to develop cars (Montagy-Pollock, 1995). Ford made joint
manufacturing, marketing, and distribution arrangements with Kia Mo-
tors which were recently merged with Hyundai Motors. Similar part-
nerships have been formed between Mercedes and Ssangyong Motors.
In general, it has been reported that business alliances are on the rise
among Korean and foreign firms doing business in Korea in order to
gain synergistic competitive advantages (Business Korea, 1996).
Regardless of the potential benefit, forming a business partnership
with chaebols does not always result in a happy-ending. For example,
the joint venture partnership between General Motors (GM) and
Daewoo Motors fell apart in 1991 after they entered into an alliance in
the late 1980s (Nakarmi, 1996). Similarly, an alliance between Arco
and Sunkyong failed. Hoechst withdrew from its joint venture agree-
ment with Lucky-Goldstar due to declining profits (Chaponniere and
Lautier, 1995). These partnering failures may have been caused by dif-
 Hokey Min 19

ferences in corporate culture and lack of shared strategic directions (see

Table 1). For instance, a lack of emphasis placed by chaebols on re-
search and development (R&D) can increase the burden of technology
sharing for foreign partners and consequently create a disharmonious
atmosphere. As a matter of fact, R&D investment averages 3% of cor-
porate expenditures at most Korean firms versus 7% at their U.S. coun-
terparts (Corporate Finance, 1995). Chaponniere and Lautier (1995)
also noted that Korean firms tend to view the joint venture as a tool to
upgrade their technological skills.
Branding
At its core, a global brand is a promise of performance–one that is
consistently delivered at a reasonable value and meets specific needs of
foreign customers (Smith, 2000). According to the survey conducted by
the Bank of Korea (Kang, 1997), nearly half (44%) of the surveyed im-
porters listed the superior quality of foreign brand products as one of the
most important reasons for importing. This survey result is somewhat
consistent with the finding of the Asia Forum 2005 that 59.3% of the
Korean consumers are willing to buy foreign brand products if their
quality is superior to that of Korean products (Chang, 1996a). Because
of a penchant for high quality, most Korean consumers are eager to buy
famous brands which may act as status symbols. Thus success in the
Korean market often rests on the firm’s ability to establish its positive
brand image. However, the establishment of a good brand image in Ko-
rea is an onerous task. The reason is that most brand name consumer
products (especially apparel) are distributed exclusively by department
stores (Chang and Lee, 1996).
In Korea, the department store charges the manufacturer 33% of the
profit margin of the product for its distribution and sales promotional ef-
forts. As such, the import channel via the trading company and the de-
partment store can add as much as 65% to 75% of the price of an import
and add up to a maximum of 500% to the landed price of an import (e.g.,
cosmetics and apparel) (Chang and Lee, 1996). For example, the regu-
lar price tag of a Lancome brand cosmetic at the department store is 4.7
times higher than its original import price. In other words, a positive
brand image can hardly be established without the loss of price competi-
tiveness. This implies that price sensitive products should not be distrib-
uted to Korean consumers through a department store.
20 JOURNAL OF MARKETING CHANNELS

Adaptation to Korean Laws and Regulations

Despite the recent move toward the liberalism and the open market
principle, the Korean government still maintains some forms of ambigu-
ous trade laws and regulations. For instance, the Korean government lim-
its automobile importers to access to off-shore borrowing and restricts
foreign automakers to access media for automobile advertisement (Kim,
1995). The Korean government imposes an engine displacement tax
based on engine size and consequently makes the after-tax price of
large-sized (over 2 liter engine) cars disproportionately high. According
to the Hyundai Motors Research Institute (Kim, 1996), the total amount
of vehicular tax can surpass the before-tax price of a large-sized car in
less than five years. With a high vehicle tax and soaring gasoline cost,
only a few Koreans can afford to buy U.S. made “gas-guzzlers.” There-
fore, it is not surprising to find that foreign imports comprised a mere
0.2% of the Korean auto market in 1994 (Kim, 1995).
Another controversial regulation can be found in the life insurance
industry. For example, the Korean government has regulated a new-
comer’s life insurance company to increase its capital amount. If the
newcomer fails to conform to such a financial regulation, it would face
business suspension or a forced takeover (Elderidge, 1996). As such, a
foreign start-up life insurance company faces serious difficulty in enter-
ing the Korean life insurance market. In the agricultural industry, the
Korean government requires that all meat products be labeled with their
country of origin. Since many Koreans are often prejudiced against
meat products of foreign origin, a country of origin regulation can offset
the price competitiveness of foreign meat products (Lee, 1996). In the
distribution industry, the Korean Fair Trade Commission (KFTC) pre-
vents foreign firms from using superior bargaining strength against the
local distributor by reviewing contract terms with the local distributor
and requiring changes in those terms if such actions deem necessary.
Furthermore, KFTC prohibits a noncompetitive clause for nonexclusive
distributors, even during the term of the agreement and thus prevents
foreign firms from requiring those local distributors to not market
competing products (Technology Law Bulletin, 1993).
As illustrated above, most of the Korean government regulations are
aimed at not only obviating excessive competition in the leading indus-
try sectors, but also preserving Korea’s public infrastructure. Consider-
ing this, the foreign firm may concentrate efforts on the less regulated or
untapped market segments such as educational services.
 Hokey Min 21

