Chaebol's entry, one-time foray...Can the Korean e-cigarette market rise in 2024?

Chaebol's entry, one-time foray...Can the Korean e-cigarette market rise in 2024?

South Korea's British American Tobacco Rosmans (BAT Rosmans) announced on January 15 that it would expand its e-cigarette product "Vuse Go 800" sales network nationwide, covering 30,000 convenience stores and tobacco shops in Seoul and other regions.

VUSE entered the Korean e-cigarette market for the first time in mid-July 2023. Half a year later, the brand once again promoted the expansion of its sales network to cover the entire country.

VUSE's actions are not isolated. Since 2023, many Chinese disposable e-cigarette brands have entered the Korean market. Among them, ELFBAR entered the market in early February and signed an exclusive distribution agreement with Setopia, a well-known Korean distributor. At the same time, well-known brands such as LOST MARY and ELUX have also entered the Korean market, breaking the market competition that was originally dominated by open e-cigarettes.

The influx of these well-known disposable brands into the Korean market has attracted great attention from those in the e-cigarette industry. Industry insiders have speculated whether this marks the beginning of the rise of South Korea's disposable e-cigarette market?

Against this background, on January 15, Two Supremes had in-depth exchanges with many people in the Korean e-cigarette industry to understand the current status of the Korean e-cigarette market.

The disposable market is gradually gaining momentum, but there is no “first”

According to public data from Korean Customs, in 2023, South Korea imported a total of US$200 million in e-cigarettes, of which e-cigarette equipment (heat-not-burn equipment and open equipment) accounted for more than 77%, and oil-containing products (closed e-cigarettes, including disposable (but the performance of the latter has been mediocre in the Korean market) reached 23%, approximately US$57.8 million, and has basically maintained a monthly increase. Among them, in December, the sales of oil-containing products increased by 47% month-on-month, reaching US$7.2 million. This data trend is consistent with the entry of disposable e-cigarette brands into the Korean market mentioned above.

However, this data does not fully reflect the actual size of the Korean e-cigarette market. A professional who has been working in the e-cigarette industry in South Korea for many years revealed that because South Korean customs has extremely strict testing requirements for nicotine products, most disposable e-cigarettes entering South Korea are actually semi-finished products and require subsequent processing steps such as oil filling in South Korea. . Therefore, the actual annual share of the Korean disposable market is far greater than the US$57.8 million indicated in the import data.

In a different trend from mainstream markets such as Europe and the United States, the Korean e-cigarette market has led to open e-cigarettes with higher cost performance due to high e-liquid taxes and other reasons, which has also given rise to a complete e-liquid industry. In the Korean market, there are many types of e-liquids, and many specialty stores used to only focus on selling e-liquid products and did not get involved in the equipment business. This is relatively rare in other markets such as Europe and the United States.

However, recently many specialty stores have begun to sell devices together with e-cigarette oil, and some stores have even begun to launch disposable e-cigarette products. Industry insiders said that two years ago, due to the high profits of Korean e-liquids, the retail side only needed to focus on the e-liquid business to obtain considerable profits. However, due to the influx of many e-liquid companies in the past two years, the profit level of e-liquids has been reduced, which has greatly squeezed the living space of the original e-liquid companies. At the same time, it has also caused the unit price and profit of open e-cigarettes to drop. Faced with fierce market competition, these companies have to actively expand product lines and introduce closed e-cigarette businesses (mainly disposable) to adapt to the diverse needs of the market.

The above-mentioned industry insiders pointed out that the market is currently in the "Spring and Autumn and Warring States" period, that is, the initial stage of development, and has not yet formed an obvious "market first" pattern. Among the many brands entering the Korean market in 2023, ELFBAR has performed the most outstandingly; relatively speaking, VUSE's performance has been mediocre, while MONS, which has already entered the market (the brand is suspected of being acquired by RELX), has maintained good performance.

Generally speaking, although South Korea's disposable e-cigarette market has improved, it has not ushered in a large-scale outbreak. An industry insider with a deep understanding of the Korean e-cigarette market explained this. He pointed out that the main reason for this phenomenon is that most e-cigarette products arrive in South Korea in the form of semi-finished products, and are subsequently assembled and refilled locally. The labor costs in South Korea are quite expensive, resulting in a significant reduction in retail profits.

