Transcript: Trade Opportunities in the Asian Century - Agribusiness and Food in South Korea and Japan

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>>Brett Cooper: So I'm going to spend most of my presentation today talking about opportunities in South Korea. It would be very remiss of me not to talk about Japan as well, which Cheryl has just pointed out is Australia's second largest export market and Queensland's largest export market as well, and that's particularly true for food and agri. So I'll spend a few minutes talking about Japan and then South Korea, then I'll hand over to my colleague Mike Clifton to talk about China.

When thinking about Japan, I guess it's important to put it in context. There's so much press reporting about China these days, people tend to forget that Japan exists in many cases, but particularly for Queensland, the importance of this market should not be underestimated, and particularly for food and agri. It's still the third largest total global market in the world for food and agribusiness. It's an incredibly wealthy country. It's a very sophisticated consumer market, and it's a market which is still showing quite good growth in food and agribusiness.

We all know about the underlying trends of food security in Japan. This is something which has been ongoing for decades. The key point here is that this relationship with Japan, it's very, very deep, it's ongoing, it's not going away. We ignore this market at our peril and I just certainly encourage everyone here today, when looking at your options in terms of food and agri, sure go for the growth in China, go for the growth in Indonesia, in Vietnam and other places like that, but Japan remains a key cash cow in this sector, for Australia in particular.

This is just a brief overview of the trade sets, so I'm not going to do a lot on it because everyone really knows the data. But it's a $50 billion market in total. About 10% - and the numbers vary depending on how you estimate it - about 10% of that is food and agri. So in terms of the total market size for food, beverage and agribusiness, about $4.5-$5 billion annually.

To put that in context it's double the size of China, it's slightly over double the size of the South Korean opportunity, and well ahead of the US market in terms of the total size. So again, just a reminder I guess to keep the total opportunity in Asia in context, and remember that the Japanese market still remains a very, very significant force for us.

Again I won't dwell on this, we all know the stats. It's really a relationship underpinned by commodities, particularly coal from Queensland and iron ore as well, but again that component of food and agri is a very significant 10% of the total export.

I wanted to share this slide with you quickly before moving on to South Korea, but again this puts the Japanese opportunity into some context. The total market is $50 billion, however what is rapidly emerging - and this is not a new trend of course, but what's rapidly emerging is the Japan/ASEAN opportunity. This chart here shows, on the left hand side we've got the total number of exports into Japan from Australia, about $50 billion. That large orange on the right is the amount of import that Japanese corporations in ASEAN import into those markets. So it's a $200 billion opportunity.

Now granted, most of that orange bar is manufacturing. It's stuff like cars, it's advanced consumer electronics and so forth. But a very, very large part of that orange bar is also food and agri, and we expect that to increase. So, just I guess the message here is when you're thinking about the Japanese market, don't just think about the domestic opportunity. Think about the links, the very deep links that the Japanese corporations have, the very deep roots they have in ASEAN markets. Also in China, but mainly in ASEAN, and think about I guess laterally, the opportunities you might have to export your product to those firms who are packaging food and who are importing raw product in those markets. Increasingly for domestic consumption in those markets, but also of course for re-export to places like Japan and also China. This is where the real emerging game for the 21st century is I guess for Australian exporters, when thinking about the Japanese market.

I'm going to very quickly touch on just some background trends in food and beverage in Japan. I think most of you probably already know this already, but it's a market which values a premium story above everything else. It's a market which values food security above everything else. Australia is in a very good position in the Japanese market, in that we have a very good reputation as clean, green, environmentally safe, and we have already a very premium brand.

The concerns of the Japanese consumer have been heightened in recent years. They don't like buying food from China, they try and avoid it where possible, and there's more of that product coming into the shelves. They don’t like buying food these days after the disaster in north east Japan two years ago, from that part of the country anymore because of the fears of - in many cases unfounded, but nonetheless real fears of contamination. So our position in the market is, if anything strengthening in terms of that brand.

