Introduction

Internationalization of production and marketing has continued to thrive globally as the businesses are realizing their ability to compete at international arena enabled by fading barriers to globalization. The process of internationalization, as described by Kotler & Armstrong (2001) includes the five stages i.e. deciding whether to go international, choosing the host country to enter, considering the mode of entry, formulating the global marketing procedure and then deciding on global marketing organizations. This report is written to provide the recommendation to PERKii Australia for exploring business and internationalization opportunities in South Korea. The report will provide the scope of going international, rationale of plan, macro & micro analysis of South Korea and the recommended mode of entry.

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Scope

PERKii is an Australian based small firm that is offering probiotic water-based drink purported to contain 1 billion micro-encapsulated probiotics for the consumers along with only 37 calories (PERKii, 2020). This beverage was developed in 2009 using the ProGel technology patented by University of Queensland for improving the probiotic stability using tiny beads called microgels. The beverage is available in five different flavors. Each probiotic in the drink is micro encapsulated for increasing the survivability and delivering goodness to the guts of consumers (Tay, 2018). The beverage is primarily produced for providing enhanced immune response and for shortening the duration of common flu symptoms in the consumers.

PERKii belongs to the food and beverage industry in Australia with a sub-industry of functional foods & beverages. Functional foods are like conventional foods but with a focus on providing physiological and psychological benefits to consumers by reducing the risk of chronic diseases through use of omega 3 fatty acids, phytochemicals, beta-glucon, probiotics and dietary fibre (Jędrusek‐Golińska, et al., 2020). The growing consumer awareness and the public’s interest in diet and health have recently spurred the demand for functional foods and nutraceuticals in Australia (Lim, 2019). It is expected that given the demand, the functional foods and supplements will be contributing AUD25 bn in Australian market latest by 2030. The protein and sustainable products are forecasted to hold 18% market share while the 28% of the share will be held by premium convenience meals and the luxury brands  (Lim, 2019). The industry is also expected to get domestic consumption for functional foods of around AUD5.5bn by 2030 with increasing opportunity to export. The estimated growth rate of the functional and fortified foods in Australia is around 3% per annum  (Lim, 2019). Given the latest trend towards consuming functional foods to improve health, South Korea has been chosen as the destination/host country to be considered for expansion.

The free trade agreement between Korea and Australia (KAFTA) reduced the barriers to investment and trade between South Korea and Australia. The given trade agreement benefits the Australian & Korean traders while protecting and enhancing the competitive position of Aussie & Korean goods and services businesses in both countries (Quansah & Ahn, 2017). KAFTA set the Korean tariffs at zero of almost 84% of Aussie goods with a target of 99.8% within 10 years. Similarly, it set tariffs of Australia at zero for 86% of Korean exports with a target of achieving 100% within eight years  (Quansah & Ahn, 2017). It is expected that by 2021, 100% of the Korean exports will be tariff free while 99.7% of Australian exports will be tariff free by 2033  (Quansah & Ahn, 2017). Based on KAFTA, the tariffs are removed on major exports to South Korea especially for beef, wheat, wine, oil seeds, cherries, mangoes, sugar and manufactured goods (including packaged food & beverages)  (Quansah & Ahn, 2017). Hence, the intended business expansion plan is protected by KAFTA and is trade-able.

Rationale for Strategic Plan

PERKii is a firm that collaborated with University of Queensland for manufacturing the beverage range using PROGEL^TM technology for coating the probiotics (PERKii, 2020). This technology ensures that the probiotics travel to the guts of the consumers for strengthening their immune systems. Currently, the firm is at early stage i.e. ramping-up for growing in other parts of the world. It is experiencing early growth where the sales are escalating and the cash is required for further expansion of products and markets. For instance, it recently secured a total of USD3 mn in capital for launching its products in USA. Currently, the beverages are being sold in 2000 stores across Australia through Caltex, Woolworths, Coles and Zambreros (Food Processing Magazine, 2019).

In order to support its expansionary plans, South Korea is identified as a prospective market for PERKii. It is an attractive destination because of the rising demand of functional food. The functional food market is steadily growing in South Korea as the total market size exceeded 3.7 trillion in 2019. South Korea has specialized in adding Korean red ginseng to foods (market share of 35.9%) for providing health benefits like improving eyesight, strengthening immune system and countering natural aging (Statista, 2019). However, probiotics are still far behind in development with 15.6% of market share in functional foods industry in South Korea (see figure 1 below). Given the COVID-19 pandemic, the demand for such foods is expected to rise in the following years (Galanakis, 2020). Due to promising future of probiotics in South Korea as per the rising demand, it has been chosen for international expansion (Neo, 2020).

The expansion into South Korean market would be supported by the current capital that is already acquired by the company containing USD1.51 mn support from Uniseed-managed investors and USD574,000 from the angel investors. Furthermore, for expansionary plans, the company has also already secured USD1 mn from Queensland Business Development Fund (Food Processing Magazine, 2019). This investment will surely aid PERKii in expanding the business in USA as well as tapping opportunities in South Korea as the Asian market is worth USD21.8 bn in functional food area (Food Processing Magazine, 2019). In order to tap the South Korean market, it is important for PERKii to understand the Health Functional Food Code of South Korea. Korean Food and Drug Administration oversee the licenses and inspection of functional foods in South Korea and issues product specific certification to the entities (both domestic and international) (Republic of Korea, 2012).

