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(Yonhap Feature) Gov't simplifies wine distribution system, but skeptics say it won't change prices

All Headlines 09:00 January 04, 2012

By Joshua Hall
Contributing writer

SEOUL, Jan. 4 (Yonhap) -- New liquor license regulations became effective on Jan. 1 that allow wine importers to sell directly to consumers and retailers to import. It's the first time in 29 years the South Korean government has simplified the wine distribution system in an effort to cut prices for consumers.

The measure will help people like Kang Soon-pil, CEO of wine shop Gallery The Wine, who previously had to deal with three separate licenses: retail, restaurant and importer. It will also be a boon for consumers who can now call the phone number of the importer on the back of the bottle and order wines directly.

Lee Chul-hyong, CEO of wine logistics and retail chain Wine Nara, believes the measure will have an effect. "If we import wine ourselves, we can cut prices by 20 to 30 percent," he said.

But not all share their views. Skeptics dismiss the revisions as ineffective, saying the real solution lies elsewhere.

Wine importers have been under pressure from the media and consumer interest groups for high wine prices following a series of free trade agreements that removed import duties on wine. Yoon Myoung, policy director at Consumers Korea, points out that free trade agreements have been ineffective at lowering wine prices. "Our organization has researched wine price since 2008. According to that result, wine price in Korea is highest of 28 countries." The survey was done in cooperation with local consumer rights organizations who visited department stores, supermarkets and wine shops in Asia, Europe, the U.S. and South America.

The Ministry of Strategy and Finance announced the new policy on Dec. 5. Prior to the revision, an importer had to work with distributors to sell imported liquor to consumers, which tacked on unnecessary costs compared to direct sales, Park Soo-hyun, a ministry official, said.

The ministry acknowledged that Consumer Korea's dissatisfaction with the ineffectiveness of the Chilean free trade agreement (FTA) was one reason for the change in policy, as Chilean wine prices have continued to increase despite the FTA with Chile being fully completed.

The government's move to eliminate the need to establish a second company, the retailer, may remove some of the administration costs that contribute to the price of wine. However, industry sources point out such savings may be very small due to the way the industry is structured. Many importers, for practical reasons, rely heavily on retail companies or wine shops, especially when handling peak seasons like the New Year and Chuseok, the Korean harvest moon holidays.

Daniel Kangas, CFO of Indulge Korea, says importers are unlikely to sell at cheaper prices direct to consumers at the cost of undercutting their existing sales that are heavily dependent on distributors and retail sales.

"Distributors are essential to our business," he said. "We work with over 100 hundred distributors to reach restaurants and retailers in Seoul, Daegu, Busan."

The revised law also has left importers with another regulation that prohibits business transactions between same tier players.

"We will have to decide whether we keep our retail license (another company) or not. At our own retail stores, about a quarter of the selection comes from other importers," said Shin Sung-ho, director of planning and communications at Nara Cellar. "If Nara Cellar wants to absorb its retail license, Nara Cellar will have to buy these wines from other importers which is against the law."

Some importers blame uncontrollable factors, such as the rising currency exchange rates and increased transportation costs for the high wine prices.

"In the past a couple of years, the costs of wine have risen mainly because of the weakness of Korean currency against the U.S. dollar, euros, and Australian dollar, the three major foreign currencies used in wine trades," Shin of Nara Cellar said. "It is true that selling and administrative expenses have also risen due to the soaring costs of oil and energy. The wine inspection cost by the Korea Food and Drug Administration (KFDA) has also gone up sharply."

Retailers, who can now directly import, theoretically can compete with importers and bring down prices. But even this revision may have limited impact since most of the major players, including department stores and hypermarts such as Shinsegae, Lotte, Costco and Homeplus, are already importing their own brands.

"We welcome the changes. It's a step in the right direction," said Lee Je-Chun, CEO of Jell Wine shop. But, he explained, it will make it harder for independent wine retailers to compete with importers in the lower and middle market. "It's still too early to tell where the market will go, but retail shops like us may focus more on premium wines," he said.

For consumers, dealing directly with importers is not exactly a favored way.

"It's not convenient to call an importer to buy one or two bottles of wine. I'd rather go to a wine shop and they can give me some advice," said Michelle Hwang, a 32-year-old office worker in Seoul.

While most welcome the government's move to simplify the licensing system, they point out that changes to the taxation system would be more effective at lowering wine prices.

Wine is currently taxed on CIF (cost insurance freight) price regardless of import volumes or alcohol level. While some countries are exempt from the 15 percent wine tax, cumulative taxes of 30 percent alcohol tax, 10 percent education tax and 10 percent apply to all wine imports.

"In Japan the liquor tax is based on the alcohol volume of the imported liquor products," Shin of Nara Cellar said. "Alcohol volume in wine is about the same across all the price ranges so liquor tax in Japan doesn't mean much when it comes to expensive bottlings and it becomes almost meaningless in case of importing very high end wines."

Many industry sources expect the retail market to grow but point out that lower prices are not possible without further liberalization of the alcohol industry. At present online sales of alcohol are illegal in Korea with the exception of makgeolli, a traditional rice beverage.

"Rent is crazy and the wine market is so small," Kang of Gallery The Wine said. "If online selling is allowed then wine prices can go down."


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