We all know about the counter-seasonal supply opportunities and we also know about the very tough competition in the market. It's not a market to be taken lightly, and that's why increasingly we have to be emphasising the paddock to plate story, the organic, the super-premium high end nature of our product because that's what they really like to see.

Here are just a bit of a laundry list of some indicative products, which are now becoming higher in demand in Japan, and in some cases quite new market segments for us. Lamb was an interesting one, Japanese haven't traditionally eaten much of this stuff. There's been a longstanding perception in the Japanese market that lamb is an unpleasant meat, a smelly meat, but that's really starting to change and we're seeing quite a lot of pick up in this particular meat in recent years, and the consumer tastes are changing.

We're seeing relatively new products for Japanese consumers like olive oil. We're seeing a much higher increase in dairy, for example ice creams, yoghurts, cheese. And again just emphasising the story of the food. They love to buy food which has for example a photo of the producer in the Darling Downs for example on that package, they love to hear that story and that will really help your brand in the market.

I'm going to talk about Korea now, which is a subject dear to my heart because I'm based in Seoul. We cover the Korean peninsula. I should emphasise at the start I'm talking about South Korea. We don't do any trade with North Korea and there are very heavy sanctions applied there, but most of the media these days in Australia it seems to be about North Korea, unfairly so. So I'm going to talk about the South Korean market.

The South Korean market overall is a larger market for Australia than the United States. It's a larger market than India. It's a larger market than Indonesia. It's our third largest market globally. The Koreans have this expression, they describe themselves as the prawns between the two whales, and that really helps I think to put Korea in context, because they're equidistant between China and Japan. A lot of people in Australia tend to overlook the market when thinking about opportunities in north Asia, because you've got the two giants, and then Korea is sort of the other market which people get a lot of reporting in the press about nuclear bombs and so forth. But it is a very large market, not to be underestimated.

I think if you're looking at a broader Asian strategy, a broader Asian push, it's really important that you include Korea in that, because it helps you diversity, it helps you hedge some of the risk that you might be taking, or that you might think you're taking, if you're putting all your eggs in the China basket, or you're heavily weighted towards Japan. So I'd certainly encourage everyone to think seriously about the opportunities in the Korean food and beverage market.

Just some very brief stats, they're growing reasonably strongly, although their growth has declined in recent years. They've got a population of 50 million. The North has a population of 25 million, just to put it in context. And they're the second country to join the OECD, so this is a wealthy country. Per capita of US$22,000. They grew from per capita of about US$160 in 1960, so you can see the dramatic transformation in their economy in the last 50 years.

They import about $1.7 billion from Australia in food and agri. This is a chart which just shows you the overall trading balance. We export about $22 billion, import about $9 billion. Most of the $22 billion for South Korea is iron ore and coal, that's about 80% of the total trade. And about between $1.7-$2 billion of that export is food and agri and beverages. So we're seeing quite good growth in the exports of food and agribusiness products to Korea.

This chart shows you the growth over the last five years, and the breakdown of the trade. As you can see it is quite a healthily growing market. It is a market with a lot of challenges, and I'll get to that in a minute. But you can see here, we've got about $1.7 billion. Beef is still the largest single product that we export to South Korea. Wheat has caught up very quickly. The reason why that proportion of wheat has increased in South Korea is because of feed wheat essentially. I'm sure many of you would be familiar with the drought in the US in the last couple of years which has caused the US supply to decline a little bit, and we've taken up a bit of the slack.

A lot of the cereals we're seeing new markets emerge in things like corn, which we haven't typically had a presence in, and the Americans obviously have got massive scale in some of those markets as well. So it's been tough for us to break into some sub sectors. But overall, quite a strongly growing market, and a big market.

