The rapid growth of E-commerce and Internet Penetration Rate serves as major Growth Drivers for E-Commerce Logistics Market in South Korea: Ken Research

21-Nov-2022   Mr. Vignesh Krishnamoorthy , Designation: Senior Consultant (Logistics Solutions) at SSI Schaefer, SSI Schaefer   Author: Savitri Ramuka

In conversation with Mr. Vignesh Krishnamoorthy, Senior Consultant (Logistics Solutions) at SSI Schaefer, we attempted to seek his opinion and understand the E-commerce logistics market of South Korea

South Korea’s E-commerce logistics market is rapidly growing due to increasing demand for cost-effective logistics and Technological Development.”

Q1. How has the South Korean E-Commerce Logistics industry evolved over the past 5 years?

The retail E-commerce industry is showing rapid growth in South Korea, with the country being ranked 5th in the world. In the past 5 years, we see the expansion of the online sales market into key categories such as home appliances, fresh food, and grocery – in addition to consumer goods. The industry is growing rapidly and has huge potential (on track to be the 3rd largest online market)  with online sales contributing to a good proportion of all retail sales in the country.

The market size of Korea’s e-commerce industry grew in the period 2010-2020. In particular, the share of mobile e-commerce has risen. By product category, the online transaction value of food and beverage was the highest, followed by home electric appliances, electronic and telecommunication equipment, and food services. The growth is boosted further with the development of high-tech logistics systems, highly reliable online payment systems, and increased speed of delivery – in the likes of rocket delivery (로켓배송), dawn delivery (새벽배송) and same-day delivery.

Q2. What are the challenges faced by the E-commerce logistics industry of South Korea?

Major challenges in this industry are the Rapidly aging population (median age 42.6) & extremely low fertility rate (0.96) which further leads to a lack of qualified workforce in the warehouse space and 82% of the population living in Urban areas while most logistics facilities are in sub-urban or outskirts to keep the costs low.

Q3. What are the key drivers of market growth?

Major growth drivers in the online retail space are certainly the smartphone ownership rate (95% - highest in the world) and internet penetration rate (96%) and to some extent, high disposable income (approx. $16,000 per capita) also serves as a growth driver.

The Major buying holidays like Seollal (Lunar New Year’s Day - Winter), Children’s Day (May 5th), Parents’ Day (May 8th), Chu-Seok (Korean Thanksgiving Day), and Christmas are the key driver for peak demand. Koreans also follow foreign countries’ buying holidays such as China’s Singles’ Day (November 11- Guanggun Jie) and Black Friday in the U.S. (Day after Thanksgiving) to get the best deals.

Q4. What impact did COVID-19 have on the South Korea E-Commerce Logistics Market?

COVID-19 has in part propelled e-commerce growth massively. Due to the COVID-19 pandemic restrictions on public dining, the online purchasing of foods and frozen commodities has been on the rise. The online transaction value of food services rose from the previous year, recording the highest growth rate.

Q5.  What is the future scenario of the E-Commerce Logistics Market in South Korea?

E-commerce will continue to drive logistics leasing demand in 2021 as the pandemic accelerates the shift to omnichannel retailing. Urban fulfillment centers (e.g., near residential neighborhoods) will continue to attract strong interest. The deployment of robots and automation systems to enhance efficiency will further stimulate demand for warehouse space in 2021.

Q6. What are the strengths and weaknesses prevailing in the e-commerce logistics market in South Korea?

The major strength driving the E-commerce logistics market includes a High potential market with high spending power, high consumerism mindset, and good logistics infrastructure along with its low cost. Meanwhile, less domestic market, high competition between players, and low profit of companies amid growth pose to be a major weakness in the E-commerce logistics market.

Q7. Are there any emerging developments that can be used to the market’s advantage?

A new supply of warehouse space during the next two years in SMA will likely exceed demand, creating fierce competition to secure tenants.

Moreover, the logistics market stands to evolve from the reorganization of Korea’s national road network. The Ministry of Land, Infrastructure, and Transport plans to bolster the current national grid network of seven vertical and nine horizontal highway corridors to 10 vertical and 10 horizontal roads by 2030. In addition, six radial roads around the nation’s five major cities (Seoul, Busan, Daegu, Daejeon, Gwangju) are planned to improve connectivity between city roads, potentially improving access for logistics centers to core markets.

Increased potential for loyalty programs (RocketWOW, SSG membership, Naver plus, etc.), Expansion of business areas into food-delivery, quick commerce, payment platforms, and OTT platforms, and Possible logistics are some of the opportunities for growth of the E-commerce logistics market of South Korea.

Q8. What are the external forces/ threats that might undermine the growth of the E-commerce logistics market?

The CPI Inflation rate is forecasted to record 5.2 percent ad 3.7 percent in 2022 and 2023, respectively. High competition is expected from e-commerce giants Amazon, Rakuten, etc. Disruption in service from delivery partners and changes in consumer spending behavior post-Covid might pose a threat to the logistics market.

Q9. Where do you see this industry after 5 years in terms of growth?

The e-commerce logistics market will be the backbone of online sales in the next 5 years and in turn, the service offerings from the logistics market will help achieve the projected targets as well as satisfy customer expectations. The market would tend to plateau amid post-pandemic consumer behavior, rising tensions in Eastern Europe, and rising oil prices, however, we believe the market would pick up and stabilize in 2023~24 and we will continue to see new service offerings and fierce competition from the e-commerce players.

Q10. What are the current and future scenario of the E-commerce logistics market in South Korea?

Covid and Post-Covid era propelled the online shopping market:

Since the first Corona case was confirmed last January, online sales have increased compared to the same month of the previous year, while offline sales fell. In particular, the 40-50 generation who used to prefer to purchase offline became new online consumers driving the rapid growth of online sales. In response to the demand, the online market is rapidly evolving.

Foods used to be preferred to purchase offline due to the concern about freshness. However, since the pandemic, the lifestyle contactless-as possible is fashion, so grocery shopping cannot be a non-exception. Besides, the deliveries get faster and faster; therefore, there is no reason why the online food market is not growing. Likewise, the ones that were not used to be considered for online shopping rather than offline base items can also be hot in online shopping in the future.

Live commerce will be the mainstream:

In line with the growing number of mobile shoppers, the mobile base live-commerce market is growing. The live commerce market accounts for an insignificant share of the total online shopping market, which is still insignificant. However, it has the highest purchase conversion rate compared to the other e-commerce market forms: traditional e-commerce purchases, and social e-commerce. However, live commerce is predicted to be the center of e-commerce shortly.

Social value management will be a must :

In terms of shopping, the consumers would consider the social values of the products/services or their providers, such as the environment, ethics, and social responsibility. Considering the core group of the MZ generation who will become the backbone of the society and the economic core presently, it can be hard to survive without value management as a product/service provider. Having an own philosophy that can appeal to society can help the business for sure.

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