May 1, 2014 7:00 pm JST

Slowing at home, South Korea's Lotte group pushes into the rest of Asia

KOICHI KATO and MANABU ITO, Nikkei staff writers

This Lotte Mart in Seoul is one of the chain's 109 or so domestic supermarkets. There were 146 overseas Lotte Marts at the end of 2013. © Reuters

SEOUL -- South Korea's Lotte group wants to join Samsung, Toyota Motor and other big names among the ranks of Asian mega-companies. To join the club, the conglomerate is going to have to change this statistic: It now gets more than 80% of total group sales at home.

     With those sales not expected to sharply increase anytime soon, the chaebol, as big family-controlled conglomerates are known in South Korea, is going shopping for some Asian revenue.

     In fact, it has been doing just that for some time now. Exploiting experience he gained from working at the London offices of Nomura Securities, Lotte group Chairman Shin Dong-bin began an aggressive acquisition binge in 2002, spending more than 10 trillion won ($9.6 billion) on 40 or so companies. Most of the acquisitions are located in Asia or former Soviet republics.

     The shopping spree is thought to be ongoing. Other group plans call for opening fast-food, retail, hotel and other operations across Asia. Lotte sees group sales at 200 trillion won by 2018.

 

Playing the sushi card

Lotte in late March opened a shopping mall in Hanoi, which is already attracting a lot of families who make numerous purchases per outing. A take-out sushi shop in the mall seems to be riding a wave of success created by a similar shop in a similar mall in Ho Chi Minh City. That mall is run by Aeon, a big Japanese retailing group. With Aeon planning to open its first Hanoi mall next year, Lotte wanted to get a head start in the name-recognition game.

     "In our overseas push," Shin said, "we're looking for properties that will allow us to simultaneously launch multiple types of operations." One way the conglomerate's pieces do business together is by taking up space in single developments that might include a supermarket, a department store, a hotel and perhaps a Lotteria burger joint. It will open one of these multiattraction developments in Hanoi by the end of the year.

     When the Lotte group expands to a new country, it usually does so by opening a Lotteria. Last spring it took the hamburger route into Myanmar. In January it decided to set up a joint venture with a Myanmar partner to make and sell soft drinks. Lotte's basic strategy is to use the Lotteria chain to research a foreign market before establishing soft drink and other retail businesses. "We have arrangements under which our group companies can help one another overseas," a Lotte representative said.

 

Staff shortages

The Lotte group in February surprised South Korea's business community by announcing personnel reshuffles. Two top executives, widely seen as among the group's most capable, were ordered to China -- Kang Hee-tae, 55, executive vice president of Lotte Department Store, and Kim Jong-in, 51, senior managing director of Lotte Mart.

     Shinsegae, a smaller chaebol that also runs a department store chain in China, sharply reduced its operations there recently. Aeon has been losing money in China for years. So has Lotte, but its Chinese operations might be able to swing to an operating profit as early as next year, according to a company executive. Lotte wants Kang and Kim to lead Lotte's efforts to further raise its profile in the Chinese market.

     Lotte believes it needs to increase the number of personnel living in and specializing in a country or region for long periods of time. Currently, South Korean personnel are dispatched to other countries on relatively short assignments.

     With this in mind, Lotte in 2010 launched a program to develop specialists in each Asian country. Under the program, it sends some executives to universities in the countries where they are working to learn the language and culture. These intensive courses last three to five months.

     "Consumption patterns are unique to each locality; they can be heavily influenced by climate and customs," a Lotte representative said, apparently convinced that his company cannot win the fierce competition now sweeping Asia by simply dispatching South Korean personnel on assignments of a few years or so. "We want our managers to adapt to local customs as if they were to live in their new country for the rest of their lives."

     Following in Samsung Electronics' footsteps, Lotte is devoting large swaths of its human resources to its Asian expansion drive. So much so that Lotte has begun to experience serious staff shortages at home -- a trend that could undermine the chaebol's entire business.

 

State of emergency

The Lotte group was established in 1967 by Shin Kyuk-ho, who also goes by the Japanese name of Takeo Shigemitsu, an ethnic Korean residing in Japan. Some 19 years earlier, Kyuk-ho had founded Lotte in Japan. After Japan established diplomatic relations with South Korea in 1965, he returned to his native land and, by adopting postwar Japan's industrial model, founded a company that would grow into a group including a financial services provider, confectionery and chemical makers as well as department store, supermarket and hotel chains. The South Korean group now exceeds the Japanese group in size.

     South Korea's Lotte group last year posted sales of $75.7 billion, up 1% from the previous year. It has become the country's fifth-largest conglomerate by assets, but the pace of its domestic growth has been steadily slowing. One drag has been a law that took effect in 2012 requiring large-scale supermarkets to close at least twice a month and banning them from operating 24 hours a day.

