Korea National Council of Consumer Organizations

Recently, there is an ongoing increase in the number of people engaging in outdoor leisure activities like hiking, camping, or family travel. On the back of this increase, South Korea’s outdoor gear market has posted a noticeable growth from 2.43 trillion won in 2009 to 6.4 trillion won in 2013.[1] However, consumers express doubts about their prices (i.e., price bubbles and consumers having to bear the burden of advertising expenses) and quality per products. The Price Monitoring Center of KNCCO (President: Lee Deok-seung) is working to point out what the current issues are by conducting an analysis of the structure of domestic outdoor gear businesses’ sales prices and their financial statements.

1. The top four outdoor gear businesses’ operating profit margin (20%) is 6.4 times higher than that of other textile/clothes businesses.[2]

- The share of their advertising/sales promotion expenses in sales (4.9%) is 7.5 times higher than that of manufacturers and 12.6 times higher than that of textile/clothes businesses.

According to the analysis of the financial statements of the top four domestic outdoor gear businesses,[3] their average annual growth rate of sales over the past five years stood at 25.1%. Their operating profit margin (20%) in the same period was 6.4 times higher than that of other textile/clothes businesses (3.1%).[4] As for K2, its operating profit margin in 2013 stood at 30.1% and it has kept posting an operating profit margin of higher than 20% over the past five years.

Looking at the share of their advertising/sales promotion expenses in sales, the outdoor gear business stood at 4.9%,[5] i.e. 7.5 times higher than that of ordinary manufacturers and 12.6 times higher than that of other textile/clothes businesses. The share of their advertising/sales promotion expenses in sales increased 7.3% in the 2008-2013 periods. The share of the cost of sales decreased 3.6% in the same period, which shows that these businesses focused more on ads and sales promotion, than on quality.

Table 1. The ratio of sales costs and ad/sales promotion expenses to sales

Source: Audit report of Black Yak, Youngone Outdoor, K2, and Millet

2. The domestic prices for some items were 60% higher than their prices in foreign countries.

- There is a price difference of 16.9% between goods sold at department stores and those on internet shopping malls

According to a survey of the sales prices of the same outdoor gear, domestic prices were 40% higher than their prices in foreign countries on average. For instance, Arcteryx and Mammut, which are world-famous brands, are priced 60% higher domestically than in foreign countries.

Another survey disclosed that prices for the same goods are much different between department stores and internet shopping malls. According to a survey of the prices of some items from the top five outdoor gear brands, there was an average of a 16.9% price difference between department stores and internet shopping malls. For some Black Yak items, the price difference came to an average of 27.4%. Considering that the average department store use fee is 28.5%, which was announced by the Fair Trade Commission, it appears that these businesses set prices based on the sales of department stores, which require the highest distribution-related fees.

Table 2. Comparison of prices of Black Yak goods offered by different distribution channels

	E Poppin Jacket	Blue Hole Jacket #1	B2XL14 Jacket #1	U Real Jacket #1	Wannabe Jacket #1
In-house shopping mall	168,000	148,000	180,000	198,000	168,000
Department store	168,000	148,000	188,000	198,000	168,000
Internet shopping mall	139,500	139,500	138,320	102,790	130,760
Difference in amount	28,500	34,910	49,680	95,210	37,240
Difference in percentage	17.0%	23.6%	26.4%	48.1%	22.2%

Source: Black Yak’s own shopping mall; Lotte Department Store; NAVER Shopping

3. In the case of rock climbing shoes, distribution handling fees and profit margins are higher than their import cost.

- The government’s intervention is required concerning excessive profit margins.

The Korea Customs Administration disclosed that the prices of imported rock climbing shoes range between 6,838 to 370,202 won and they are sold at prices that are about 4.4 times higher on average than those in the country-of-origin. The third group of import price of the shoes which are close to the average, sold for 239,500 won at a department store. However, their import price was only 57,055 won (23.8%), vs. the distribution fee (28.5%) and the import business’s profit (29.3%). It is judged that the consumer price was the result of a price bubble created in the middle of the boom for outdoor gear, the store attached the highest sales price possible because it is a famous foreign outdoor gear brand, and the seller charged the high distribution fee in the market.

Table 3. Structure of prices for imported rock climbing shoes sold at department stores

	Amount	Percentage	Remarks
Import price	57,055	23.8%	Source: The Korea Customs Administration
Sales management expense	44,068	18.4%	The share of sales management expenses (not including sales commission) in sales based on the top four outdoor gear businesses’ financial statements
Distribution fee	68,258	28.5%	Source: The Fair Trade Commission
Import business’s profit	70,119	29.3%	The share of what is left after excluding import cost, sales management expense, and distribution fee from the sales price
Sales price	239,500	100%	Total

※ Based on the third group’s price(4.2 times the import price), analyzed the structure of prices close to the average price (4.4 times the import price)

Outdoor gear businesses should set reasonable sales prices. The watchdog agencies should set up an institutional apparatus to put a stop to unreasonable profit margins. Consumers should strive for rational purchasing.

Domestic outdoor gear businesses appear to enjoy a very high operating profit margin, as compared to other businesses. This is supposedly due to the practice of setting high prices and has nothing to do with product quality. Businesses need to focus their capability on the supply of high-quality goods at reasonable prices, rather than on earning high profit through selling world-famous brands.

The government should set up an institutional apparatus to put a stop to unreasonable profit margins in connection with the need to control consumer prices and improve the business environment for manufacturers.

Consumers should display rational consumption behavior (i.e., meticulously checking to see whether the goods purchased by them are actually suitable for them, rather than just carelessly choosing expensive, highly-functional ones).

Through meticulous monitoring, consumer organizations will continue to strive to get the market to operate in a way that it supplies good-quality outdoor gear to people at reasonable prices.

-----------------------------Partners of Korea National Council of Consumer Organizations------------------------------

National YMCA of Korea, Green Consumers Network in Korea, Korea Federation of Housewives Clubs, National Council of Homemakers Classes, Korea Consumer Education Center, National Council of YMCAs of Korea, Consumers Union of Korea, Consumer Affairs Institute, Citizens Alliance for Consumer Protection of Korea

[1] Outdoor gear market size, Samsung Fashion Institute

[2] Audit report for Black Yak, Youngone Outdoor, K2, and Millet

[3] Kolon Industry is also included in the country’s top five outdoor gear brands, but its financial statements do not specify the portion of the outdoor gear sector. Thus, Kolon Industry was excluded in this report.

[4] Businesses’ operating profit margin in 2012, The Bank of Korea

[5] Audit report on outdoor gear businesses in 2012 (Black Yak, Youngone Outdoor, K2, and Millet). According to the Bank of Korea, the percentage of ads/sales promotion expenses in sales for ordinary manufacturers and textile/clothing businesses come to 0.6% and 0.39%, respectively.