South Korea Food and Drink Report Q4 2009

The South Korean economy has shown a number of signs that the worst of the downturn may now be over and as such we have revised up our 2009 real GDP forecast for the country from -3.3% to a more modest contraction of 1.9%. However, the recovery is likely to be a slow one and this may go some way to explaining the limited amount of merger, acquisition and expansion activity witnessed in the food and beverage industry this quarter.

Despite the lack of significant industry activity there have been some interesting developments in the mass grocery retail (MGR) sector. Following last quarter's announcement by Tesco Samsung confirming its ambitious expansion plans, the retailer faced a hurdle in July over the planned opening of a Homeplus Express Convenience store in the Seoul suburb of Incheon resulting in a suspension of the store opening.

The South Korean retail industry is fairly unregulated with few restrictions placed on store opening locations, hours or sizes, which has led to a heavy influx of investment in the sector. Smaller independent retailers have become increasingly frustrated by the expansion plans of modern retailers causing the government to consider sending a bill to the National Assembly to introduce regulations to govern smallstore openings.

In response to the concerns of smaller retailers the country's Small and Medium Business Administration (SMBA) announced this quarter that it is considering uniting its members under a single franchise in order to improve their competitiveness. This greater competition is likely to be far more favourable to the likes of Tesco Samsung than prohibitive planning regulations as it could stimulate further dynamism in a market that is increasingly mature.

Moving to the drinks sector, rumours are circulating that the new owner of Oriental Brewery, Kohlberg Kravis Roberts (KKR) is seeking to offload a 50% stake in the company to early bidding rival Affinity Equity Partners. The purchase of OB was KKR's first Korean investment and so should the deal go ahead it would give KKR access to a partner with a successful track record in the country.

Elsewhere in the drinks industry Starbucks Coffee Korea opened its 300th store in the country in Q309.

Coffee sales are expected to climb 14.6% to reach KRW102.92bn in 2013 and Starbucks Coffee Korea wants to ensure it is well placed to take advantage of this, even if the current downturn has temporarily dented interest in caf?(C) culture.

Although the South Korean economy has shown signs of picking up, in the immediate term the environment for the country's food and drink producers is likely to remain tough, with consolidation, rather than rapid expansion, the key.