Private Equity's Inward Look at Acquiring Korean Niche Firms... Concerns About Brand Value Erosion

While private equity investment in major domestic franchise brands such as Mega Coffee, Compose Coffee, and Mammoth Coffee is active, concerns are arising that this could seriously damage brand value. Critics point out that if investors approach these businesses solely for profitability without a deep understanding of the industry, the brand's identity and value can easily be destroyed. Park Jong-yeon, Department Head, stated, "Actually, not many people in private equity funds understand the business. I think brands are bound to be ruined."

The concepts of 'adequate' or 'ordinary' are gradually disappearing from the consumer market, and consumption polarization is deepening. Consumers now tend to be willing to pay more not just for value for money, but if the purchase provides an experience or aligns with their lifestyle philosophy. Noh Hee-young, Advisor, explained, "Now, rather than talking about that, people absolutely won't buy what they don't want, and they'll buy what they want even if it's expensive, if it gives them an experience or helps their lifestyle philosophy. So, polarization is getting more severe, and words like 'adequate' or 'ordinary' seem to be disappearing from our society." Furthermore, with the advancement of AI technology allowing consumers to easily re-verify product information, the difficulty of corporate marketing is increasing.

CJ Olive Young aims to enhance K-beauty's status by entering the U.S. market but faces the challenge of overcoming its limitations as a retail brand. In the U.S. market, Olive Young is often perceived as merely a distribution channel rather than an individual brand like L'Oréal or Estée Lauder. Given the case of Sephora, which succeeded globally but withdrew from the Korean market, it is not easy for a retail brand to secure independent competitiveness in the global market. Noh Hee-young, Advisor, pointed out the difficulty of retail branding, saying, "The problem is that Olive Young is actually remembered as a brand, like L'Oréal or Estée Lauder. So, it's remembered as a retail brand, but how it will compete here is the question."

Currently, K-beauty boasts strengths in cost-effectiveness and rapid trend reflection, but it suffers from low brand loyalty and a lack of high-end premium brands. There is a need to shift strategies towards securing the power of individual brands rather than relying on distribution platforms. Noh Hee-young, Advisor, emphasized, "From now on, how quickly can we create a brand like Estée Lauder at Olive Young? Like Shiseido in Japan, and Clé de Peau, K-beauty is loved by people because it offers good value for money, is fun, and fast." She stressed the importance of leveraging Koreans' unique excellent skincare experience as a differentiated strategy to elevate to a high-end brand.

The cosmetics brand d'Alba is successfully targeting the global market by using high-end ingredients like Italian white truffle while maintaining an ambiguous identity as a K-beauty brand. This strategy has been effective in expanding brand recognition by targeting consumers worldwide without being tied to a specific country. Noh Hee-young, Advisor, praised d'Alba's strategy, stating, "Dalba, with its unique white truffle, which is actually Italian, started to globalize it in a way that made its K-beauty identity ambiguous—is it a K-beauty brand or an Italian brand? I think that was very smart."

Dalba, where Noh Hee-young serves as an ambassador, employs a strategy of selecting ambassadors not just for their appearance but for their ability to convey the brand's story and identity. This effectively communicates the brand's values and narrative to consumers beyond just product sales, providing a brand experience that goes beyond a mere product. The advisor stated, "I am now acting as an ambassador, a kind of spokesperson, and I actually think Dalba was very smart in this," emphasizing the importance of this strategy.

Noh Hee-young, Advisor, expressed strong confidence in Dalba's mist product and personally recommended its use. She emphasized that it provides sufficient and dewy moisture without spraying too much or causing clumping, leading to high consumer satisfaction. The advisor explained, "Try the mist once. And, you know, when you spray it, sometimes too much comes out and it can get clumpy or sticky. But it absolutely doesn't do that, and it provides very dewy, sufficient moisture that you'll be pleased with."

Bibimbap, a familiar dish to Koreans, failed to successfully establish itself in overseas markets, particularly in the United States, because it did not properly understand local eating habits. Koreans naturally mix bibimbap, but foreigners are not accustomed to mixing ingredients, and a low perception of minced meat also created resistance. Noh Hee-young, Advisor, pointed out, "We say bibimbap tastes good when it's well-mixed. But foreigners eat everything separately. They don't mix it," emphasizing the importance of product development that reflects local eating habits and preferences.

Mandu (dumplings) was identified as the Asian food item with the highest potential for global success. Mandu's versatility in cooking methods, such as steaming, frying, boiling, or microwaving, aligned with American consumers' preference for convenient meal preparation. In particular, Bibigo Mandu created a sensation and successfully established itself in the U.S. market through a marketing strategy combined with Psy's 'Gangnam Style.' Noh Hee-young, Advisor, analyzed mandu's success factors, stating, "Among Asian foods, I found that mandu had an advantage. So, seeing that, in Korea, it's steamed, baked, or steamed and then frozen, so you can pan-fry it, boil it, or deep-fry it. Plus, the microwave made it very easy."

