As an avid skincare enthusiast, I am always on the lookout for effective and close-to-earth products good for the skin, which brings me back to when I first explored Innisfree in 2016 and tried out its Jeju Facial Foam Scrub and mask packs. And that was how I fell in love with this eco-friendly brand.
Launched in 2000 as South Korea’s first natural cosmetic and skincare brand by Amorepacific Corp, holding firm of primarily Laneige, Etude House, Mamonde and Sulwhasoo, it has gained much attention due to its promotion of using the purest ingredients from Jeju Island’s plants and minerals in their products. The brand name originated from W. B. Yeats’ poem, ‘The Lake Isle of Innisfree’. It offers a wide range of items from skincare, to makeup, to hair care, in South Korea and nine other countries, including Singapore and Indonesia. Not only cosmetics, Innisfree also has its own concept café and an Innisfree Jeju House, giving visitors a feel of the natural quality ingredients it uses in its products.
Innisfree was motivated to enter the Indonesian market after the THAAD (Terminal High Altitude Area Defence) incident, which dated back in July 2016 by former South Korean President Park Geun Hye. Both USA and South Korea, ruled by current President Moon Jae In, saw that the THAAD was a necessity to defend against North Korea’s missile threat, also as part of their North-East Asia security strategy. This had created tensions between South Korea and its neighbours, especially China, which opposed against the deployment.
Because of this tension, Amorepacific Corp. had seen a huge loss of revenue, since in 2016 it had generated about 90% of its revenue from South Korea and China alone, where their target consumers are. They then decided to target Muslim consumers. More than 60% of the world’s Muslims are in Asia. Entering the “melting pot” region was a challenge, but with in-depth research regarding the lifestyle and routine of Muslims, they made it into and see potential in this market. (Annex A)
Innisfree has launched in Indonesia just this year and has three stores currently, two located in Jakarta and one in Bandung.
2.1. PLES Analysis
Below is a PLES analysis of Indonesia to evaluate how opening Innisfree there would be affected including its international business practices.
Indonesia is a constitutional, presidential representative, democratic republic country. The president of Indonesia, alongside the vice president and the cabinet, is both head of state and head of government, and is of a multi-party system. The President and Vice-President are selected through a presidential election. Candidates’ ethnicity, religion, previous social position in the Indonesian society, and such, optimise the chances of winning (gaining the votes of people who belong in the categories they fall in).
Indonesia mostly follows the Civil law or “Undang-undang” established by People’s Representative Council, intermixed with Customary Law and Roman Dutch Law. Common law and Theocratic law are followed in certain parts of Indonesia. In Aceh, Sumatra, the Syariah law (Muslim code of religious law) is followed.
In the case of Jakarta and Bandung where Innisfree entered, it will adhere to the Civil law.
ASEAN-Korea Free Trade Agreement (AKFTA)1
The ASEAN-Korean FTA was to create opportunity for the population of ASEAN & Korea through more liberal, facilitative market access and investment regimes among parties of AKFTA. There are 3 major agreements:
1) ASEAN-Korea Trade in Goods Agreement
2) ASEAN-Korea Trade in Services Agreement
3) ASEAN-Korea Trade in Investment Agreement
In terms of investment, they are through:
a) Creating conducive environment for ASEAN and Korean investor and their investments
b) Promoting cooperation on a mutually beneficial basis
c) Encouraging and promoting the flow of investments and cooperation between ASEAN and Korea
d) Improving transparency of investment rules
e) Providing for the protection of investments
Foreign Corrupt practices
According to the Corruption Perception Index in 2016, Indonesia ranked 90th out of 176 countries2 with a score of 37, being 4 places towards being “Highly Corrupt”. Nevertheless, it had been steadily improving since 2005.
Since Suharto’s New Order Regime (1965-1998), it resulted to a rapid and sustained economic growth, not forgetting to pull along corruption.
KKN is an infamous abbreviation among Indonesians which stands for Korupsi (Corruption), Kolusi (Collusion), Nepotisme (Nepotism). In 2001, regional decentralisation had allowed corruption to scatter to the districts, so it became possible for more officials from the government and other agencies to dig out financial extras.3
Indonesia has a market economy, where state-owned enterprises (SOEs) and large private business groups (conglomerates) play a significant role. Small-medium enterprises (SMEs) account for 99% of the total active enterprises, thus being accountable for 60% of Indonesia’s GDP. This acts as Indonesia’s backbone since employment opportunities are open for almost 108 million Indonesians.
US$1 is equivalent to Indonesian Rupiah (IDR) 13,418, which is equivalent to Korean Won (KRW) 1,063.34.
