A Transactions Cost Analytic Assessment of the Korean High End Fashion Retail Management System: Implications for Retail Management Evolution in China and Other Emerging Markets

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ABSTRACT

Though derived from a pre-war Japanese system, the Korean high end fashion retail management system is uniquely Korean. It uses a consignment system usually viewed as a manufacturer dominated model. Nevertheless our research data indicates that the Korean retailers possess a lot of traditional power through their connections with dominant chaebol organizations that control virtually all areas of Korean business. This manuscript uses a transactions cost analytic approach to develop a theoretical model that predicts future fashion retailing evolution in Korea and suggests how Chinese fashion retailing, currently dominated by Andre Kim and other Korean designers, will evolve. Information asymmetry and environmental uncertainty are hypothesized to be lower in the Korean system than comparable western models. However, much higher levels of specific assets need to be invested and monitoring and policing costs also considerably higher. Bargaining costs are lower for powerful international fashion houses and designers, but higher for less well established international and national brands and designers. At considerable risk to their professional careers, the authors make predictions for the future of high-end fashion retailing in Korea and China and other emerging markets.

Introduction

In today's hyper competitive and turbulent fashion marketing environment, channel and retailing systems compete for supremacy. In theory, those systems that develop a loyal base of satisfied customers and maintain efficient supply chain networks will out compete less efficient systems. In practice, however enough inertia exists to allow inefficiency to survive until an environmental shock or some pioneering entrepreneur initiates a more effective process. Some systems adapt to the new competitive milieu by either attenuating or removing the flaws in their existing systems or adapting critical elements of newer systems.

In the current article we use the Korean high-end fashion marketing system as the focus of analysis. Korea makes a good model for predicting retailing evolution in China and other emerging markets because it has only recently accepted economic liberalization and emerged as a first world economy. As part of the transition out of its export led labor intensive manufacturing era, Korea's apparel and accessory manufacturers and designers were able to maintain enough of what Porter (1990) calls exceptional cultural identification and unique technical propositions to remain viable. Thus, unlike their counterparts in Japan, Europe and the United States (see Azuma 2002), Korea's traditional textile industry has had to adapt to a quality and logistics based model (Christopher & Peck 2004).

The retailing system for fashion goods in Korea is quite different from the classic department store model developed in the U.S. The Korean word for upscale retail stores is translated into English as "department store," but the resemblance ends there. Another, very different and unique system exists for lower end fashion goods. We will follow Kim & Kincade (2009)'s terminology, wherein the upscale system is designated as a Branded Hive System and the lower end system as the Private Brand Hive System.

In the next section of the manuscript, we review the extant literature on retail evolution followed by an incorporation of agency theory and transactions cost economics. Then we use our insider experiences and current contacts in the fashion industry to give a thick description of department store high end fashion retailing environment in Korea. We organize this section using a transaction costs analytic theoretical model to compare the Korean system to other models.

Traditional Retail Evolution Theories

Based on historical observations in the U.S. and Europe, McNair (1958) proposed a cyclical theory, still widely taught in textbooks, that came to be known as the Wheel of Retailing. It suggests that most retailers start out as discounters, offering customers a limited assortment at a favorable price. …