Exporting Processed Cheese from Australia to South Korea - Case Study Example

Exporting Processed Cheese from Australia to South Korea 2010 Executive Summary Republic of Korea is one of the fastest growing market for processed cheese in the Asia Pacific because of high and growing per capita income, rapid urbanization and changing lifestyle and dietary habits that have increased the demand for processed food. Australia is the second largest exporter of processed cheese to South Korea, after the United States but Australian companies have an advantage in geographical proximity that result in lower transportation and logistics expenses. Since the dairy product market in South Korea is controlled by a small number of companies and cooperatives, the entry mode in the company will have to be through joint ventures with agents and distributors. Another mode of entry could be through the organized retail sector and food servicing chains. Introduction In order to develop a plan for our company, which produces processed cheese used for cooking pasta, pizza, etc., plans to internationalize, we need to look at different markets that provide opportunities for an Australian company. European Union is the leading exporter of processed cheese, followed by Australia. Major importers are Japan, the United States, Russia, the European Union, Saudi Arabia and Republic of Korea (ZMI, 2005). This report will analyze the South Korean market, or Republic of Korea, the business opportunities and entry mode into this new market for our company. The Product The cheese produced by our company is made of cow’s milk, from the semi-solid form after souring. The milk is produced by the Fresian dairy cows, which are the most popular cows raised in Australia. In New South Wales, there are as many as 1,800 dairy farms (Kraft Foods). There are more than 100 types of cheese that are produced in Australia and 60 percent of the cheese produced in the country is exported. In particular, there is a growing market for specialist cheese, that is, other than cheddar and mozzarella, which are used for cooking. There are 90 specialist cheesemakers in Australia, including our company. Although cheddar is the most important cheese product in the country, the share of cheddar in total cheese production has fallen over the years, which is demonstrated in the following table. Australian Cheese Production by Type of Cheese (tonnes) Type 1996/97 % 2001/02 % % Change Increase in Tonnes (%) Cheddar 176,086 60.7 223,007 54.0 -6.7 26.6 Semi-Hard 63,789 22.0 93,671 22.7 +0.7 46.8 Hard Grating 9,983 3.4 15,581 3.8 +0.4 56.1 Fresh 37,504 13.0 76,665 18.6 +5.6 104.4 Mould 2,632 0.9 3,686 0.9 0 40.0 Total 289,994 100 412,612 100 Source: Australian Specialist Cheesemakers’ Association, n.d Although most of the market for specialist cheese, or processed cheese, is in the domestic market, the export market, most importantly the Asia Pacific, is growing, providing opportunities for small and medium enterprises like our company. At present, most Australian exporters of processed cheese are the large producers and smaller producers lack the capacity, resources, price competitiveness and awareness about the export markets. World trade in specialist cheese is dominated by the European countries, where producers enjoy high levels of subsidies and therefore are able to offer lower prices than Australian companies, but Australia has a special advantage in the Asia Pacific region because of the geographical proximity. Most of the Australian processed cheese exports are through agents and consolidators but increasingly many smaller manufacturers are collaborating to create export networks by pooling resources and experience to explore the export market so that economies of scale in freight and sharing of cost of production may be achieved (Australian Specialist Cheesemakers’ Association, n.d). Cheese prices are highly dependent on milk prices, which are higher in Australia than in the European Union. In the case of processed cheese, there is a wide variance between the different types of products, from low-priced long-living spreads to tailor-made products catering to food products and the food industry (ZMI, 2005). Typically, the USA is the largest consumer of processed cheese, followed by the European Union, Japan and Russia. Besides, in other countries that are new to the cheese tradition, like South Korea, processed cheese is one of the first contact with the cheese culture (ZMI, 2005). The Company Processed cheese is produced by small scale producers as well as by multinational companies. Our company is a Sydney-based medium-sized manufacturer of processed cheese. We manufacture processed cheese used for cooking pasta and pizza. The company sells the product in the domestic market. We now plan to explore the international market, beginning with the fast growing Asian markets. Since Republic of Korea is one of the fastest growing market for processed cheese and the 4th largest trading partner of Australia, accounting for 7.8 percent of the total volume of exports from the country, the following sections will detail the business environment in this new market and the possible entry modes into this market. In food imports, Australia comprises 18 percent of Korean imports and the major imports are beef cuts, wheat, malt cheese and milk powder (Department of Primary Industries, 2009). The major competitors in cheese imports in Korea are New Zealand, Uruguay and the United States. PESTLE Analysis Political environment: South Korea is a market economy and has one of the highest per capita income in the world. It has concluded Free Trade Agreement with many countries, including Chile, Singapore, ASEAN and European Union. Talks on FTA are underway with the United States, Australia, Canada and Mexico. Even though the country is reducing tariff and non-tariff barriers for agricultural commodities, the level of protection for agricultural commodities is still relatively high