Dairy and Products Annual Update in Republic of Korea Oct. 17, 2016

Highlights

Since the FMD outbreak in 2010, local raw milk production has rebounded, but has outpaced slower growing demand. As a result, higher ending stock levels in 2014 carried over into 2015. Overall local raw milk products recorded 2 percent negative volume, but per capita volume consumption continued to increase in 2015. Drinking milk products recorded negative volume and value growth in 2015 as per capita volume consumption continued to decrease. Consumers who continue to drink milk will shift to reduced fat milk from full fat fresh milk. The share of reduced fat fresh milk is projected to be 19% in 2020, up from 16% in 2015. Flavored milk drinks contain sugar, so it is unlikely to post strong growth given health and wellness trends. All cheese categories recorded positive value growth in 2015. The introduction of different types of processed cheese led to growth. Cheddar sliced processed cheese dominated processed cheese but the range expanded to include Mozzarella, Gorgonzola, Gouda and Camembert sliced processed cheeses. The potential uses on product packaging promoted use of cheese on hamburgers, sandwiches, instant noodles and Gimbap. A new type called snack cheese or portion cheese also helped processed cheese to continue positive value growth. Local NFDM production decreased 20 percent in 2015 from the previous year while consumption remained relatively flat. However, year end inventory remained high mostly due to less expensive imports.

Executive Summary

Korean raw fluid milk production posted 2 percent negative volume, however, per capita volume consumption for dairy products overall continued to increase in 2015. Drinking milk products recorded negative volume and value growth in 2015 as per capita volume consumption continued to decrease. In South Korea, raw milk production rebounded since 2011 after recovering from foot-and-mouth disease (FMD) outbreak in 2010, but consumer consumption was lower. Consumers who continue to drink milk will shift to reduced fat milk from full fat fresh milk. The share of reduced fat fresh milk is projected to be 19% in 2020, up from 16% in 2015.

Domestic cheese manufacturers distribute imported cheese brands, but with the exception of Philadelphia spreadable processed cheese, value share of global brands remained small. Korean consumers are not yet familiar with natural unprocessed cheese, but the number of imported brands in unprocessed cheese continues to increase. All cheese categories recorded positive value growth in 2015. The introduction of different types of processed cheese led to growth. Cheddar sliced processed cheese dominated processed cheese but the range increased to include Mozzarella, Gorgonzola, Gouda and Camembert sliced processed cheeses.

Over production of fresh milk and less expensive NFDM imports have resulted in higher inventories in 2015. In 2015, local NFDM production amounted to 17,000 MT; a 20% decrease from the previous year. Yoghurt is expected to be stagnant with 1% at constant 2016 prices. Drinking yoghurt and plain yoghurt products are expected to increase, but fruited yoghurt is predicted to decrease 2% at constant 2016 prices. Flavored yoghurt, which was mainly targeted at children, showed positive value and volume growth in 2015 thanks to active marketing campaigns using famous animated characters. Fruited yoghurt contains sugar or fruit concentrate, so consumers shifted to plain yoghurt in order to consume more natural food. Ice cream manufacturers are set to introduce premium single portion ice cream desserts, such as ice cream waffles or macaroon ice cream. Manufacturers are predicted to develop ice cream by targeting adult consumers rather than children. Coffee-flavored ice cream and real cheese cake with ice cream are likely to remain popular with adults.

Commodities:

Dairy, Milk, Fluid

Production

Local raw milk products recorded 2 percent negative volume but per capita volume consumption continued to increase in 2015. Drinking milk products recorded negative volume and value growth in 2015 as per capita volume consumption continued to decrease. In South Korea, raw milk production increased since 2011 after recovering from foot-and-mouth disease (FMD), but has outpaced consumer consumption growth.

Consumption

Fresh milk decreased by 2% in both retail value and volume terms in 2015. In particular, full fat fresh milk posted value decline of 3% due to the increase in value share of 3% in semi skimmed fresh milk. According to the research, drinking more than 680ml per day is not beneficial to bone health for adults so drinking only one cup of milk per day is enough. There were several articles explaining the disadvantages of drinking cow's milk for health which quoted research from Uppsala University in Sweden. The articles also recommend reduced fat milk for adults to help prevent a number of adult health problems. The volume sales of fresh milk therefore decreased since 2011, but reduced fat milk has been recorded to continue increase despite overall slowdown in milk since 2012.