One of the main reasons global conglomerates struggle in the Korean market is the mismatch between the rapid pace of trend changes in Korea and the rigid decision-making structure of their headquarters. Korean consumers are quick to adopt new products and trends, and they demand rapid changes in distribution channels, but global companies must go through complex approval procedures at their headquarters for product procurement or localization adjustments (e.g., size, taste), which inevitably slows down their response time. Noh Hee-young, Advisor, pointed out, "Our country is fast in everything, and we need to introduce trendy things quickly. But for foreign companies, to procure something, they have to get permission from their headquarters, apply, and then put it in, and I think their speed can't keep up with the speed of Koreans."

The Korean market is perceived as very demanding and challenging for global brands. Due to the high intensity of competition relative to market size and the stringent demands of consumers, there is a tendency to view profitability as low. Cases like Chipotle, which once considered entering the Korean market but ultimately withdrew due to a perceived lack of market merit, attest to this. Noh Hee-young, Advisor, conveyed the perception of global companies, stating, "At that time, they said that the Korean market had no merit for them. It was too difficult."

Customer satisfaction is no longer just a service but a core asset for companies. In the case of Dyson, the British home appliance brand that was once immensely popular in Korea, its brand image was severely tarnished and its popularity waned due to poor after-sales service quality. This demonstrates that Korean consumers have high expectations not only for product performance but also for after-sales service, suggesting that companies must continuously invest in improving service quality for customer satisfaction. Noh Hee-young, Advisor, explained, "In Dyson's case, it was incredibly popular in Korea, but then it lost some momentum. One of the reasons for that decline, people said, was because the after-sales service wasn't good."

The active inflow of private equity and foreign corporate investment into the domestic franchise market, including Mega Coffee, Compose Coffee, and Mammoth Coffee, is due to the rapid scalability and high growth potential of these brands. These franchise models can expand their number of stores and market share relatively quickly, making them attractive investment opportunities for investors. Global investment funds tend to focus their investments on these franchise companies, expecting high returns in a short period.

Private equity's brand management approach after investment tends to focus primarily on profit improvement and cost reduction. This often leads to workforce reductions, declining service quality, and product cost-cutting, ultimately passing the burden onto consumers. This efficiency-only approach, without a deep understanding of the business, diminishes the brand's intrinsic value and, in the long term, can lead to customer attrition, weakening brand competitiveness. Noh Hee-young, Advisor, pointed out, "From profit improvement, that burden immediately falls on the consumer. Because rather than having better products and better branding, to improve profits, they cut staff or the service deteriorates."

Private equity should aim for strategies that maintain product and service quality while enhancing efficiency, rather than solely focusing on cost reduction. For example, efficiency can be generated by securing cheaper supply prices or developing proprietary distribution channels to reduce unnecessary margins. This approach allows for improving profitability while preserving the brand's intrinsic value, and it is crucial to strengthen expertise in brand operation to foster long-term growth. Noh Hee-young, Advisor, emphasized, "Actually, you need to think about maintaining quality and capturing efficiency. Like securing supply prices at a lower cost, or developing your own new distribution channels."

F&B (food and beverage) brands may present greater challenges for private equity investment compared to cosmetics brands. Cosmetics, being manufactured goods, are easier to mass-produce with consistent ingredients and are advantageous for export. In contrast, F&B involves many variables to manage, such as freshness, taste uniformity, and hygiene, making the risk relatively higher in the process of mass production and global expansion. Noh Hee-young, Advisor, stated, "Actually, F&B is harder. The opportunities for mass production while keeping ingredients identical are in manufactured goods. Rather, I approve of private equity investing in K-beauty."

To secure competitiveness, large retail companies like Homeplus must move beyond competing primarily on manufactured goods and differentiate themselves in fresh food categories such as fruits and livestock. Competition for mass-produced manufactured goods is already fierce with online shopping malls and other distribution channels, making it crucial to enhance the competitiveness of perishable goods purchased directly in stores. This requires a strategic approach to improve customer experience through display methods and store layouts. Noh Hee-young, Advisor, suggested, "First, I think about what the product's competitiveness is, and that's actually fruits, then meat, and so on. Because we can't compete on manufactured goods. So, we have to make the decision on fresh produce."

Both corporate branding and personal branding begin with setting specific goals and target audiences. The core is not merely showcasing individual strengths, but rather forming and delivering value through interaction with a 'person who will buy my branding,' meaning consumers or a specific target. Branding is ultimately about being recognized and chosen by the target audience; without a clear sense of purpose, successful branding is difficult to achieve. Noh Hee-young, Advisor, emphasized, "Why is personal branding needed? Why would people sitting at home need personal branding? It's done through a target audience. Someone who will buy my branding."