compared to many other countries. However, the Korean government has been liberalizing the trade environment, leading to growth in import of dairy products, particularly processed food. Following the Asian financial crisis of 1997, the Korean government has instituted fiscal policy reforms that have brought about corporate and fiscal stability. Two major banks have been nationalized and mergers and acquisitions as well as debt swaps have been encouraged. The chaebols, large Korean conglomerates that have for long been powerful for long, have their power curbed. The country has moved to a free floating exchange rate and the markets have been opened to foreign investors. Australia imports motor vehicles, telecommunication equipment, refined petroleum, television sets and so on from Korea while Korea imports crude coal, coal, iron ore and beef from Australia. Both Australia and Korea at present impose tariffs on imports from each other. A Free Trade Agreement, which is under negotiation, between the two countries would greatly encourage trade between the two countries (Australian Chamber of Commerce and Industry, 2009). Economic environment: South Korea is one of the leading economies in the Asia Pacific region, after Japan, which is the target for Australian trade relations. Although the country was one of the less developed economies in the 1960s, it demonstrated remarkable growth over the last three decades, particularly in the 1980s and 1990s and is the 10th largest economy in the world today (Department of Primary Industries, 2009). The land area of South Korea is limited, only about half the size of the state of Victoria. Of this, only 22 percent is under farming, with rice the main agricultural product. Although milk is produced in the country, the price is three times that in Australia. Hence, South Korea mainly depends on imported dairy products, particularly processed cheese (Department of Primary Industries, 2009). The country imports around 150,000 tons of dairy products, valued at $300mn, every year. South Korea imported 50,000 tons of cheese worth $220mn in 2007-08 despite a 36 percent import tariff rate. Because of the high income levels, leading to higher consumer demand for convenience foods and greater variety, and low share of land under cultivation, South Korea imports 70 percent of the food requirement. South Korea has been witnessing strong economic growth in the 2000s, with per capita Gross Domestic Product in 2008 being $22,000 compared to Australia’s $46,000. Annual disposable income has increased from $8,000 in 2000 to $13,000 in 2008 and is expected to reach $15,000 in 2010. Although share of consumer spending on food has in total has decreased from 13 percent to 12 percent, that of processed goods has increased, reflecting that people are shifting from low value to high value food products. In particular, the young generation who are more exposed to western lifestyle have a higher demand for products like cheese, yoghurt, prepared meat products, beverages and microwavable products. Hence, processed cheese which is used in cooking favorite western items like pasta and pizza have a growing demand (Department of Primary Industries, 2009). However, the global economic downturn has had an adverse impact on the fast food industry and hence on the market for imported processed cheese. The depreciation of the US dollar has meant US cheese more competitive than Australian cheese as a result of which the US has gained market share relative to Australia in the South Korean market (Austrade, 2009). Production and prices of dairy products are controlled by the government as a result of which the farm gate prices are one of the highest in the world. About 70 percent of the milk produced in the country is sold as fluid milk (Australia Dairy Industry Association, 2009). Social environment: South Korea’s economic growth over the last decades has been attributed mostly to the investment in the social sectors like education, health and land reforms. The country has one of the largest proportion of people who have completed secondary education. This has transformed the people into more aware citizens who are concerned about healthy food. South Korea is one of the most densely populated countries in the world, with 80 percent of the population living in the urban areas. As many as one-fourth of the population, or 10 million people, live in Seoul, the capital of the country. The population is ageing, with 10 percent above the age of 65, 18 percent below the age of 14 and 72 percent within the age of 14 and 65. The population structure is expected to be reversed from 2000 to 2050, with a more ageing population (Department of Primary Industries, 2009). With the fast growth of the economy, the urban population is adopting a western lifestyle and dietary habits. Even the elderly are focused towards traditional and modern healthy foods. Processed food and beverages have become important items in Korean diets. The shift in diet from traditional grain-based products to meat, fruits and dairy products is typical of a growing, urbanizing economy. The South Korean society reflects this trend with 50 percent of consumer spending on food being spent on non-traditional items like meat, dairy products, eggs, wine and vegetables. However, the ageing population implies that the growth of healthy food like organic food, fruits and vegetables, would be higher than that of convenience products like processed cheese that is demanded more by the younger population. Besides, it is the young population who eat out more than the elderly and the demand for processed food is mainly from the restaurants and for home cooking by the young. However, the number of single person household in South Korea is on the rise, accounting for 20 percent of all households in the country (Department of Primary Industries, 2009). The hectic work schedule and lifestyle changes that imply that people live outside of their houses for longer