Manufacturers focused on launching premium positioned milk products to attract consumers such as fat free milk (FFM) but the marketing strategy did not result in positive volume or value growth. Due to frequent promotional sales through major distribution channels to boost drinking milk because of oversupply in volume, current unit price of flavored milk drinks and cow's milk both declined, although there was more premiumisation in drinking milk products. Organic milk and fat free milk (FFM) also declined in both volume and value terms during 2015 which are normally distributed so they can be targeted at children, but they were affected by the overall weak performance of children's food market. Flavored milk drinks declined by 3% in both value and volume in 2015. Dairy only flavored milk drinks declined more rapidly than flavored milk drinks with fruit juice, with banana flavor continuing to lead. Among dairy only flavored milk drinks, chocolate flavor had the largest share followed by coffee flavor. Meanwhile, banana flavor's value sales continued to have the largest share of 30%. Soy milk declined by 3% in value terms in 2015. To boost the stagnant market, players introduced different flavored soy milk drinks such as green tea soy latte, soy milk with real fruit juice and coffee flavored soy milk to attract drinkers of RTD products, targeted at the younger consumer group.

Marketing

Seoul Dairy Cooperative maintained the leading position with a 31% value share of drinking milk products. The company introduced reduced fat fresh milk in March 2015, which helped it gain more value share. The company attracted consumer interest in fresh milk with new products. The second and third players in drinking milk, Maeil Dairies Co. and Namyang Dairy Products Co., had respective value shares of 19% and 16% in 2015. Maeil Dairies Co. expanded fresh milk products' line by adding more reduced fat fresh milk in 2014 to boost stagnating milk category.

Consumers who continue to drink milk will shift to reduced fat milk from full fat fresh milk. Market share of reduced fat fresh milk is expected to be 19% in 2020, up from 16% in 2015. The value share of reduced fat fresh milk increased to 38% from 30% in 2015. Flavored milk drinks contain sugar, so it is unlikely to post strong growth given the health and wellness trend. Manufacturers replaced sugar with fructose to reduce calories in skimmed milk.

Production, Supply and Demand Data Statistics:

Policy

Commodities:

Dairy, Cheese

Production

Domestic manufacturers distribute imported cheese brands, but with the exception of Philadelphia spreadable processed cheese, value share of global brands remained small. Korean consumers are not yet familiar with natural unprocessed cheese, but the number of imported brands in unprocessed cheese continues to increase especially by Seoul Dairy Cooperative and mixed retailers.

Seoul Dairy Cooperative maintained a solid leading position with a 32% value share in 2015. The company strengthened the new brand by targeting adults; it contained 83% natural cheese and lower sodium. Through active marketing strategy for the representative new brand of Seoul Dairy Cooperative, the company retained the largest value share in cheese.

Sangha cheese brand by Maeil Dairies Co. posted value growth of 2% in 2015, although value share remained the same. The company had a strong performance in both processed cheese and unprocessed cheese. It maintained the leading position within soft cheese excluding grated cheese. Within soft cheese, grated cheese for pizza had a 40% share with the highest number of natural soft cheese products in South Korea.

Within soft cheese, private label grated cheese had a strong performance. Most hypermarkets distribute their own grated soft cheese for pizza at a cheaper price than leading brands, so they have competitive advantage in price.

In 2015, private label had a 3% value share of processed cheese and 16% value share of unprocessed cheese despite the value decline or stagnation of most leading grated soft cheese brands

Consumption

All cheese categories recorded positive value growth in 2015. The types of processed cheese became diverse, which led to growth. For example, Cheddar sliced processed cheese dominated processed cheese but the range expanded to include Mozzarella, Gorgonzola, Gouda and Camembert sliced processed cheeses. The potential uses on product packaging promoted the use of cheese on hamburgers, sandwiches, instant noodles and Gimbap. In addition, a new type called snack cheese or portion cheese also helped processed cheese to continue positive value growth. As the number of consumers who enjoy cheese when drinking wine is increasing, changing the shape of processed cheese made it easier to eat.