Establishment of Independent Retail Networks

Though excluded from carrying many top-of-the-line brands, large-

scale discounters have recently emerged as the major retailing force in
the outskirts of Seoul such as Boondang and Ilsan satellite cities (Kim,
1997). These include a French hypermarket called “Carrefour” and a
Dutch cash and carry style mass merchant called “Makro.” They defy
norms by bypassing the traditional wholesale channel, and selling a
wide assortment of both foreign imports and domestic products at sub-
stantially lower prices for extended shopping hours (e.g., open 24 hours
a day). Since they are not affiliated with the chaebol network, many for-
eign firms that are excluded from the chaebol connection may channel
through these discounters. Although, like the Japanese, Korean con-
sumers are less sensitive to price advantages than are their American
counterparts, discounters have gained enormous popularity from Ko-
rean consumers who have become more price conscious due to the
ongoing recession and chronic inflation in Korea.
Another way of reaching Korean consumers without the chaebol
connection is the use of independent retail establishments such as
Yongsan Electronics Market, Namdaemoon Samik Fashion Town, and
Dongdaemoon Art Plaza. For example, foreign computer producers
such as IBM, Compaq, Digital, and Dell have successfully distributed
their PCs to Korean consumers and doubled their local market share
through Yongsan Electronics Market where 60% of the foreign brand
personal computers (PCs) are being sold (Business Korea, 1994b).

Direct Marketing

According to the survey of the Korean Consumer Protection Asso-

ciation (Choi, 1996), Korean distributors charge foreign importers an
average markup of as high as 209% of the price of an import. Over-
whelmed by excessive distribution commission, some foreign firms
such as Amway, Newskin, Sunrider, Omega, and Parker Glassware
have utilized a variety of direct marketing strategies involving home
TV shopping, Internet shopping, door-to-door selling, in-home party,
and mail ordering in order to reach Korean consumers directly. Direct
marketing show signs of great promise in Korea. Daily Economy
(1997) reported that retail sales through direct marketing have amassed
to approximately $3.5 billion in 1996. In particular, sales through cat-
alog shopping have expanded at an annual growth rate of 40 to 50%
during the 1990s (Daily Economy, 1997). Home shopping networks
22 JOURNAL OF MARKETING CHANNELS

through the Home Shopping Television (HSTV) and Hankuk Home

Shopping cable channels reported having a similar success ever since
they started business in mid-summer of 1995 (Lee, 1995). Similarly,
LG Home Shopping Inc., a retail cable TV network, posted $280 mil-
lion in revenue in 2000, up 42% from the previous year (Moon,
2000a). The instant success of direct marketing is due to its substantial
price advantage, generous money back guarantees, free delivery ser-
vices, and 24 hour shopping without cash payment (Lee, 1995; Daily
Economy, 1997).
However, direct marketing strategies are not without drawbacks. The
most serious problem is the high cost of free delivery. Therefore, direct
marketing is not a viable option for selling heavy furniture, agricultural
produce, and cheap materials. Home TV shopping can run into difficul-
ties due to a relatively small number (about 200,000) of Korean house-
holds who currently subscribe to cable TV services. Furthermore,
stringent trade regulations of the Korean government still discourage
door-to-door sales and promotion.

CONCLUDING REMARKS

Many foreign firms interested in entering the Korean market are often
unaware of various opportunities and challenges regarding Korean mar-
ket entry. This lack of awareness is due in large part to the Westerner’s
misunderstanding of the Korean distribution system and unique socio-
economic environments affecting the Korean market. Though outdated,
regulated, and inefficient the Korean distribution system displays high
levels of complexity, consumer responsiveness, vertical coordination, and
innovative transformation. Recognizing those idiosyncrasies, it is time for
foreign firms to re-formulate their distribution/marketing strategies which
can adapt to the current Korean rules and standards. In so doing, foreign
firms should increase joint interdependency between them and Korean
partners so that they can enhance chances for mutual information sharing
which, in turn, facilitates concrete understanding of market competition,
distribution dynamics, and consumer needs. Besides, the foreign firms
must not only shift their focus from short-term profit/cost saving to
long-term gain/stability but also create the most streamlined distribution
channels that will best fit with their long-term objectives in the Korean
market.
 Hokey Min 23

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