Korea’s Big Retailers Under Pressure

Korea’s Big Retailers Under Pressure

By Kati Chitrakorn, BOF, Aug., 2017

South Korea's retail sector has long been dominated by major conglomerates, but the country’s new president seems prepared to take a harder stance against the country's so-called 'chaebols.'

SEOUL, South Korea — You only have to walk down the streets of Seoul to see the influence of South Korea’s enormous, family run conglomerates, better known as chaebols. Samsung, Lotte, Hyundai, LG — these chaebols, which have dominated the fashion, electronics and entertainment industries in the country since the 1960s, are unavoidable.

By Euromonitor’s estimate, these sprawling empires account for a staggering 85 percent of the country’s GDP. Having monopolised vast tracts of the economy for generations, calls for them to be reformed have come and gone. But with a new president now in office, the latest campaign could be different.

As Moon Jae-in takes his first step towards shifting South Korea’s economy to an “income-led growth” system, the president’s new five-year policy roadmap is coming into sharper focus, and it has significant implications for retail. Major shopping complexes such as Shinsegae Group’s Starfield and Lotte World Tower are obliged to close at least twice a month from 2018.

These mega-malls carry high street favourites like Cos and Uniqlo; luxury brands like Balenciaga, Hermès, Prada and Chanel; and premium local labels like Wooyoungmi and Juun J. But as of next year, they will be required to close biweekly on Sundays, and also cannot open from midnight to 10am.

While these closing times may seem the norm for Western businesses, South Korea has a 24-hour lifestyle loved by residents and tourists. Trendy shopping destinations like Doota open from 10:30am to 5am. Seoul’s introduction of all-night bus services in 2013 quickly went viral online, with local citizens and foreign visitors joyfully stating their support of the new service.

The new proposal comes as South Korea — Asia's fourth-largest economy — faces geopolitical tensions with North Korea and China, and growing uncertainty surrounding US trade policies. The country has also been experiencing rising household debt and a high unemployment rate among young people over the past few years, which rose to a record level towards the end of 2016.

In addition, political protests around this time — which led to the impeachment of former president Park Geun-hye who was accused of bribery, coercion, abuse of power and leaking state secrets — affected the city's retail market. “The last four or five months have been complete chaos,” Jung Kuho, executive director of Seoul Fashion Week, told BoF in March. “Everyone is so concerned with politics and the economy that they don’t want to spend their money. You don’t buy luxury goods when there’s this much uncertainty.”

If smaller businesses cannot offer better benefits, consumers will not turn to them just because of the regulation.

President Moon claims that he wants to make a meaningful transition from existing economic policies that benefit big corporations to ones that increase the majority of household income. This is not the first time the government has tightened control on big market operators. In 2012 regulations imposed mandatory closures twice a month for nationwide chains of hypermarkets, supermarkets and 24-hour convenience stores. These included big-box retailers like Tesco and Costco, as well as discount food chains like E-Mart, Home Plus and Lotte Mart, which would also be fined if they set up new outlets without the consent of nearby local merchants.

“We need to protect small to medium businesses. Local stores are what makes each neighbourhood unique and creates a certain character. Their businesses must not be jeopardised by mega-malls that are mostly led by conglomerates,” says Inhae Yeo, the South Korean director at Oikonomos, a fashion communications agency focused on intercultural relations.

However, not all agree with Moon’s economic policies. Some consumers have complained that the government is trying to deprive them of their right to convenience. Mega-malls, in particular, are preferred destinations for customers to spend time with their families and friends on the weekend.

Lotte World Tower, a popular tourist attraction, drew 126,000 daily visitors on average in April 2017. According to Lotte Corporation, about 102,000 people visit the tower on weekdays, while it attracts 203,000 visitors on weekends. Meanwhile, Shinsegae’s Starfield Hanam has attracted more than 10 million visitors since its opening last September. According to the mega shopping mall operator, the number of daily visitors, on average, is 71,000 — larger than Tokyo Disneyland in Japan, which attracts 16 million annually on average.

“Mega complex malls like Lotte and Starfield are not simply just shopping malls. They are a combined leisure place — a ‘theme park shopping mall,’ if you like — where consumers of all ages can spend time.

Restaurants, shopping, cinema, and many other leisure activities are offered,” says Sunny Um, a research analyst at Euromonitor International. “These malls have been the main force in attracting customers from all ages and act as a place for families and friends to hang out,” adds Yeo.

Lotte and Shinsegae have claimed that weekend revenue is about 1.5 to 2.5 times higher than on the weekdays. Following the president’s new requirements, Euromonitor estimates monthly revenue will decline by 10 percent. Thousands of low-income workers and merchants could also be hit by the regulation. “There are quite a number of independently owned apparel and accessories stores in the malls, such as Coex,” says Um. Restricted opening hours would have an impact on their businesses.

The impact of Moon’s restrictions are yet to be seen. However, South Korean consumers have previously proven resilient in the face of bureaucratic interference in their shopping habits. “Sales revenue of these hypermarkets fell over the past five years, but not by the length the government had expected. Rather than switching to small grocery stores or traditional market places, many consumers turned to the hypermarket’s online order and delivery, or simply went grocery shopping on weekdays and Saturdays,” says Um. “If smaller businesses cannot offer better benefits, consumers will not turn to them just because of the regulation.”