Indonesia’s GDP has been showing a slow but steady rise, forecasting a 5.3% change in 2018, increasing from 5.1% in 2017 and 5.0% in 2016. In 2016, Jakarta recorded an average salary of US$14,361 and Bandung US$6,918. A basic lunch meal in the business district in Jakarta costs about IDR 76,030 (US$5.67) and in Bandung about IDR 57,639 (US$4.30).
Economic Development Issues
The need for Innovation and Entrepreneurship: New Southern Policy
The “New Southern Policy” aims to expand the economic influence of South Korea and diversify its trades beyond traditional partners4. As a pivot towards the ASEAN market after the THAAD incident with China, South Korean President Moon Jae In signed a deal of US$1.9 billion in November 2017 with Indonesian President Joko in hopes to build stronger trade ties. It covers projects in energy, infrastructure and other developmental initiatives, including helping Jakarta fund part of an ongoing Light Rail Transit project worth US$500 million. Indonesia has become a market for Korean-made defence equipment, on a KF-X joint-fighter programme, and South Korea’s investments in Indonesia are greatly welcomed.5
This deal may spark positive energy between both countries in service of economic boost.
Indonesia, an emerging middle-income country, is populated by over 260 million people, making it the 4th largest populated country, with 41% Javanese and 15% Sundanese.
Indonesians take pride in courtesy, harmony and joint decisions, which is proved by their low score of 14 in Individualism. It also believes in the national motto “Unity in diversity”, which reflects its multi-ethnicity, culture and language found within.
Its young population is a significant strength, implying a large growing workforce.6 Despite successfully cutting the poverty rate to more than half since 1999, to 10.9% in 2016, out of 252 million, more than 28 million Indonesians still live below the poverty line. Approximately 40% of the entire population, are susceptible to fall into poverty.
Indonesia is a Muslim-majority country. The population is guaranteed of freedom of worship. Although Indonesia is not an Islamic country, Islamic principles do influence political decision making.
After Suharto’s era, political decentralization occurred, which meant regional decision-making has become more affected by the regional religious context. For instance, in Muslim populated provinces, implemented policies can include the regional restriction of pork-related businesses.
There are currently over 700 million languages spoken in Indonesia. Most of Indonesia speaks in Indonesian language, a variant of the Malay language, and can speak more than one language, like Javanese. The top 3 languages spoken in Indonesia are: Indonesian (about 210 million), Javanese (about 84.3 million), Sundanese (about 42 million). The Indonesian language is mainly used in commerce, administration, education, media, etc.
English language is a continuous challenge in Indonesia.
The education system of Indonesia starts from Kindergarten, then Elementary school, then Middle school, then either University or Vocational school, which afterwards graduates can choose to continue to tertiary education.7
In 2013, the Minister of Education and Culture Mohammad Nuh had emphasised that district/province languages will still be included in curriculums, and in the same year, English language subjects has been removed from Primary school curriculums, particularly due to the dropping standards in Bahasa Indonesia.
2.2. Modes of Entry
‘Koreabuys’ is the largest and trusted Korean fashion and cosmetics online shopping platform in Southeast Asia, including Indonesia, with many famous Korean cosmetics and fashion brands. Original Korean cosmetics, such as Etude House, Missha, Tonymoly, Laneige, The Face Shop, Innisfree and more, could be purchased at the lowest price in the fastest and safest delivery method.
Innisfree products are also sold through online shopping sites like Lazada and Qoo10.
Innisfree, together with Time International as its brand curator8, had opened two stores in Jakarta, Indonesia, in March and April 2017. It later opened a third store in Bandung later in September.
2.3. Organisational Structure
CentralisationSince Innisfree is under its parent AmorePacific Group, the major decision-making power resides among the Board of 6 Directors, based on the Commercial Act of Korea and the company’s Articles of Incorporation. This is to maintain professionalism and reinforce its core competency and expertise in beauty and healthcare businesses. Plus, all stakeholders achieve shared goals, including strong returns and disbursements of management risks.
Innisfree’s market managers can make decisions for the operations within, to meet the market’s needs.
Innisfree, in specific, has a Worldwide Area structure9.
As cliché as it may sound, the Korean presence has been booming in Indonesia and worldwide already, whatever the industry may be.10 Attracting the South-East Asian market was not that of a difficulty.
Good thing Innisfree was brought into Indonesia as a wholly-owned business, given Indonesia’s struggle to manage corruption practices in general. Thus, Innisfree has lower risk of mismanagement, which includes corruption, collusion and nepotism.