Soft cheese showed 4% value growth thanks to the popularity of string cheese. Manufacturers focused on making simple shapes of unprocessed cheese for convenience. String cheese therefore grew strongly since 2011, which led sales reaching $50 million in 2015. The original natural soft cheese still had a lower share of unprocessed cheese. Camembert showed stagnation in value share and other cheese increased by 8% while Mozzarella and Cheddar cheese lost marginal value share in 2015.

As the number of brands and shapes was diverse, current unit price of cheese increased slightly in 2015. Full fat cheese and organic cheese continued to grow even if at a slower rate. Previously, organic cheeses were targeted at babies and children, but in 2015 this cheese type was targeted at adults who are concerned about health and weight management with reduced fat cheese including vitamins and dietary fiber.

In South Korea, only cream cheese was available within spreadable processed cheese. Philadelphia, distributed by Dongsuh Foods Co., dominated with a 78% value share in 2015. Cheese is still distributed mainly through hypermarkets with a 68% value share.

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Marketing

Processed sliced cheese is already mature and special cheese such as organic or full fat cheese targeted at babies and children will also decrease in volume terms due to continuing lower birth rate.

In unprocessed soft cheese, grated cheese and string cheese types will continue to have a strong performance. Instead of use with pizza, grated cheese for other Korean-style food is expected to increase due to manufacturers' efforts to introduce new packaging for existing grated cheese products. Even if the growth rate is slower, string cheese will be popular with consumer groups of all ages as a snack.

With continuing popularity of grated soft cheese, hypermarkets will still be considered the most popular distribution channel thanks to strong performance of private label's grated cheese products. Even if processed cheese must be kept refrigerated, non-store retailers which deliver products to the home will continue to deliver the products.

In 2015, Pulmuone Co. Ltd entered the unprocessed cheese category with four different types of soft cheese. The company already has strong brand reputation in health and wellness food products in South Korea, so it is expected to have the same performance in soft cheese. As new products, especially those positioned as premium, are actively introduced constant unit price of both processed cheese and unprocessed cheese are predicted to increase slightly.

Commodities

Dairy, Milk, Nonfat Dry

Production

Local NFDM production decreased 20% in 2015 from the previous year while consumption remained relatively flat. However, year end inventory remained high mostly due to less expensive imports. Local raw fluid milk price reached $1.1 per liter since August 2013, the highest raw fluid milk price in the world. As a result, local NFDM production costs roughly $11 per liter. However, practical retail value of market price can be only $3 per liter due to an inexpensive imported NFDM

Consumption

In 2015, inventory of NFDM and amount of duty-free NFDM imports impacted the markets. The oversupply of fresh milk led to the significant amount of NFDM production at 17,076 metric tons. In 2015, NFDM consumption amounted to 36,648 MT, an increase of 14 percent compared to the year of 2014. NFDM is used primarily for bakeries, infant formula and as an ingredient in other dairy products. Since NFDM production is largely a result of marketing quota policies, consumption is expected to continue to track closely with production.

In 2015, NFDM import increased by 1 percent to 21,260 MT compared to 2014. Due to the FMD outbreak in November 2010, imports increased to 34,000 MT, jumping by 320 percent over 2010. On March 2011, the Ministry of Strategy and Finance (MOSF) announced temporary a zero duty on 30,000 MT of powdered skim & whole milk powder through the end of 2011 in order to stabilize food prices amid growing inflationary pressures. There was over production of fresh milk which resulted turned in the over production of NFDM in 2015.

Marketing

The Korea Customs Service reimburses the high out-of-quota tariff of 176% to importers when they have re- exported processed dairy-based products made from the imported NFDM. Korean dairy manufacturing companies are looking forward to expanding the market opportunities for exporting to China. Local food processors import NFDM for the purpose of processing into infant formula, bakery use and re-exporting to other countries, including China. However, in 2015, most imported NFDM was used for bakery ingredients and infant formula.