The consumer preferences have some similarities to Japan, but there are differences as well. There's an increasing preference of the Korean consumers to value premium product, to value organic product and to value very safe product. They also have similar fears to the Japanese consumer where it comes to Chinese product, and you'll see there's more and more Chinese product coming into Korean supermarkets and discount shops, but on balance they try and avoid that if they can. There's a very strong ingrained preference to buy domestically produced product as well, and we benefit in the market from having a clean, green and safe image. So quite similar in that respect to Japan.

I think from now on you're going to see more of the organic story, you're going to see more of the preference for a paddock to plate type marketing pitch, which will really resonate with a lot of Korean consumers, and I think you're going to see the premium organic segment as well. Just some anecdotal information, in my neighbourhood in Seoul, there seems to be like a little organic bakery popping up every second week. Admittedly it's not an entirely representative neighbourhood, but nonetheless I think it's symptomatic of a broader trend that is really placing a premium on quality.

The final dot point on this page, I just want to emphasise that it's quite a unique business culture. I can see people nodding their heads, those who have been to Korea, and moves incredibly quickly. In many ways quite different to negotiating with the Japanese for example, who tend to be a bit more cautious and take their time when coming to a deal. The Koreans if they like you, they'll make a deal quickly. It's getting to the point if they like you and you have a good business case, setting the business case aside that's a given. If they like you, you'll get a contract signed, but getting to that point does take quite a bit of effort. But it is a very quick business culture, they like quick turnaround. There's an expression in Korean which is "very, very quick" and that's the overall sense of the business culture there. So quite different to Japan, and a market that you should take in its own right and not make too many assumptions that it is similar to China and Japan in some ways, although there are many differences as well.

I'll quickly talk about the challenges in the market before we talk about the opportunities. Everyone obviously knows that we have FTA negotiations underway with Korea. I can't escape the fact that the market is difficult for us at the moment because the US, the EU both have FTAs in place with Korea and that's resulted in significant lowering of tariffs for those two countries in terms of some of their agricultural products in Korea, and that's going to be ongoing. So the market is quite tough for Australian exporters at the moment, including with the high dollar, and there's no way to sugar coat that, it is quite a difficult market.

But that doesn't mean that you have to sort of set aside and put it in the too hard basket. It's like anywhere, if you try and persist, you take a long term approach, you work with your local partner and you establish a good rapport with a solid business case and a good product, you can do good business. But just be aware it is challenging.

The EU is now sending a lot of for example dairy products into Korean supermarkets. The US is becoming increasingly competitive on beef, on cereals as well, and feed for example. But again, these are not insurmountable barriers. If you choose your right partner, you go in with a good business case and are very careful about how you position your product, you can do very well. But it is a difficult market at the moment because of the tariff situation.

This is a list of some particular products which we're seeing spike in demand, or really starting from quite a low base in some cases. Dairy, it's something which hasn’t featured prominently in the Korean diet to date. Again, it feels a little bit like Japan a few years ago in that dairy was a really niche product, but that's good because it means there is quite a lot of room for growth. They're eating more butter these days, more margarine, drinking more milk, and cheese is starting to really increase in terms of the dominance in the local diet.

We're seeing a lot of baby foods which are organic emerge on the shelves, and again this is partially a bit of a pushback from the fears about buying stuff from China, but again Australia is very well positioned in baby food because they know we're safe.

Nuts and dried fruits is again something we're seeing a lot of interest in from consumers and the market growing quite quickly. Wine again is a tough market for us at the moment, and partially because we don't - Chile also has an FTA with Korea and their wine is pretty good, so very price competitive with what we can offer.

In the premium segment, we can certainly hold our own and charge a premium price because they recognise Australian wine as being a very, very good product.

Under emerging opportunities, we see a lot of growth in some new things in Korea which we haven't had a presence in typically. Table grapes for example, and there've been some quarantine issues of late about that, but we're hopeful that will be resolved. Western vegetables, again the Korean diet is quite unique. They don't eat a lot of western vegetables, but again it's changing and so we see a lot of demand increasing for things that they typically haven't eaten a lot of to date, and food technology.

