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The E-Commerce Led Transformation of Korean Logistics

To say that Korea has embraced e-commerce is an understatement. With 85% of the 50 million inhabitants equipped with a smartphone, almost 100% of consumers aged 10-40 have shopped online.

Written By: Johnathan Noone, Senior Manager, Global Occupier & Investor Service, Cushman & Wakefield

The scale of e-commerce potential in Asia cannot be overestimated. With BMI Research projecting that the market will be worth US$1.6 trillion by 2021, the rise of affordable, high speed mobile computing is bringing retail to the fingertips of 4.5 billion people. Such a rapid industry expansion is of course creating teething problems. Chief among these is the shortcomings of the logistics industry, a problem that is only going to become more acute as customers demand faster and more reliable delivery of goods. In 2016 the Asian Development Bank forecast that US$8.4 trillion in investment would be needed to upgrade Asia’s transportation infrastructure in order to support the growth of e-commerce and trade.

A microcosm of this challenge can be seen in Korea. To say that Korea has embraced e-commerce is an understatement. With 85% of the 50 million inhabitants equipped with a smartphone, almost 100% of consumers aged 10-40 have shopped online. Indeed, not only are Koreans shopping online more than almost any other country in the world, but they are also buying in product categories that have very little online penetration anywhere else. A great example of this is FMCG. In Korea, 16.6% of all FMCG shopping is done online, a figure expected to grow to 25% within the next decade. This compares favourably even with a mature market like the USA, where online FMCG penetration stands at only 1.4%.

As you can imagine, this trend has created a significant headache for Korean logistics, a pain which is doubled by the demands of Korean consumers expectant of rapid and convenient service. One example of this is home food delivery – meals are dropped off and the same worker returns 40 minutes later to pick up the dirty plates.

How can Korean logistics keep up with expectations?

The reality is that up to this point they haven’t been keeping up. The challenge isn’t necessarily a lack of warehousing space. Nor is there a shortcoming in manpower, with labour costs sitting below those of neighbouring Japan. Instead, the pain point seems to lie in the quality of warehousing facilities. Having a stock of warehouses equipped to an international standard is essential as the breadth of products and the demand for speed continue to increase. Up to this point, MNCs entering the market looking for quality warehouses have often been left disappointed, sometimes being forced to build-to-suit in order to meet their needs.

Ultimately, the lack of sophisticated players in the Korean logistics market with a standardised and integrated strategy has been a limiting factor to further growth of the local e-commerce market. Having said that, there are already signs of change that bode well for the future.

International opportunities

In recent years the Korean logistics industry has seen a gradual influx of foreign developers and investors partnering with local firms to increase the quality of local facilities. Hundreds of millions of dollars have already been invested by the likes of Blackstone Group and GIC, with more than 6.7 million sqft being delivered in Greater Seoul in 2017 alone. Not only are these global players bringing their financial clout to the Korean logistics space, but they also provide perspective and guidance of what an international-quality facility should be. This is essential if the industry is to reach the standards of markets like Singapore and Japan.

The opportunity on offer to early movers into the market is significant. The gap in the leasing market for space of an international standard is driving significant yields of 5.5-6.5% in the key logistics areas of Gyeonggi-do province, including Icheon, Yongin, Hwaseong, Anseong, Ansan, and Anyang. As the market continues to gradually mature and supply grows to meet demand, yields are expected to compress towards 5%. This will follow a similar pathway to Tokyo inland logistics, where yields have gradually fallen from approx. 6.5% in 2010 to 4.5% today.

With e-commerce forecast to account for 31% of Korea’s retail industry by 2021, from 18% in 2016, the opportunity is clearly sizeable. For this potential to be reached though, there remain significant Korean logistics challenges to be overcome. These challenges could well yield significant rewards for international investors and developers willing to step into this market.

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