A New Chapter in the South Korea’s Beer Industry

On June 5, the South Korean government announced to reform the tax system on beer from price-based to volume-based system beginning with beer and takju, Korean traditional rice wine, to address imbalances in taxes between imported and domestic beer.

Beer landscape in South Korea – imported beer leads the market

The change — the first since 1968 — calls for a tax system that levies based on amount rather than price of beer. Currently, South Korea imposes a 72 percent liquor tax on beer. The tax base for domestic beer includes manufacturing costs, sales, marketing, promotions costs, profit and general expenses.

In contrast, imported beer tax is based only import prices, making it possible to sell ‘4 (cans) for 10,000 (won)’ — cheaper than domestic beer brands. From 2018, imported beer from the United States and the European Union benefited from customs tax exemptions, according to their trade agreements with South Korea, allowing more room for price promotion.

Furthermore, South Korean consumers see imported beer as a better quality and richer taste option than domestic beer. Although domestic producers launched premium products such as all-malt beer, they failed to break the domestic beer’s cheap and low-quality image.

In 2018, the average liquor tax for domestic beer was estimated at 848 won (USD 0.70) for a liter while that of imported beer is believed to be 709 won.

Four for 10,000 promotion will still be in trend

The key to a changed alcohol taxation system in South Korea is how it will affect the decreasing sales of local beer. In Japan and China, where the volume-based tax is applied to beer, the market share of imported beer is less than five percent. On the other hand, imported beer successfully took a premium positioning in South Korea, and it recorded more than one-fifth of the total sales.

According to Euromonitor International, imported lager took 21.3 percent of South Korean lager market in 2018. The new liquor tax is expected to cause a slight drop in the tax on domestic beer. While the tax on imported beer will rise, imported beer will not likely experience a large decrease once the new tax system is implemented.

Consumers perceive imported beer as a different category from domestic beer. While the price of Korean beer is expected to fall slightly due to the beer tax reform, beer consumers who enjoy imported beer will not switch to the domestic beer/lager due to the small price reduction. Additionally, leading Korean brewers are also expanding portfolios for foreign brands, hence imported beer is forecasted to remain solid among consumers looking for diverse drinking experiences.

Geography Category Data Type Unit   2014 2015 2016 2017 2018
South Korea Lager Total Volume million litres   1,728.3 1,798.5 1,725.3 1,823.1 1,883.8
South Korea Domestic Lager Total Volume million litres   1,641.0 1,674.4 1,561.5 1,487.5 1,482.3
South Korea Imported Lager Total Volume million litres   87.3 124.2 163.8 335.6 401.5
South Korea % of Domestic Lager Total Volume million litres   94.9% 93.1% 90.5% 81.6% 78.7%
South Korea % of Imported Lager Total Volume million litres   5.1% 6.9% 9.5% 18.4% 21.3%

 

Who is the winner after introducing new liquor tax reform?

The new system will give momentum for craft beer and premium takju to develop more premium variations thanks to increasing price-competitiveness. Craft beer is projected to grow as the consumer base expands, though the current market share remains small at less than one percent.

Domestic craft beer sees a growth due to increasing consumer’s demand on the diversified taste of beer while the domestic lager experiences a decline. The number of beer breweries almost doubled over the last five years. Since craft beer’s high price is the biggest obstacle to expand the consumer base, this new tax system will benefit micro craft beer companies and premium takju.