I'll just talk very briefly about some channels in Korea because I’m conscious of time. This chart is really just to explain how the channels for buying food and beverage product is shifting over time. Traditionally Korea has been quite a fragmented market in terms of the channel structure. So your mum and dad shops on the corner have been typically the retail outlet where people go and buy their food and beverage. That's really changing with the emergence of big, mega retail chains. Costco for example have a presence. E-Mart, which is the biggest single discount chain - it's a mega-chain, they've got hundreds of shops. Tesco, re-branded as Home Plus in South Korea. They have chains pretty much everywhere, and a couple of others. This chart just shows the growth in those discount stores, and the amount of volume as you can see, they have now the largest amount of volume in terms of selling a product.

So the key message here is, if you're selling a food and beverage product, this is more for processed food suppliers, the key is to get into those discount shops as well because that's where a lot of the consumer decision making happens, and that sort of filters down to other channels as well.

The other thing to note on this page here is the internet shopping spike in terms of the sales per channel.

E-Mart is the largest discount chain. This is just to show you that the proportion of their imported goods is growing strongly, and so again just reinforcing the message about how important it is to get access to the big discount chain. This is fairly representative we think of the other chains as well.

This chart shows the import directly from those chains. Another feature of the Korean market is that food and beverage typically go through wholesalers but the proportion of product directly imported from the big discount chains, ie. not through wholesalers and then re-sold onto chains is increasing, and this chart is just to give you a bit of data about that. So again, reinforcing the importance of getting access directly to the discount chains. Austrade have got good links into these chains, so we can help you meet some of these people who actually make the purchasing decisions.

I wanted to share this page with you because it's actually really important, this is a typical mark up for a processed food product going to the Korean market. So the wholesale price of $1 as it arrives on the docks in Inchon or Pusan. Customs duty typically depending on the product of course about 8%. Getting it up to Seoul which is half the population in Korea, and by far the largest single market, typically around 20%. The importers will then - if you're going through a wholesaler, which again is a typical scenario, they'll take about 30%, add that onto the price. The wholesaler then adds another 15%, the retailer will add about 25%, then there's the VAT of 10%, and they'll sell it for about $2.66. So considerable mark up, and that hopefully will give the processed food exporters among you a bit of a feel for the value chain, and that will help you I guess price your product accordingly.

Again this will differ significantly depending on the product, but it's fairly typical of the type of market that you'll see in South Korea.

I'll finish with a brief case study and then hand over to my colleague Michael. It's an example really just to show you the type of work that Austrade does in the market for exporters. This is very recent, it's so recent in fact that they haven't inked the contract yet, we have obviously permission from the companies today to use it as a case study. The negotiations are still ongoing, but we're very confident they'll be concluded very quickly.

About a month or so ago, the Korean company - one of our contact importers, called us up and said we want to import some non-GMO canola oil for on-sale onto a leading snack manufacturer. They wanted 20 tons a month. Our team in Sydney - obviously in Seoul we looked at the opportunity, we assessed it as genuine, we sent it down to our team in Sydney. Our team in Sydney then qualified it, assessed it again as a genuine one, an opportunity that Australia had supply capacity for. Distributed it to potential suppliers in Australia. They got a reply very quickly. We were then given that information, we passed that back to the importer. The negotiations started immediately, and we're hopeful as I said of a contract being inked.

This is the very typical I guess example of how we can help, and there are many hundreds more of these type of examples.

So I'll just conclude my presentation by going back to where I started. South Korea matters as a market. We're quite optimistic about the prospects. I just encourage everyone to certainly include it as part of your Asia portfolio, or your Asia strategy when you're thinking about opportunities to export. We've got a fantastic team in Seoul. We've got about 19 staff including myself and one other Australian based. Very long standing team, eked networks into all industries, and we're waiting for your phone calls to help.

So again, thank you everyone for coming in this morning and it's been a pleasure to talk with you.

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