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Overview of Korea Economy and Franchise Business
“We consider South Korea as a developed market, which means it is no different to the UK or the US… Korean consumers demand and expect high-end products.” Hari Nair: Managing director, that of Kimberly-Clark.
Lately everything seems to be prefixed with K: K-Pop, K-food, K-beauty, K-movies; why not go to your local K-culture festival, there must be one near you, or soon. Korean culture is on fire these days and has been warmly received. Domestic franchisors, quite rightly, rode this wave and rapidly expanded internationally- China being Korea franchisors first choice. However for a foreign franchisor, what is this market like?
GDP was 1.2 trillion US dollars in 2013 and is expected to increase as consumer spending and confidence grow through 2014 and 2015. The latest report from the Hyundai Research Institute predicts that Korea will expand by 3.5% in the first half of 2015 and 3.6% in the second half.
Given Korea’s comparatively slower Asian growth, it remains a good target for franchisors due to the country’s historic years of stable growth, affluent consumers and early development. The average disposable income per household per month was US$3150 in the second quarter of 2014, an increase of 2.8% from the second quarter of 2013, with significant increases in bakery, confectionery & snacks, coffee & tea, and juice & beverage sectors (Statistics Korea ). ).
The demand for foreign brands spans a range of sectors and recently a wider range of channels. 65% of the population is classified as middle class (OECD) so unlike many other Asian countries there is not the general trend of a new, emerging middle class. Supported by mass media and a relatively high degree of travel experience, Korean consumers are savvy in a developed, globalized market.
Korean consumers have a strong purchase history of foreign brands so in addition to valuing money, they have a high understanding of brand philosophy and marketing channels. They will gladly try new products and are always looking for new tastes and ways to improve their lifestyle and image.
For a franchisor, the marketing must be more sophisticated to match the level of the consumer. For example, almost 80% of the population is online, making it the most connected country on the planet! and they love their credit cards. Annual credit card transactions are over 65% higher than the US. This combination means that a high proportion of online spending and retail e-commerce is expected to touch $25.3 billion by 2017 (Borderfree). Any marketing strategy must be multi-channel and use aspects of social media to promote brands and use the technology to offer more efficient shopping channels and delivery.
Korea’s population is aging and urbanized. The median age in 2012 was 39.1 years and the over 60 group is expected to account for nearly 25% of the population by 2020 (Statistics Korea). Some franchisors may already target this older market while others can easily adapt or extend to target this group. However for the rest of us do not despair, as PwC reminds us, 70% of the population remains within most retailers’ targeted demographic of 15-64 years.
With more than 90% of the population living in urban areas, these conurbations are densely populated, affluent dense spaces and retail venues are at a premium. The 4 main population areas: Seoul metro-15 million, Busan metro-4 million, Daegu metro-3 million, and Daejeon metro-2 million.
Key retail players are set to open mega centers outside the major cities over the coming years but currently Gyeonggi (the area directly surrounding Seoul) and Seoul account for 42% of the total retail space in all of Korea (www.kintex.com). Supermarkets and hypermarkets lead retail channels and this lead will increase as it aligns with the 3 main purchase drivers of choice, convenience and price.
Despite economies of scale enabling large shopping complexes to compete effectively with smaller stores, operators are always looking to differentiate themselves from one another. Enhancing the shopper experience by offering the latest trending brands is a primary way they do this. Not only are they looking for exciting foreign tenants, these operators are also willing to accept Master deals and develop concepts across their formats.
If this is an inbound strategy of interest, remember that these companies are looking for a brand that will drive traffic, so the product or service either has an established name or has a strong unique factor attached to it. Strange with long-term viability can be a good USP and malls, a very effective way to introduce your brand in Korea-mainly because the cost of educating the population will be borne by the mall operators and you can be sure that it will be done with high. level of proficiency.
The franchise market in 2013 was valued at US$89.8 billion with nearly 3,000 franchises. There were 283 retail franchises, 601 service franchises and 2,089 food service franchises (export.gov). Even with recent declines in GDP, the franchise industry has shown respectable growth over the past few years with an average of 200 new franchises opening each year since 2010.
