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Korean Retailers Undergo Upgrading
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By Tom Coyner
Korea Times
April 20, 2007
It’s amazing what a decade can bring in a rapidly evolving economy such as
Korea. In my recent article I discussed how traditional stores have seen
their markets nibbled away by first department store and later convenience
stores. As important as these developments may be, Korean consumers are now
being offered new alternatives
Consider it was only a bit more than a decade ago, 1994, that Costco entered
a joint venture with Shinsegae Department Store to create Korea’s first
major discount store in Seoul, Price Club Korea. Until the Asian financial
crisis three years later, the two partners learned from each other.
Shinsegae became familiar with warehouse-like discount super stores and
Costco learned about Korean retailing. The two companies split apart with
Costco buying out most of Shinsegae’s interests in the three existing stores
for $94 million.
While Costco failed to meet its plans to expand to a total of 10 stores, its
Seoul store became its most profitable single store worldwide, specializing
in the retail of imported goods at low prices.
Stodgy Shinsegae, Korea’s oldest department store, took its lessons and
launched E-Mart, a hybrid of a Costco operation and what the Koreans guessed
correctly what might work best in Korea. Free from partner consensus, E-Mart
aggressively started buying up cheap parcels of land and opening new stores
at the rate of 10 a year. Listening to Korean consumers who liked the cheap
prices but felt uncomfortable with bulk purchases, E-Mart offered discounted
pricing in smaller quantities and in familiar environments similar to
conventional department stores rather than warehouses. Furthermore, E-Mart
-- and other Korean major discounters -- offer more fresh produce and feature
special in-store events. Korean discounters also provide additional retail
experiences such as fast food outlets, food stalls and full restaurants.
Within a few years, E-Mart has moved to the number one slot and represents
as much as one third of discount retail sales that amounted to some 8.1
trillion won or roughly in excess of $8.1 billion. That figures consisted of
about 80 percent of the total Shinsegae retail sales of 10.4 trillion, in
2005, generated by 71 stores in 2004; and by 2006, there were 102 stores
(including 16 Wal-Mart outlets in Korea with sales of roughly $2.6 billion,
plus seven in China). In many ways, E-Mart has become the model after which
Lotte Mart (as of 2006, 47 outlets with $4 billion sales), Home Plus (as of
2206, 51 outlets with $6 billion sales) and others have followed.
France’s Carrefour and America’s Wal-Mart took a more Western approach in
line with their global strategies -- and proved to be much less successful
than the market leaders. Britain’s Tesco PLC, who partnered with Samsung
Group to form Samsung Home Plus, had done better than other foreign
investors into this market sector. In fact, in 2004, Home Plus ranked second
in market after E-Mart with annual revenue of $3.5 billion generated by 31
stores.
Wal-Mart had only 16 stores in all of Korea with just one store in the Seoul
metropolitan area. As a result, Wal-Mart could not achieve the economies of
scale and most Koreans did not become familiar with the company’s name.
Furthermore, the tall shelving and the bulk packaging, that were beyond most
local consumers’ imagination, put off Korean shoppers. Later, Wal-Mart moved
to break down the bulk packaging, but it was too late. In May 2006, Wal-Mart
sold all 16 stores to E-Mart owner, Shinsegae, 825 billion won
(approximately $825 million).
In 2006, Carrefour sold its Korean operations to E-Land, originally a
fashion retail company, but one with superior logistics and distribution
outlets capable of handling a wider variety of goods. As of this writing,
the Carrefour stores number 32 and are undergoing remodeling under the new
name of Homever.
Nationwide, sales for all large discount stores came to W21.4 trillion, or
more than $20 billion.
Online Retailers: TV Home Shopping and Cyber Malls
As one foreign consumer products company country manager put it,
``Technology is changing Korea! Korea is one of the most advanced countries
in the world regarding high-speed Internet and cell phone penetration. There
has been incredible growth behind home shopping channels and Internet
channels. I see great access to Korean consumers. It is now possible for a
company to get their own shopping mall on the Internet, etc.’’