hours have meant that eating out has gained force as a trend. Although there is a change in lifestyle and diet towards consumption of processed food, the problem of obesity in South Korea is not as serious as in the western countries (Department of Primary Industries, 2009). But, as the shift towards convenience food gains ground, it is likely that there will be an increased awareness about healthy food, which would hamper the sales of processed high calorie food like processed cheese. Technological environment: Food retailing in South Korea is mainly through the organized sector dominated by supermarkets and hypermarkets, the latter taking up a major market share. Increasingly, online retailing is gaining ground, particularly in convenience foods. Innovative technology like smart cards equipped with barcoders, electronic price tagging and touch screens on the shopping carts provide product information and reduce payment time, thus boosting sales. Miltinational fast food chains like Starbucks, Coffee Bean Leaf , Java Coffee and many others have become immensely popular (Department of Primary Industries, 2009). In particular, the expansion of Dunkin Donuts’ has boosted demand for processed cheese in South Korea (Austrade, 2007). Legal environment: The South Korean government has introduced carbon labels for some products since January 2009 (Department of Primary Industries, 2009). The ministry of Health and Welfare has introduced the Functional Health Food Law that requires products to mention the ingredients and doses. Ethical environment: Over the last decade, South Koreans have become more conscious about ecology and environment. As a result, the consumption of food made out of organic raw materials has been on the rise. Mode of Entry Republic of Korea is expected to be one of the fastest growing markets for processed cheese because of exposure to western foods like pasta and pizza and growing per capita income. As much as 60 percent of the Australian cheese imported in Korea is in the form of natural cheese used in the manufacture of processed cheese, followed by the market for mozzarella and gouda cheese used as pizza topping in food servicing. The local dairy manufacturers are trying hard to enter the market for processed cheese because the fluid milk market has become saturated (Austrade, 2009). Therefore, in order to export processed cheese, is a tough market that has to deal with local dairy manufacturers as well processors. The Korean dairy industry is dominated by a small group of companies and cooperatives that control the retail distribution of milk, cream, ice cream, yoghurt and cheese. It is therefore advisable that the entry mode into the South Korean market is through collaborations with local agents and dealers. Although South Koreans are as quality conscious as other developed Asian economies like Japan, they are also price sensitive. The high tariff rates on imported cheese means that Australian exporters of processed cheese would be at a disadvantage particularly in the context of the Free Trade Agreement between Republic of Korea and the European Union, which would mean that trade between the latter two group of countries would be free of tariff rates. The other mode of entry into the South Korean processed cheese market is to tie up with bakeries and fast food chains. More than half of the cheese supplied to these outlets is imported from the United States as most of the multinational fast food chains originate from there. However, Australia has the advantage of geographical proximity to South Korea as a result of which transport and logistic costs for cheese, which is a perishable product, is lower for Australian imports rather than US imports. Conclusion and Recommendation South Korea is a major growing international market for Australian processed cheese. For our company, this market provides opportunities for a growing market share in comparison to the other exporters from the United States and the European Union because of lower transportation costs. On the other hand, most of the Australian cheese exports to South Korea are in the form of natural cheese that is processed locally. However, the transportation of natural cheese is cumbersome and expensive compared to that of processed cheese. Hence, with the expertise in processed of cheese in Australia, it is a better option to export processed rather than natural cheese. But, since the South Korean dairy market is highly concentrated and controlled by a few companies and cooperatives, the company has to tie up with local agents and distributors. Besides, the company should also tap the bakeries, fast food service and the organized retail sector comprising the supermarkets and hypermarkets for marketing of the products. Works Cited Australian Specialist Cheesemakers’ Association, http://www.australiancheese.org/production.aspx Australian Chamber of Commerce and Industry, ACCI Submission to the Department of Foreign Affairs and Trade, Korean Task Force, 2009, http://www.dfat.gov.au/geo/rok/fta/submissions/akfta_pubsub_adic.pdf Austrade, Aussie cheese creams it up in Korea, Media Release, 2 July, 2007, http://www.austrade.gov.au/Aussie-cheese-creams-it-in-South-Korea/default.aspx Austrade, Dairy to Korea, 2009, http://www.austrade.gov.au/Dairy-to-Korea/default.aspx Australian Dairy Industry Association, Korea Australian Free Trade Agreement Negotiations, 2009, http://www.acci.asn.au/text_files/submissions/2009/FTA%20Submission%20Korea_Feb09.pdf Department of Primary Industries, South Korea Food Market, 2009, http://www.dpi.vic.gov.au/dpi/nrenti.nsf/LinkView/8B58A731F9A07B72CA257678001B29503EAE47A0DB5D4984CA25727A00781A83 Kraft Foods, Cheese and Kraft, http://www.kraft.com.au/Products/ProductList/C/Cheese/CheeseArticles/CheeseProductFacts.htm ZMI, The Role of Processed Cheese Markets for the Overall Cheese and Dairy Sector, 2005, http://www.assifonte.org/deutsch/processed_cheese/processed_cheese_market_2005.pdf Read More