Post Covid-19 and Regulations Changes in the Alcoholic Beverage Industry

Covid-19 Effect on the Beer Industry.

As social distancing is an ongoing phenomenon, meetings with friends and colleagues for a drink have been pushed back or canceled. As the period of social distancing has been prolonged, it has started to create Covid-19 stress, also causing the "Corona Blues Effect", where people are stressed out due to Covid-19. Global analysis Nielsen Company announced a 291% increase in global alcoholic beverage sales, which we can understand is not only an issue in Korea.

With this effect, instead of visiting bars and restaurants, people are heading to convenience stores for drinks and snacks, which is increasing the Hon-sool & Home-sool (drinking alone / at home phenomenon. For more information visit- Link).

General Beer Distribution

Before Covid-19, restaurants, pubs and bars covered 60% of distribution which decreased to 40% as household and retail took the larger portion of the sales pie. Major beer companies are focusing on hon-sool promotions and increasing their distribution to retailers.  The government has made an Emergency Relief Fund payment to all households to ease the impact of COVID-19.  However, these funds cannot be used at hypermarkets so they are not enjoying the current sales boom.

Regulation Changes in the Alcoholic Beverage Industry

In the1990s, although Korea was 10^th in the global economic market and over 90% of consumption was limited to two types of alcoholic beverages, soju and beer. Starting from 2010, as imported beers entered the market, consumers started to realize that there was no diversity in the Korean alcoholic beverage market. To Increase the quality and diversity, changes were planned by the Ministry of Economy and Finance.  

Liquor Tax Law Renewal

The taxation of beer and rice wine (탁주) was changed for the first time after 50 years. Starting from 2020 beer and rice wine are taxed based on the alcohol ratio and volume, compared to ad valorem which was based on price.

Alcoholic Beverage Regulation Improvement Plan

On May 19^th, 2020, the Ministry of Economy and Finance (MOEF) announced the Alcoholic Beverage Regulation Improvement Plan focusing on five sectors: manufacturing, distribution, sales, tax, and traditional alcoholic beverages.

Manufacturing:

Alcoholic beverage license was linked to the specific distilleries/breweries and does not allow manufacturing outside of the premises. However, the improvement plan is planning to allow OEM production of alcoholic beverages.

The improvement plan also suggest, if there is no safety risk, a simple change such as mixture ratio or change of alcohol percentage will not require a full approval but merely submitting a report which simplify changes in the manufacturing process.  

Other (non-alcohol) production activities in an alcoholic beverage manufacturing line is restricted. This restriction will be lifted to make by-product manufacturing more efficient and reduce cost.

Currently, when manufacturers do not produce a specific alcohol beverage for more than 2 calendar years, they would lose all alcoholic beverage licenses.  The improvement plan suggests only limiting the license suspension to the product which is no longer being produced.

The plan will facilitate the introduction of new products.  The time consuming ‘manufacturing process approval’ and ‘quality inspection’ process which takes about 15 days each but under the new improvement plan, they can be processed simultaneously cutting the time to introduce a new product in half to 15 days.

Finally, nitrogen gas can now be used in alcoholic beverages manufacturing.

Distribution

Distribution of alcoholic beverages have been limited to exclusive ‘alcoholic beverage delivery vehicles’. However, the improvement plan will allow the distribution of alcoholic beverages on any distribution vehicle. This will allow parcel delivery services to transport alcoholic beverages. (This excluded B2C delivery)

Non-store retail sales of traditional alcoholic beverage has required a special report to the tax office (including the social security number of buyers). Under the improvement plan, if the purchaser has proof of age, the report will be unnecessary.

Sales

Alcoholic beverages can be delivered to consumers together with food but the limits on how much could be delivered was not clear. The improvement plan straightens out the confusion by allowing the value of alcoholic beverages up to the cost of the food being delivered.

Alcoholic beverage distribution for any product is strictly segregated between on or off-premises channels (and the containers have the channel on the label). As this involves unnecessary inventory cost, the plan suggests eliminating the distinction.

Currently, alcoholic beverage manufacturers are permitted to allow visitors to sample their products only in their original state without making any changes such as blending soju with other drinks to make cocktails.  This regulation will be changed to allow it in the future.

Tax

As alcohol tax has been based on ad valorem, any change in price or introduction of a new product required a report to the Director of the National Tax Service. However, as the tax computation is changed to alcohol content, this will no longer be required.

Soju and beer are sold through three channels, household use (e.g. supermarkets, department stores and convenience stores), large discount stores and foodservice. This will be simplified to two channels.

Currently, a brewer of beer or traditional wine is required to pay a minimum revenue tax for each type of beverage produced regardless (for example, equivalent to 50,000 bottles) regardless of the quantity produced.  This is a handicap to craft beverage makers and therefore, the plan is to simplify the requirement.

Traditional alcoholic beverage makers must also pay a revenue tax regardless of the quantity produced.  Producers of small quantities of traditional alcoholic beverages will be exempt from the tax.  (The quantity has not been announced yet.)

Under the current law, a liquor store larger than 1,000 cm³ must submit a sales record. Under the plan, this will be increased to stores of 3,000 cm³ or larger.   

Traditional alcoholic beverage

 

Alcoholic beverages supplied to the military and foreign crews are tax exempt. This will be expanded to include the traditional and small distillery/brewery onsite sales to foreign tourists.

Tasting events are only allowed for licensed alcoholic beverage manufacturers and importers. However, under the plan, this will be expanded to include licensed alcoholic beverage distributors and retailers such as traditional alcoholic beverage promotion centers.