In 1996, Korea’s TV home shopping industry came into existence. TV home
shopping sharply expanded during the first two years of the new millennium,
averaging over 60 percent growth annually. In 2003, the industry’s growth
slowed to 10 percent with market sales totaling about $3.5 billion.
The first two TV home shopping operators were LG and CJ, later joined by
Hyundai, Woori, and Nongsusan in 2001. Since then, Hyundai made the most
aggressive advances in terms of sales, market share, and customer
satisfaction. All five of these original five operators provide Internet and
catalog shopping services reaching an estimated 12 million cable-connected
television receivers.
While TV home shopping remains a strong and competitive retail channel, the
fastest growing channel has been and continues to be the Internet.
As of October 2005, according to the Korea National Statistical Office,
there were 2,229 Korean Cyber Malls mainly dealing in retail e-commerce
transactions between business and consumer -- an increase of 22.2 percent
year-on-year. In October 2005, clothes/fashions and related good made up
17.2 percent of all cyber mall purchases followed by home electric
appliances/electronics/telecommunication equipment (16.7 percent), travel
arrangement and reservation services (13 percent), household goods/motor
vehicle parts and accessories (10.5 percent), and computer and
computer-related appliances (9 percent).
Not content with conventional Internet shopping malls, Korean Internet
retailers are constantly trying to upgrade the shopper’s experience. For
example, in 2006, GSeshop installed on its Web site a three-dimensional
depiction of a department store, where visitors can click on displayed
products, in 3-D, on the shelves. Not to be outdone, GS3shop’s competitor,
CJ Mall, began screening live broadcasts on its shopping site. Similar to
television home shopping, a "shopping jockey" introduces various goods, and
chats real time with potential customers, answering their questions on the
spot.
Today online retailing has been a boon for delivery companies -- and a bane
for Korean drivers who find the roads even more congested with delivery
motorcycles and trucks. And it is no wonder. In 2006, total sales for all
Korean online retailers were as much as $14 billion. That includes online
retailing, however, from brick & mortar establishments such as major
discount stores and department stores. In fact, online sales by these two
major retail sectors are larger than those from the pure online Internet
shopping malls.
There are special problems, however, with Korean online retailing. Consumers
have often complained about ending up with different products than what were
displayed. And, not surprisingly, there can be serious customer
dissatisfaction caused by product size and specification disputes. As quick
as it may be to find and order an online product, delivery can be
exasperatingly slow. And, finally, some online retailers may find themselves
in legal jeopardy by unwittingly acting as jobbers for potentially dangerous
products, such as high-pressure air guns, etc.
How Does Korea Stack Up?
Today, South Korea’s retail turnover is roughly one-eighteenth of the U.S.
and a seventh of Japan markets. But the two most striking characteristics,
like much of the Korean economy, are the market share domination by the
largest players and the rapid growth in the underdeveloped sectors.
Lotte stores have a whopping 6.3 percent and Shinsegae outlets have an even
larger 6.5 percent of total retail sales. The biggest consolidated retailers
in the U.S. (Federated Stores) and in Japan (Takeshimaya) can only boast
about half that percentage of their markets. These two giants are in a
fierce competition to open up new premium and television home shopping
channels while continuing to increase the number of large retail stores.
Korean large store chains (department stores and large discounters) cover as
much as 48 percent of retail sales. But that is much smaller than the like
enterprises in the U.S. with 78 percent market share and Japan with 75
percent market share.
The real growth, however, lies elsewhere. According to a late 2006 analysis
by Hannuri Investment & Securities, the underdeveloped retail distribution
market has potential growth by as much as 48 percent by modernization and
consolidation. Today professional distribution companies are achieving this
at a much faster rate than in the U.S. and Japan.
So while Korea’s top two distribution giants’ market shares are expected to
increase, there still remain much greater opportunities in Korea’s
relatively backward retail distribution supply chains. Today the Koreans are
aggressively moving to upgrade this important part of their economy.
Tom Coyner is president of Soft Landing Korea (www.softlandingkorea.com),
a sales-focused business development firm, and co-author of Mastering
Korean Business: A Practical Guide.
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