Koreans are very open to partnering with overseas franchisors, especially those who have an existing reputation in Korea or core values that reflect their country of origin. Koreans aged 55 and over have recently proven themselves to be good franchisees because they have more capital and knowledge, and being a family oriented culture, will pass the business down to their children. The franchise industry regulations ensure that business generally runs smoothly and Korea is seen as a simple place to franchise.
The normal investment range is between $4,300 and $8,700 with a 2-year contract term. Such a low average franchise fee can make it difficult for a foreign franchisor to recruit a multi-unit or larger partner. There will also be a lot of negotiation over royalties, as they are usually lower for domestic Korean franchises.
Brief breakdown of sectors:
The Korean food market is expected to be US$53.5 billion in 2013 and accounts for 25% of total retail sales; growth of 5.5% from 2012 (JLL).
The organic food market is expected to grow to $6 billion by 2020 (Organic Trade Association).
The online channel is projected to grow at a CAGR of 11.38%, 2013-2018 (Research and Markets).
South Koreans spent $17.9 billion on private tuition in 2012.
The beauty and personal care retail market posted 5.8% year-over-year growth through 2013.
The cosmetics sector was the best performing sector in 2012.
Korea is the 8th largest luxury market worth nearly $4.5 billion.
Households spent 12.4% of total consumer spending on eating out (GAIN).
In 2012, imports of chocolate-based confectionery products from the United States increased by 12% from the previous year (GAIN).
Korea has become the largest men’s cosmetics market in the world. The expenditure of 635 million US dollars in 2013 was almost a fifth of the global figure (Euromonitor).
Koreans are educated, sophisticated, relatively well off and well informed. With sophisticated consumers comes a pickier, more demanding buyer. Strategy and approach should match other advanced countries. Consumers are not just looking for a global brand, they are looking for a brand that has a clear USP and they will pay more for that. That USP can be in reputation, quality, ingredients or innovation, but it must stand apart from the crowd in a specific way.
This does not mean that all markets are saturated and there is no opportunity for new sectors. As mentioned, there is an aging population and the affluent 50+ baby boom generation is far from complete. Other notable changes that open up markets:
Increase in dual income families.
Increase in single parent households.
Increase in single households.
Korean consumers are very used to being informed through various channels about a product before they buy it. A 2012 Embrain Trend Monitor survey found that 79% of customers check user reviews before purchasing and 74% have written ratings and reviews. Therefore, the more information you can provide through various channels will only be a good thing. The a surprise or curiosity an advertising strategy will either have to be carefully molded or have a very solid budget behind it.
Koreans are image conscious in all aspects and they have the experience to understand what lifestyle or status a brand represents. They closely follow and are influenced by the media and celebrity styles and trends. Although these fads can be short-lived, it is good advice to have the ability to quickly adapt and run campaigns or introduce extensions that connect with the latest trends.
An overview of where demand lies and where future demand might lie:
Due to the wealth of recognized foods, innovative and high-quality foods will appeal.
Franchises providing efficiency in shopping and delivery will match consumers’ convenience needs.
Koreans are educated and understand the need of their children. Within this market there is a high demand for professional and language services.
An older, more affluent demographic presents a growing market for targeted services and products.
Think of Koreans as savvy consumers. They are looking for organic, natural, fresh, high quality products.
Health-enhancing and anti-aging foods and businesses will show high demand.
Health benefiting herbs will be trending ingredients.
Koreans prefer foods with brighter, more saturated colors (Origin of human color preference for food).
Specialty stores stocking a range of niche, higher priced, quality items that are related to the above are spreading across Korea and cover a range of sectors from beauty to bakeries to grocery stores.
The bottom line:
Solid market but with competition, and commercial real estate can be expensive. This must be balanced with the sophistication and wealth of the market. It cannot be denied that nowadays there is more tendency to go out than into Korea, however, with a developed market that has a proven globalized view, it is an easy country to enter.
To conclude: Although potential may not be as great as their Asian neighbors, reduced times and costs due to educated consumers and well-experienced franchisees are key points.
Franchise Meets scores: 7/10.
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