Production, Supply and Demand Data Statistics

Whey Products

Whey is co-product of cheese and contains lactose, protein, vitamins and minerals which are 50% of the nutrient of the original milk. Diverse whey protein usage across categories such as sports & energy bar, cereals, desserts and ice cream, baby food, bakery goods, and soft drinks continue to be introduced to the market. Whey protein demands are supported by body builders, extreme athletes, everyday active consumers and weight watchers. Whey/dairy proteins are considered as a key ingredient for satiety promoting products and aid to reduce risk for many adult diseases such as bone health, obesity, diabetes and heart diseases as the health benefits.

Yoghurt Products

Production / Consumption / Marketing

In 2015, yoghurt and sour milk products decreased in both value and volume terms, the value posted 1% decrease to reach $2.0 billion value sales in 2015. Drinking yoghurt, which had the largest value share, declined by 4% in value terms due to absence of new products. Most categories of spoonable yoghurt (excluding fruited yoghurt) had healthy value growth due to the craze of Greek yoghurt. The Greek yoghurt will continue the popularity of plain yoghurt. In foodservice, Greek yoghurt will also be diverse and it is expected that the number of Greek yoghurt specialist cafés will increase, targeting younger consumers who are especially concerned about health.

Drinking yoghurt and plain yoghurt is expected to increase, but fruited yoghurt is predicted to decrease 2% at constant 2016 prices. Flavored yoghurt, which was mainly targeted at children, posted positive value and volume growth in 2015 thanks to active marketing campaigns using famous animated characters. Plain yoghurt had 32% current value growth in 2015.

Consumers tend to purchase plain yoghurt for not only spoonable yoghurt, but also as a dressing for fruit and salad given the health and wellness trend. Fruited yoghurt contains sugar or fruit concentrate, so consumers shifted to plain yoghurt in order to consume more natural food.

Maeil Dairies Co. introduced Maeil Bio large pack size in 2014, which had a 20% value share within a year of its introduction. Namyang Dairy Products Co. also posted a strong performance of Milk 100 nothing-added concept of plain yoghurt with both large cup and small cup pack size. Current unit price of plain yoghurt therefore declined slightly in 2015. Korea Yakult maintained the largest value share of 45% within yoghurt and sour milk products. Although the company lost value share in 2015 due to the decline in value share of drinking yoghurt, it still had a solid leading position. The company had a 51% value share within drinking yoghurt. Binggrae Co. maintained a strong position with a 34% value share in plain yoghurt. The company posted 20% value growth within plain yoghurt.

Ice Cream

Production / Consumption / Marketing

Ice cream was the only packaged food category where hypermarkets held a very small retail value share (only 4%) in 2015. Supermarkets and independent small grocers regarded ice cream as an important product to attract consumers.

The rising current unit prices of ice cream as a result of the government retail selling price system limited the fall in retail current value sales to 1% and sales reached $1.9 billion in 2015, however, retail volume sales decreased by 2%. In addition, the MERS Corona Virus spread nationally during summer 2015. Thus, ice cream sales decreased as consumers put off visiting retailers to avoid being infected with the virus. In terms of format, sticks continued to lose retail value share in impulse ice cream and fell to 29% in 2015. On the other hand, cones share continued to rise gradually to reach 20%. The share of “others", such as pouches, cups and tubes, increased between 2012 and 2015 to reach one half of retail value sales.

In particular, pouch ice cream benefited by being targeted at adults. In South Korea, vanilla, strawberry and chocolate remained the top ice cream flavors in retail value sales terms in 2015. The popularity of coffee-flavored ice cream steadily grew, especially among adult consumers. On the other hand, fruit-flavored ice cream remained limited in terms of product variety and existing brands lost retail value sales.

Lotte Confectionery leads ice cream in 2015, with a 30% share of retail value sales, followed by Binggrae, with a 27% share. As retail value sales of ice cream decreased, Lotte Confectionery focused on super premium ice cream and premium desserts. Binggrae Co. expanded the flavors of its famous Melona (melon flavor) brand. Since 1992, the company has extended its flavors to include strawberry, banana, and mango.

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