Macro Analysis

For conducting the macro analysis of South Korea, economic and social factors are chosen from PEST framework, while business environment will also be discussed for South Korea.

Economic Environment of South Korea:

• According to Statista (2019), 6% of the surveyed South Koreans consumed probiotics drinks every day.
• Due to cheap prices and reliability, the imported functional foods have increased demand in South Korea(AKBC, 2018).
• It is the fourth largest trading partner of Australia with a population of 50 mn and GDP per capita of USD 42,661 (purchasing power parity) (AKBC, 2018).
• The South Korean economy is blessed with high per capita income and has a high again population due to which general public loves healthy eating (AKBC, 2018).
• The economy of South Korea grew at rate of 2% in 2019 with stable low inflation rate of 0.3% in 2020(Knowledge Sourcing Intelligence, 2020). Due to its economic growth and stability, it is ranked as the elite country in OECD and G-20.

Social Environment of South Korea:

• South Korea is ranked 3^rd for longest working hours in the world due to which people didn’t have time for healthy food so they started relying on health functional foods and demand for such foods became high(AKBC, 2018).
• Both middle-aged and older Korean people consume high amount of functional foods while it is now also expanding to younger women in 20s and 30s that are interested in weight loss and skin improvement(AKBC, 2018).
• South Koreans purchase health functional foods once or twice a day (Knowledge Sourcing Intelligence, 2020).
• Dietary patterns in South Korea are shifting because of wealthy population and focus on healthy products(AKBC, 2018).
• South Korean consumers have a heavy emphasis on healthy eating as they believe in health-improving efficacy of regular food ingredients since thousands of years (Knowledge Sourcing Intelligence, 2020).
• Food and medicine are considered to be same in South Korea as they have a theme of “well-being” that has evoked new consumer trends of seeking physical and psychological health benefits through adopting wholesome eating approach in daily life(AKBC, 2018).
• Sales of glucosamine, vitamins, ginseng, pollen, fish oil, milk thistle, aloe gel and probiotics have risen as they foods are associated with health benefits(Statista, 2019).

Business Environment of South Korea:

• The market size of health functional foods market in South Korea exceeded 3.7 trillion in 2019 and probiotics market has a CAGR of 6.04% during 2019-2025(Knowledge Sourcing Intelligence, 2020).
• With Red Ginseng leading the market, new products and various ingredients including vitamins, thistle milk and aloe gel based consumables are emerging(Statista, 2019).
• According to AKBC (2018) report, the ready to drink beverages like fresh juices, apple cider, energy drinks and healthy drinks have a medium to high suitability to be exported to the market in South Korea.
• Donga Otsuka Holding Co. Ltd has the highest market share of functional beverage market in South Korea of about 35.2 percent. The best-selling drink was Pocari Sweat(AGR, 2019).
• Lotte Chilsung Beverage remained the largest domestic player followed by Coca-Cola Korea, Dongsuh Foods and Yakult (AGR, 2019).
• In the Probiotics market, the leading brands remained to be Korea Yakult Co. Ltd, Namyang Dairy Products Co. Ltd, Maeli Dairies Co. Ltd, Seoul Dairy Cooperative and Lotte Group (see table below for market shares) in South Korea (AGR, 2019).
• Probiotics has gained recent popularity in South Korea due to healthful gut and stronger immunity. The refrigerated probiotic drinks and juice market in South Korea experienced a rise of 31.2% in sales since 2016 due to which many companies emerged as the prospective sellers (AGR, 2019).
• The direct competitor for PERKii probiotic drink include the DanActive probiotic drink containing 10 bn live cultures by Danone and probiotic drink from Yakult containing 8 bn live cultures sold in South Korea (AGR, 2019).
• Proven South Korean brands have gained the loyalty amongst customers in probiotics drinks like Toreta, Pocari Sweat, chocolate milk, Korea Yakult yogurt and fermented kimchi due to which the international brands are finding it difficult to enter the market (AGR, 2019).

Micro Analysis

SWOT

Porter Five Forces

Threat of Substitutes

High- As there are number of substitutes available in South Korea including Ginseng, milk thistle, vitamins, garcinia, aloegel etc, the threat of substitutability of probiotics is high. However, there are two major drinks offering probiotics in South Korea i.e. Yakult and DanActive.

Barriers to Entry

Low-Medium- Due to open policies to trade and KAFTA, the barriers to enter the market are low. However, stiff competition from the local competitors in South Korea in probiotics market offers high barriers to entry due to which overall entry barriers are medium.

Rivalry

Low-Medium- The direct competitors of PERKii are Yakult and Danone due to their probiotics infused drinks. However, none of them have used any technology for encapsulating the probiotics due to which PERKii can gain competitive advantage as its microgels can survive the stomach environment for longer time as compared to Yakult and Danone products.

Bargaining Power of Suppliers

High- As the drink is made by PROGEL^TM technology patented by University of Queensland, there is high dependence on them for the technology. Hence, they have high bargaining power.

Bargaining Power of Buyers

Medium- With no switching cost and availability of other functional foods and beverages, the bargaining power of buyers remains to be medium. However, due to PROGEL^TM technology, PERKii can get loyal customer base easily.