8/26/2012

How Foreign Importers Entering Korea May Prosper from the Korean Middle Class in Korea being Screwed by Inflation: Screwflation

The Korea Times has reported that stagnant wages and food inflation is leading to "Screwflation" in Korea.  This phenomenon is a potential opportunity for importers with an eagerness to directly access the market.  The term Screwflation was coined by Wall Street guru Doug Kass.  Kass explains the notion in his, typical, straight forward manner:
Screwflation, like its first cousin stagflation, is an expression of a period of slow and uneven economic growth, but, its potential inflationary consequences have an outsized impact on a specific group. The emergence of screwflation hurts just the group that you want to protect — namely, the middle class, a segment of the population that has already spent a decade experiencing an erosion in disposable income and a painful period (at least over the past several years) of lower stock and home prices. Importantly, quantitative easing is designed to lower real interest rates and, at the same time, raise inflation. A lower interest rate policy hurts the savings classes — both the middle class and the elderly. And inflation in the costs of food, energy and everything else consumed (without a concomitant increase in salaries) will screw the average American who doesn’t benefit from QE 2.
The situation, in Korea, is far more damaging to the middle class than according to an article by the Korea Times.  The Korea Times notes that:
Economists say Asia’s fourth-largest economy is showing signs of entering the so-called screwflation, a new economic term combining “screw” and “inflation,” in which inflation is rising and the middle class is being screwed by a myriad of financial burdens.

Prices on goods like food and fuel are soaring hurting Korean consumers from middle- and low-income brackets, many of whom have been already screwed due to the prolonged slump in the property market and job losses

The term has become popular since hedge fund heavyweight Doug Kass used it in a Wall Street Journal contribution two years ago. If this trend continues, it will be a long-term potential threat to the retail market.

According to data from Statistics Korea, the average Korean household in the middle class, the third grade among five classes by income, earned 3.6 million won per month in the second quarter, up 5.9 percent or 200,000 won from a year ago.

However, key consumer prices hiked higher than income. For instance, rice, a must-have item for a Korean meal, rose 7.7 percent in July from a year ago, according to the central bank. Chinese cabbage, a key ingredient of kimchi, spiked 34.6 percent during the same period.

Green onion, one of the most frequent ingredients of Korean food, is selling up 73.4 percent from the previous year provoking headaches for housewives who struggle to make daily meals on a tighter budget.

“It’s crazy. It’s hard to spend less than 100,000 won in one grocery shopping trip. The prices of almost all foods rose recently though my husband’s income is at the same level,” said a 32-year-old housewife of a four-member family who declined to be identified.

A period of heavy rainfall followed by extremely hot weather raised the prices of agricultural products and vegetables even further. The Korean Peninsula suffered from the hottest summer in 18 years since 1994 due to climate change which made the North Pacific High remain in the country longer than previous years.

According to the retail industry, E-Mart, the nation’s biggest discount chain, sells Chinese cabbage at 2,380 won per 800 grams, up 20.2 percent from a week ago. Lotte Mart raised the price of cucumbers by 20 percent to 1,000 won from the previous week, while it’s selling lettuce at 1,800 won per 150 grams, up 50 percent from a week ago.

“Vegetable prices are rising fast as the supply has dwindled drastically, hit hard by heavy rain,” said an industry source. He said the trend will continue if the rainfall does not stop soon.

The finance minister said earlier this week that the government will take preemptive action to keep inflation in check amid worries that recently soaring prices of produce and processed goods could exert upward inflationary pressure.

"Prices of agricultural products and processed goods have been surging recently," Finance Minister Bahk Jae-wan told at a price stabilization meeting. "The government will not lower its guard and take preemptive action in stabilizing prices and people’s livelihoods."

Bahk also said that the government will consider stockpiling or importing key fishery products including pollock and hairtail on expectations that their prices could rise on growing demand ahead of the Chuseok holiday that starts in late September.

Korea depends heavily on imports for its corn and wheat demands, which is raising concerns that price hikes in global markets could lead to food price increases in the domestic market.
Consumers in Korea are, often, wondering when FTAs will lower retail prices.  The answer lies in when the complicated and screw the producer/farmer and consumer distribution channels, in Korea, are finally aggressively fought by online and even brick and mortar retailors.

As New Zealand Trade & Enterprise noted about Korea:  "Complicated import restrictions exist for many products and distribution channels for most items can be lengthy and complex.  New Zealand exporters should check trade barriers carefully.  Generally, you should work with a Korean agent or importer rather than entering the market directly."

Hopefully, a government like the New Zealand government could assist producers in forming a cooperative.  A cooperative, with the right attitude and know-how that could directly sell to consumers.   The consumers and producers would benefit with the Korean "discount markets" and numerous "agents"being left out of the mix.  Yes, foreign importers can compete in the Korean market and can sell, successfully, to end users. 

Some large international meat and wine producers have been very successful in this model in Korea, however, they have not, yet, been willing to engage in aggressive price wars, since the present model is still producing for them high margins and few risks. 

The opportunity lies in producer/farmers or those close in the supply chain to these individuals to directly sell to consumers.  A good start is online - leading to a true cooperative import retail brick and mortar establishment.  More to come and hopefully some from our Senior Commercial Advisor's Joe Day and Tom Coyner. 
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Sean Hayes, IPG's Co-Chair of the Korea Practice Team, may be contacted at: SeanHayes@ipglegal.com