Consumer Market Suffers 'Squeezed Middle'

As income disparity widens, so does the spending gap, triggering fears of social instability. Spending and income patterns both show evidence of a "squeezed middle," where sales of luxury goods as well as ultra low-priced products have increased, while mid-priced products are struggling.

Kim Min-jung at Hyundai Research Institute said, "As the income gap widens, high-income earners look for more expensive products, while low-income earners are showing the opposite tendency. The price gap is widening more than ever before."

◆ Watches, Cars, Cosmetics

At the upper end of the scale, sales of luxury European watches rose more than six-fold from US$23.83 million in 2004 to $158.9 million last year. Oh Young-hoon at Lotte Department Store, said, "The popularity of luxury brands ranges from bags and clothes to watches and other accessories. Despite the slow domestic economy, sales of luxury watches post double-digit growth every year."

Demand for luxury cars is rising as well. Imported cars accounted for 13.96 percent of the local market as of July this year compared to just 6.92 percent in 2010.

Sales of Korean-made cars increased only for subcompacts and light trucks, while sales of mid-sized passenger cars and large sedans have been dropping since 2010.

Lee Hang-koo at the Korea Institute for Industrial Economics and Trade said sales of the LF Sonata, the most recent version of the mid-sized sedan to come out in five years, dropped by half just five months after it was released, showing how slow sales are for mid-sized and large cars. The only cars that continue to see increased domestic sales are pickup trucks for businesses and luxury imports.

The same trend is apparent in the tourism industry. The number of Koreans traveling abroad has increased by a million every year, while those who opt to travel within the country have dropped more than 2 million a year after peaking in 2011.

The number of Koreans spending money on local restaurants and shopping centers has dropped by around 4.5 million over the last two years.

◆ Mid-Range Products

This polarization in spending threatens Korean manufacturers. As the market for products aimed at middle-class consumers shrinks, a growing number of local manufacturers are facing financial difficulties.

One executive with a domestic apparel maker said, "For the domestic fashion industry to be able to invest in R&D and develop new products to compete with high-priced luxury goods, they must first gain a solid footing in the domestic market, but that is becoming increasingly difficult as the market for mid-priced products shrinks."

A case in point is the cosmetics market, which has split into low-priced products dominated by Korean makers such as The Face Shop and Missha, and high-end imports.

Jang Jun-ki of the Korea Cosmetic Association said, "As the market becomes increasingly polarized, sales have plummeted for mid-sized cosmetics makers like Hanbul and Coreana. This trend has weakened the entire domestic cosmetics industry."

Experts said domestic manufacturers need to become more active in dealing with a changing market. Chun Su-bong at the Korea Chamber of Commerce and Industry said, "If it is too difficult to bolster the quality of a product over a short period of time, businesses need to roll their sleeves up and come up with a wide range of new ideas for new products and target key consumer groups with specialized items."