Taking a 10ml product as an example, it includes labor costs, e-liquid costs, equipment, packaging, circulation and other costs. In the past, a US$1 e-cigarette might be sold for US$5, and importers and wholesalers only had to pay the cost of distribution, while the profit margins of retail stores could reach 100%, and middlemen could also make huge profits.

However, things have changed now. Take an e-cigarette priced at 13,800 won (approximately US$10) as an example. If its export price is US$3, the cost of assembly in South Korea is US$2, plus a circulation profit of US$2-3, the retail store will only gain approximately US$3. $3 profit. This status quo has resulted in retail stores not being interested in selling disposable e-cigarettes, thus limiting the large-scale development of the disposable market.

Excessive regulation limits market development

In 2022, South Korea's population will be 51.63 million. According to statistics, in 2020, the proportion of South Korean smokers in the total population was approximately 19.2%. The industry generally believes that South Korea’s e-cigarette market has great potential.

A person who is engaged in brand agency in the Korean e-cigarette market revealed that Korean consumers are very receptive to e-cigarette products, and the unit price of Korean e-cigarettes is very high. Judging from these conditions, the Korean market should be considered a good market.

However, the performance of the Korean market fell far behind industry insiders' expectations. The actual performance of the market is sluggish, and the above-mentioned person described it as "tasteless to eat, and a pity to discard." One of the reasons for this situation is the over-regulation of the e-cigarette industry in the Korean market.

Since South Korea implements a unique tax standard for e-liquids, which only imposes high taxes on natural nicotine and does not impose taxes on synthetic nicotine, most Korean e-liquids use synthetic nicotine to avoid high taxes. At the same time, there are also cases where natural nicotine is used as synthetic nicotine.

In this regard, South Korean Customs has been promoting technological innovation to improve the ability to identify natural nicotine disguised as synthetic nicotine.

Despite this, there are still a lot of "miscalculations". According to the above-mentioned person, although most Chinese manufacturers export e-liquid products to South Korea, they mostly use synthetic nicotine. However, due to the technical limitations of customs in identifying nicotine, "misjudgment" often occurs. He used his own experience as an example, saying that he once had a batch of synthetic nicotine products that were mistakenly identified as natural nicotine during customs inspection, resulting in the goods being detained for up to three months.

It’s not just customs enforcement that is strict. The above-mentioned people pointed out that the five major departments in South Korea (including Customs, Police Agency, Food and Drug Administration, National Complaint Center, and Taxation Bureau) have "unfriendly" attitudes towards e-cigarettes. Specifically, these products must undergo strict inspections from customs clearance to retail. Five departments take turns enforcing the law. E-cigarette companies must be inspected by at least one department almost every month. This emerging law enforcement environment has brought huge business challenges to e-cigarette companies.

On October 26, 2023, according to South Korean media reports, the South Korean government seized 39 companies suspected of evading e-liquid taxes, involving tax evasion amounts as high as 175.5 billion won (approximately US$130 million). This exposure shocked the entire Korean e-cigarette industry. Industry insiders say this amount may even exceed the current size of the entire South Korean e-cigarette market.

However, the South Korean government seems to have recognized the shortcomings of this tax method and may tax synthetic nicotine in 2024. Related bills are currently under discussion.

The pros and cons of chaebol’s entry

The main sales channels in the Korean e-cigarette market can be divided into three categories: convenience stores, professional VAPE SHOPs, and emerging “outside” channels, namely clothing stores.

According to industry insiders, due to restrictions on the growth of South Korea's clothing and entertainment industries, some large companies led by chaebols have begun to gradually get involved in the e-cigarette business. However, these large companies are currently in the stage of developing new products and negotiating with the government, and have not yet formed large-scale operations.

The entry of chaebol will break the inherent pattern of the Korean market. Practitioners generally believe that there are pros and cons for South Korean chaebols to enter the e-cigarette industry. The advantage is that because they have more advantages in negotiations with the government, they may prompt the government to lower taxes and relax regulations on the e-cigarette industry, thereby better promoting the booming development of the industry. However, the involvement of chaebol may also lead to the collapse of small businesses and make the industry highly concentrated.

Looking into the future of the Korean market, a professional who has been engaged in open e-cigarettes for many years said that the Korean market contains huge potential and is full of confidence in the future development of e-cigarettes. At the same time, the involvement of well-known disposable e-cigarette brands and chaebols will undoubtedly inject new vitality into this currently somewhat dull market and break the current market structure.
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