An implication on international business for both South Korea and Indonesia would be:
Despite the great revenue loss from its neighbour China, the THAAD incident has allowed Innisfree to be exposed to the Muslim market, and expanding their knowledge about the relationship between Muslim lifestyle/routine and wearing makeup.
Since Innisfree just entered the South-East Asian market like Indonesia, there are no concrete proof yet of its success apart from sales and the K-presence. A year down the road, Innisfree can gain feedback from the Indonesian consumers about how Innisfree brought to them makeup which cater to their needs, especially the Muslim market that they intended to target.
To ease the research process about South-East Asia’s demographics, Amorepacific Corp. had opened a research centre in Singapore this year, in hopes to also open a KRW 110 billion (US$102.3 million) production facility in Johor, Malaysia, tentatively in 2020.
A recommended international business strategy would be Localisation strategy11, since they want to appeal more towards the South-East Asian/Muslim consumers.
Some ways to further improve Innisfree’s business in Indonesia towards localisation include:
a) Innisfree can seek to local artists to endorse their products. For instance, Oki Setiana Dewi or Dewi Sandra, profound hijab icons among Indonesians, who also endorsed other local cosmetic brands before.
b) With the widespread of technological advancements, videos can be a way to portray real users of Innisfree products and relate back to Innisfree’s research about Indonesian market and makeup i.e. Muslims’ routine of taking ablution 5 times a day, and hence making lightweight makeup.
c) More foundation shades to cater to all skin types, like the 14-shade range introduced in Innisfree’s New York flagship store.
1 Benefits of AKFTA:
a) The ASEAN-Korea FTA is expected to vitalize trade and multiply exchanges in goods, services and investments by significantly cutting tariff barriers among the Parties.
b) As the two parties adopt a more advanced free market system through the elimination of tariffs and non-tariff barriers, businesses will be able to expand inter-regional exports and enjoy economies of scale.
c) The creation of a huge free market covering 11 countries will bring dynamic benefits to the region since it will attract more foreign direct investments, which will subsequently create more jobs and facilitate the transfer of advanced technology.
d) Common standards for production technology, product regulations, distribution, and after- sales service could spread across countries in the region.
e) By lowering trade barriers, ASEAN and Korea predict that intra-trade and investment between them will rise to an equivalent of $150 billion by 2015.
2 The lower the country is placed in the ranking, the worse the corruption is in the country.
3 To tackle this issue, in 2003, a new government agency, “Corruption Eradication Commission” (KPK), was formed. It aimed to investigate, prosecute and monitor the governance of state. However, during Yudhoyono’s era, several ministers from the agency stepped down due to being suspected of corruption (High-profile cases). In 2014, during Joko’s era, he called for a “mental revolution” urgency to combat against corruption. For instance, moving many government services online so that bribe-hungry bureaucrats had fewer chances to gain extra money.
4 South Korea’s traditional trade partners: Japan, China, Russia
5 South Korea’s investment in Indonesia has almost doubled in the first half of 2017, while trade increased by 19.3% in the same period.
6 Indonesia’s total median age is 28.6 years old (2016 estimate).
7 The education system of Indonesia starts with Kindergarten (3-5 years old), then Sekolah Dasar (Elementary school) (6-11 years old), after which they go to Sekolah Menengah Pertama (Middle School) (12-14 years old), then on to either Sekolah Menengah Atas (University) or Sekolah Menengah Kejuruan (Vocational School). Afterwards, they continue to tertiary levels (Degree, Associates’ Degree, Master’s, Phd).
8 Time International is Indonesia’s world-class curator and cultivator of leading brands. It prides itself in being the current holder to exclusive retailing rights or authorised sales points to over 60 of the world’s most renowned timepiece and lifestyle brands, having more than 92 stores throughout the nation.
9 Innisfree operates in several countries outside South Korea (Domestic) and each market has its own set of functions i.e. HR, Marketing, Sales, etc.
10 The Korea Creative Content Agency (KOCCA) in Indonesia organised the K-Content Expo 2017, which featured more than 40 Korean creative content companies, including SM Entertainment, KBS Media, etc. The exhibition displayed South Korea’s K-pop industry, animation and beauty products as part of the Korea Festival at the JIExpo Kemayoran in Central Jakarta. Indonesian agency Creative Economy Agency (BEKRAF) also participated in the event. BEKRAF is the agency which handles the creative content economy in Indonesia.
11 Localisation Strategy (High pressures for Local responsiveness, Low pressures for Cost reductions): Refers to customising goods/services to match tastes in different national markets, thus increasing value in local markets. In this case, Innisfree looks out to producing lightweight make-up to appeal to Muslim consumers and also due to the climate of the region.