Korea Craft Beers Get Boost in Challenge to $1.3 Billion Duopoly

The smell of fresh paint lingers at the renovated Vaneheim microbrewery in northeast Seoul, a sign of owner Kim Jung Ha’s optimism after a decade of struggling with the economics of South Korea’s lopsided beer market.

Under revisions to alcohol laws announced by the finance ministry yesterday, house brewers like Kim will be allowed to distribute their beer through other bars and restaurants for the first time, while paying a lower rate of tax. The changes are expected to bring more competition to a $1.3 billion beer market that grew 6 percent in 2013 and is dominated by Hite Jinro Co. (000080) and Oriental Brewery Co., re-acquired this week by the world’s biggest beer maker Anheuser-Busch InBev NV.

The changes come as President Park Geun Hye begins her second year in office promising a more “creative” economy that supports small- and medium-sized companies.

“The past 10 years have been a process of bitter learning,” Kim, a 34-year-old who studied both culinary arts and business in college, said last month at Vaneheim, which has seating for 110 people on wooden tables with a window allowing customers to see the polished metal brewing tanks. “Although it’s a small and incremental change, I’m thankful things are finally moving in the right direction,” she said.

Photographer: SeongJoon Cho/Bloomberg

A bartender pours beer into a glass at the Oktoberfest brew house in Seoul, South Korea. Close

A bartender pours beer into a glass at the Oktoberfest brew house in Seoul, South Korea.

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Photographer: SeongJoon Cho/Bloomberg

A bartender pours beer into a glass at the Oktoberfest brew house in Seoul, South Korea.

Oriental Brewery and Hite Jinro, who’ve been making beer in South Korea since 1933, have dominated the market thanks to legislation that limits licenses based on brewing capacity and a tax system that rewards economies of scale.

Bomb Shots

The government began granting licenses to microbreweries in 2002, when the nation co-hosted the soccer World Cup and consumer perceptions of beer changed. Beer was mainly used for “poktanju,” or bomb shots, in which Korean soju or rice wine is tipped into a glass of beer and downed in one go, said Kim, who opened Vaneheim in a two-story brick building in the primarily residential district of Nowon-gu in 2004.

New licensees found the market tilted against them. Under the current system, Jinro Hite and Oriental Brewery pay an effective 72 percent tax rate, or about 395 won ($0.37) per 355 milliliters (12 ounces) of beer, according to Hong Jong Haak, a lawmaker campaigning for support for small brewers.

While the effective rate for smaller breweries is 57.6 percent, their typical payment is about 710 won because the levy is calculated based on cost of production, allowing the biggest brewers to remain dominant as demand grows, Hong said.

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A worker inspects a brewing tank at the Oktoberfest brew house in Seoul, South Korea. Close

A worker inspects a brewing tank at the Oktoberfest brew house in Seoul, South Korea.

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Photographer: SeongJoon Cho/Bloomberg

A worker inspects a brewing tank at the Oktoberfest brew house in Seoul, South Korea.

“Compared to the regular brands I’ve always had, I’m surprised to find the rich flavors in these craft beers,” company worker Jeon Mi Young, 36, said at a downtown branch of the Oktoberfest microbrewery chain last month. “Although I like drinking beer, I’ve never really had a chance to try craft beers as they’re still hard to find.”

Paying More

AB InBev (ABI) said this week it is paying $5.8 billion for Oriental Brewery, a business it sold to KKR & Co. (KKR) in 2009 for $1.8 billion as it sought to cut debt. Since then, Oriental Brewery has become South Korea’s largest beer maker and more than doubled earnings, boosted by its Cass brand.

South Korea’s beer market was worth $1.3 billion in 2013, a 6 percent increase from a year earlier, and is forecast to reach $1.6 billion by 2017, according to a Bloomberg Industries report published this week. Oriental Brewery and Hite Jinro had a combined 94.8 percent market share in 2012, according to the report, which cited data from Euromonitor International.

“Korean consumers have become more sophisticated and interested in what else is out there, not just beer,” said Daniel Tudor, one of three partners of the Booth microbrewery in Seoul. “This is bottom-up stuff, and people enjoy it because rough around the edges. Five or ten years from now, the whole landscape for beer will be different.”

Photographer: SeongJoon Cho/Bloomberg

OB and Hite Jinro, which own about 96 percent of market share, have been criticized for producing almost identical lager-style beers with indifferent price tags. Close

OB and Hite Jinro, which own about 96 percent of market share, have been criticized for... Read More

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Photographer: SeongJoon Cho/Bloomberg

OB and Hite Jinro, which own about 96 percent of market share, have been criticized for producing almost identical lager-style beers with indifferent price tags.

Lower Taxes

The finance ministry said yesterday the lower tax rate for microbreweries - an effective 43.2 percent - will take effect from April, and they’ll be able to sell their beer off-site from Feb. 21.

While microbreweries may still pay more than Hite Jinro and Oriental Brewery, the reduction will help smaller brewers operating with slim profit margins to stay afloat, said Lee Won Sik, whose Oktoberfest has eight branches, including one in the Gangnam neighborhood made famous by rapper Psy.

“Many small beer producers closed because they couldn’t reach economies of scale and suffered due to the excessive tax burden, low sales and expensive management costs,” he said.

For Platinum Brewing Co., high taxes were a major reason for its decision to relocate from South Korea to Yantai, northeast China, in 2010. With signs of industry deregulation at home, Platinum is planning to return in three to five years, according to spokesman Song Byeong Chul.

‘Impossible’

“The environment back then was almost impossible for us,” Song said by phone. “The government had no idea what it needed to do to accommodate the emerging small beer makers.”

Even more than the reduced tax burden, microbreweries will benefit from a broader sales network allowed under the rule changes, according to Craftone owner Chung Hyun Chul, whose American-style beer is called ‘Mingle.’

“It’s an opportunity for us,” Chung said. “We weren’t even allowed to compete with major companies before.”

Oriental Brewery and Hite Jinro, whose main Cass and Hite beers are identically priced with the same 4.5 percent alcohol content, are already responding to the market changes. Hite introduced its Queen’s Ale in September, while Oriental Brewery said it will introduce a new ale beer early this year.

“We will further develop new products and try to improve our existing products to meet consumer demand,” said Hite Jinro spokesman Choi Yong Woon, who predicts competition may intensify further if Oriental Brewery’s new owner sells more of its international brands, including Budweiser and Corona.

Oriental Brewery spokeswoman Lee Eun Ah said South Korea’s beer market will be “invigorated” by microbreweries selling in more locations and the arrival of Lotte Liquor, a unit of South Korea’s fifth-biggest industrial group, which broke ground on a 50,000-kiloliter capacity beer factory last year.

For Kim at Vaneheim, the changes are welcome even if they bring more competition from other brewers. She likens the surging interest in beer with the sudden spread of coffee shops across the country over the past decade.

“People have just started to pay more attention to beer,” she said.

To contact the reporter on this story: Heesu Lee in Seoul at hlee425@bloomberg.net

To contact the editor responsible for this story: Brian Fowler at bfowler4@bloomberg.net

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