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Changing consumer patterns caused by mobile phones are transforming the distribution market in tech-crazed Korea

Due to the sluggish economy and declining consumer confidence, the recession has left quite an impact on Korea’s distribution industry. As a result, the industry’s growth rate dropped 1.4 percent annually since 2013. Department stores and large-scale supermarkets are showing only moderate growth and recorded negative growth in 2014, overshadowing their past glory as the engines of growth. Among the main reasons for this decline is the implementation of laws limiting the number of new department stores, as well as the enforcement of compulsory closures of department stores on weekends.

On the one hand, external factors such as weak domestic demand are to blame. On the other, the lack of growth momentum in the industry itself is the main culprit behind such lackluster performance. For instance, large discount stores and online shopping malls sprung up in the mid-1990s and the early 2000s, advancing the distribution industry in terms of size and structure. Now, offline retailers and online shopping malls have lost their vitality and are showing stagnant growth. Department stores’ sales growth, for example, has continued to decline from 2010 to 2013, and posted -1.6 percent growth with KRW 29 trillion (USD 25.7 billion) in 2014. The good news, though, is that mobile shopping channels are growing rapidly and are serving as new sources of hope for Korea’s distribution market.

The reasons behind the rapid growth in the mobile shopping market can be attributed to the widespread penetration of mobile devices, technological advancements and changes in consumption patterns. We all know that smart phones, tablet PCs and other mobile devices have already become part of our daily lives, especially in Korea. According to McKinsey & Company, the country has the highest smartphone penetration rate in the world: more than two-thirds of South Koreans own one.

The wireless Internet and advanced forms of mobile payment have made it even easier to shop on the go. One-person households and dual-income families who prefer mobile shopping to save time are increasing in number. Consequently, from 2012, the transaction volume of mobile shopping increased approximately 600 percent to KRW 13 trillion (USD 11.4 billion) in 2014 and KRW 24.5 trillion (USD 21.7 billion) in 2015. Mobile shopping, thus, is not just an additional distribution channel, but a significant driver of growth as it brought about major structural changes across the industry, as well as new changes in consumption patterns.

The most notable advantage of mobile devices is its portability. With mobile devices, consumers can go shopping whenever and wherever they go. Even if they don’t make a purchase, they can still learn about the products and be updated on latest information at their fingertips. This has caused distributors to become much closer to the consumers. Consumers can also easily switch between different shopping channels. For instance, one can buy a product online after looking at it in the offline store, or conversely, buy a product offline with a discount coupon offered by the online web site. Lotte is one such company that offers shoppers with real-time notification of promotion deals on their phones as soon as they enter one of its department stores.

The rise of mobile shopping has two implications for the distribution industry. First, it means mobile e-commerce is jumpstarting the distribution industry in the midst of stagnant economic growth. Second, it means that multi-channel shopping is becoming more commonplace. As mobile devices give way to easy research, purchase, and payment for a product, more customers are using different channels to compare prices in real time, tearing down the barriers that were once there between distribution channels.

Against this backdrop, major distributors in Korea quickly came up with their own mobile shopping channels. However, the result was not what they had initially expected. While they achieved growth in mobile sales, their total sales remained stagnant and profits rather declined. Three television home shopping companies, which actively introduced mobile shopping channels, are good examples. While their total sales increased only slightly, they had to endure profit losses due to steep price discounts, low commission fees and high marketing fees of mobile shopping. For some companies, the sales of television home shopping shrank because of their new mobile channel. This means that instead of new customers flowing into the mobile channel, existing customers moved from television to mobile shopping. If this trend goes on, the existing distribution channels will continue to lose their ground.

Overseas large distributors, who learned this lesson earlier, began deploying omni-channel strategies, or cross-channel business models that companies use to increase customer experience. Their purpose is to prevent profit losses and to quickly respond to changing consumption trends. That is because omnichannels can lessen competition between distribution channels by ensuring an organic convergence of online and offline distribution channels, and satisfy customers with a multi-channel shopping experience while securing their loyalty with quality services.

Under such circumstances, the emergence of mobile shopping can help increase the size of the distribution industry, while the omni-channel can improve internal efficiency. Therefore, it is necessary to recognize the importance of mobile shopping and omni-channels, and how they can lay the groundwork for further growth of the distribution market in Korea.

As mentioned, due to online and offline distributors’ efforts to expand their mobile shopping business, sales in this area saw rapid growth. But so far, this growth is more attributed to the shift of existing consumers from offline stores and PC to mobile channels, and not the result of new customers or revenue. In order to go beyond this simple shift between channels, more efforts need to be made at the corporate and government levels.

First, corporations should not only adopt the mobile shopping platform but devise new distribution strategies that can create synergy and not competition. Second, the government should establish a mobile shopping environment that boosts reverse overseas direct purchases. In case of the United States, mobile shopping took up more than 50 percent of Internet shopping transactions made during the Thanksgiving holiday in 2014. In China, mobile shopping increased rapidly from 1.5 percent in 2011 to 9.1 percent in 2013. As China launched its 4G services last year, the mobile shopping market will only grow faster.

As such, the pie for mobile shopping is growing globally, and we need to prepare measures on how to expand this industry to foreign markets. To this end, the online payment system for foreigners needs to be urgently improved. Domestic online and mobile shopping malls are, at present, poorly equipped for oneclick payment process. Although there are discussions for the introduction of a simple payment system, various regulations are still getting in the way. Against this backdrop, the government should act swiftly in order not to lag behind in the fast-changing market.

In addition, the increasing share of mobile shopping in the distribution industry can negatively affect the sales of small and mid-sized shopping mall operators and traditional market merchants that do not have their own mobile applications. The sales of traditional markets has decreased from KRW 27.3 trillion (USD 24.3 billion) in 2005 to KRW 19.9 trillion (USD 17.8 billion) in 2013. 60.1 percent of mobile shopping customers use mobile applications to buy products, and this trend will only get stronger. This is the reason why traditional market merchants and small, mid-sized shopping malls can lose their competitiveness as they find it difficult to come up with their own mobile apps.

As the distribution industry is quickly being transformed by mobile platforms, traditional market owners and small and midsized shopping malls will more likely fall behind if they fail to adapt to new changes. That is why the government should coordinate among small stores and business operators while developing free mobile apps for them so that the distribution industry can develop more equitably.

Source: Jinkyung Goo, Sang-Hyun Lee, Dong-Hee Lee (2015),
A Study on the Changes in the Ecology of the Retailing Sector According to Emerging New Distribution Channels: the Spread of Mobile Shopping and the Emergence of Omni-channel Distribution,
Korea Institute for Industrial Economics & Trade (KIET)