Low prices foreboding recession

By Yoon Ja-young

The economic slump is changing market trends, with more people seeking cheaper products and sellers cutting prices. While some say prices are becoming reasonable from the days of the bubble, others are concerned it may be a foreboding of a Japanese-type long recession.

The changing trends in consumption can be witnessed in the wine market. During the era of the asset bubble, the wine market was led by premium wines from France and Chile, with price tags of over 100,000 won.

According to Lotte Department Store, however, wines priced less than 50,000 won took 75 percent of total sales this year, up around 10 percentage points from the previous year. At E Mart, a retail outlet chain, wines costing less than 20,000 won take 58 percent of sales.

While coffee franchises are closing due to red ocean competition, the franchises specializing in cheaper coffee are expanding their stake. Total sales of Ediya, a low-priced coffee franchise, grew 48 percent to 116.2 billion won last year from the previous year, marking the steepest rise among local coffee franchises. Paik’s Coffee, a coffee franchise launched by franchise restaurant Midas Paik Jong-won, is also expanding shops with the success of its 1,500 won tall Americano. Juicy Fresh Juice Bar is another success story in franchises, selling fresh juice at 1,500 won.

Some analysts say it reminds them of Japan when it was entering its long recession. LG Economic Research Institute economist Lee Ji-pyeong said in a report that what Korea is facing now, such as a low birthrate, aging population, strengthening of the local currency, challenges by developing countries and pressure to make a shift from copycat to innovation leader, are what Japan had to go through when it fell into the low-growth trap.

He then analyzes the list of items hit during Japan’s two lost decades. “When you see the list, there are many innovative IT products that gave birth to the new economy but also included are numerous low-priced products and services reflecting the long recession,” he notes in the report.

In 1993, for instance, cheap suits for men, low-priced restaurants, and ultra-low-priced overseas tour packages hit the market. Half-priced hamburgers, shops selling every item at 100 yen and cheap gyudon (a Japanese dish similar to bulgogi) also represent the new era.

Some economists warn that price cutting will lead to weak investment and slow job growth, forming a vicious cycle. Korea’s consumer prices have been marking below 1 percent growth for 11 consecutive months, and real wage growth is also stagnant in the 1 percent range.

Lee said cutting prices may seem to help improve corporate profitability for the short term, but stressed that it does not last long in many cases.

“Low-priced chains like McDonald’s were praised as the winner of ‘deflation management,’ but they faced limitation when they only resorted to the low price,” he said.

He cited UNIQLO as a more successful case. “It made a leap in the deflation era with low-priced garments like others, but it later created new additional value by using new materials or applying the basic design to senior citizen fashion,” he said, advising businesses to go a step further from merely cutting prices.