Changes and Outcome

More improvements are needed in the industry but the improvements will provide more diversity in the alcoholic beverages market while increasing the quality of products. Overall, the renewal will eliminate unnecessary costs of manufacturing, tax, transportation, and inventory and therefore improving efficiency. Moreover, traditional alcoholic beverages were handicapped under the old regulations but with the changes the possibilities for growth will increase.

   

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What can we do to minimize the risks of the corona virus infection?

IRC Managing Partner Interview:

   

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Easter – the promise of Life After

Cherry blossoms splash color across the cityscape as the fresh green hues of spring push aside the brown cocoon of winter. A sense of hope and new life has been palpable this past week culminating in Easter Sunday with its promise of a life after. 

Overall, it has been a good week for Korea with daily new cases of COVID-19 dropping to around 25.  Sadly, the week also marked the capital city's first two deaths from the virus and saw the total nationwide death rate pass through the 200 threshold. While each life is precious and even a single death a tragedy for loved ones, compared to other major metropolitan areas, Seoul in particular and Korea in general have fared very well.

Source: http://ncov.mohw.go.kr/

Korea has managed this remarkable performance without any general lockdown that is being imposed in most 'advanced' western nations.  Korea, a 'globally connected' society, has made every effort to keep the skies open although all arriving passengers are obliged to 'self-quarantine' for 14 days. Schools remain closed and large gatherings remain banned (respected by all but a few unrepentant protestant churches). People go to work, factories are operating, restaurants remain open (albeit with somewhat reduced clientele), public transport is operating normally.  Traffic was very light on Easter Sunday but any respite from rush hour on Friday night was indiscernible. While the frenetic energy of Seoul is somewhat subdued, for most of the population, life goes on more or less as normal.

Korea is frequently cited as a model case for dealing with the pandemic and many world leaders have called President Moon looking for insights into how best to manage the crisis in their own jurisdictions.  Unfortunately, I doubt whether Korea's model offers a blueprint for others.  The most effective countermeasure is to be prepared.  In most countries, it is too late for that.  Korea never stood down from MERS so all of the systems were in place to identify people infected by the virus.  Potential spreaders were quickly isolated.  Tracking systems are world class providing citizens with real time information about places where infected people have been. Recent arrivals violating the 14-day quarantine are identified immediately and sanctioned.  Admonitions to wash your hands, wear a mask, cover your mouth when sneezing and exercise social distancing are ubiquitous.  However, Korea's most enviable and most difficult to copy secret weapon is the disciplined population. Virtual universal adherence to pandemic countermeasures have spared the government more draconian measures. While many countries have had to resort to suspending political freedoms to achieve effective countermeasures, Koreans go to the polls on the 15^th of April to elect their representatives to the National Assembly.  There is much to be admired about Korea's response but copying it may be more difficult.

Personally, I am proud of Korea, the country that my family has called home for 135 years.  In my lifetime, this country had changed itself from a poor nation, unable to feed and care for itself to a global model – perhaps the only country to emerge from this crisis with minimal impact in all spheres, health, economy and politics. 

대한민국 만세!

Peter Underwood, Managing Partner 

For up to date information: Korean Ministry of Health and Welfare Infection Rate Tracker 

http://ncov.mohw.go.kr/ 

   

contact@ircconsultingkorea.com  

IRC CONSULTING 

Suite 1705, Officia Building, 92, Saemunan-ro, Jongno-gu, Seoul, Republic of Korea 03186 

서울시 종로구 새문안로 92 광화문 오피시아빌딩, 1705호 Tel: +82-2-737-3222,  http://www.ircconsultingkorea.com 

Korea: Second Wave?

As the world reels from the impact of the rapidly spreading virus, I too have tempered my optimism over the past week.  The early assessment that the virus was coming under control (based on daily declines in the number of new cases) proves to have been pre-mature. There were several days last week where daily new cases jumped back to the 150 plus mark.   

Furthermore, the virus seems to be stalking closer.  A greater percentage of the new cases are in the Seoul, metropolitan area and less concentrated in the Daegu hot spot.  The son of a colleague at SFS, our local international school, returned from a study break in the UK with COVID-19 among his gifts. Saruga, our local supermarket was closed for disinfecting on Sunday when it transpired that a patron who visited on Wednesday had tested positive. I am not sure whether I should be pleased that we took care of the weekly purchases on Saturday morning before it closed or be concerned that we shopped while the virus might have been lurking around.  

Public support in the fight against the virus seems to have taken a blow as well. Video clips of young people thronging to night clubs laid bare the image of civic solidarity.  Many churches continue to hold mass services tarnishing the reputation of Christianity here.  News reports about a young family of three that recklessly visited Italy last week all returning with the virus enraged citizens who are clamoring they be punished.  The prime minister gave a speech on Saturday urging all citizens to be vigilant pleading for the postponement of all non-urgent meetings. The next week or two will unveil whether Korea's tremendous efforts are a model for the world to follow or were merely a fluke. We are not out of the woods yet but let's hope that Sunday's low number of new cases (64) is a return to the downward trend and that last week's high numbers were the anomaly.   

Peter Underwood, Managing Partner 

For up to date information: Korean Ministry of Health and Welfare Infection Rate Tracker 

http://ncov.mohw.go.kr/ 

   

contact@ircconsultingkorea.com  

IRC CONSULTING 

Suite 1705, Officia Building, 92, Saemunan-ro, Jongno-gu, Seoul, Republic of Korea 03186 

서울시 종로구 새문안로 92 광화문 오피시아빌딩, 1705호 Tel: +82-2-737-3222,  http://www.ircconsultingkorea.com