     The law is intended to arm South Korea's small retailers with a stone they can use against the country's Goliaths.

     Lotte Mart opened few new stores last year. That, along with stagnant sales growth, prompted President Noh Byung-yong to declare a state of emergency at a board of directors meeting in March. He then announced Lotte Mart would curb the number of new hires this year.

     Another drag is South Korea itself, specifically its aging population and low birthrate. The country's working-age population is projected to start declining in 2017. Consumption patterns are expected to change significantly. Retailers are already having to adapt.     

     No surprise, then, that Lotte Mart was operating 146 overseas supermarkets at the end of 2013. That is up from one in 2007 and surpasses the 109 supermarkets it runs in South Korea. It took six years for Lotte Mart's overseas chain to grow bigger in number than its domestic network.

     The retailer aims to expand the combined number to 700 by 2018, which would make it Asia's leading supermarket chain.

 

Playing the beer card

But what to do at home? Perhaps start selling altered states of mind? Lotte is getting into the beer business.

     Lotte is involved at all stages of bringing products to the consumer -- from manufacturing to distributing to retailing.

     Beer will be no different. Lotte used German-style equipment in building its brewery, in Chungju, in the middle of the country, where it began making suds April 8. The all-malt Kloud, which has a richer taste than other South Korean brands, went on sale only days ago. Annual production is starting at 50,000 kiloliters, but Lotte hopes to increase that to 500,000kl by 2017. That would be 20% or so of the beer South Koreans now consume in a year.

     Shin Dong-bin is said to have been itching to get into the beer business for quite awhile. He once toyed with the idea of acquiring Oriental Brewery -- the country's largest brewer and known in South Korea as OB -- when it was owned by an investment fund.

     And Lotte already sells Asahi Super Dry in South Korea under a tie-up with Japan's Asahi Breweries.

     With OB and HiteJinro combining for 90% or so of South Korea's beer market, many analysts doubt Lotte will be able to break the two brewers' market dominance. Shin does not seem to care.

     Beer might give the conglomerate another way to boost its brand recognition overseas. "We would like to start offering the beer overseas in the future," a Lotte executive said. "We might start selling it in countries where we run large-scale supermarket chains."

 

Founding family issues

"I hardly see him these days." That was a Lotte representative referring to company founder Shin Kyuk-ho. Kyuk-ho used to visit Lotte Department Store outlets in Seoul almost every day. Now Shin Dong-bin, Kyuk-ho's second son and the chaebol's current chairman, makes the rounds.

     Kyuk-ho, who created Japan's largest confectionery maker and one of South Korea's top five business empires from scratch, turns 92 in October. Late last year he underwent emergency surgery after falling down.

     Hiroyuki Shigemitsu, Kyuk-ho's eldest son, has taken over Japan's Lotte group. The two groups are seeking ways to cooperate with each other in the confectionery business. But their leaders' sibling rivalry simmers just beneath the surface.

     Just last year, in fact, the brothers got into something of a bidding war as each tried to up his stake in South Korea's Lotte Confectionery.

     The cooperative relationship between Japan's and South Korea's Lotte groups is cemented only by a marginal capital tie-up, so it could be terminated if the balance of power, underpinned by this capital alliance, tilts too far to one side.

     Just like other South Korean conglomerates, South Korea's Lotte group is controlled by the founding family, making it easy for management to make quick decisions. This has worked for Lotte so far in its expansion drive. It took a mere four months for Lotte Chemical, the group's petrochemical unit, to reach an agreement with a U.S. company to jointly build an ethylene factory using shale gas as the raw material in the U.S. state of Louisiana. The use of shale gas is expected to cut ethylene output costs by 30-40%.

     Other examples of quick Lotte decision-making include the expansion of a business tie-up with Titan Chemicals, a Malaysian company the group had earlier acquired, as well as construction of a polyethylene factory in Uzbekistan.

     "Quick decision-making gives us an advantage in a fast-changing business environment," said Kim Gyo-hyun, vice president of Lotte Chemical. The company aims to boost sales by 150% from 2013 levels by 2018.

 

Size issues

The rapid expansion of Lotte's business activities is making it increasingly difficult for the founding family to keep a close eye on every aspect of its empire.

     "This kind of scandal should never have happened," Shin Dong-bin scolded his directors in early April. "Make sure it never happens again." He was using unusually strong tones while referring to a series of scandals that had come to light, including the loss of customer information by a group credit card company and suspected embezzlement by the Lotte Department Store president.

     As part of the restructuring effort carried out in February, President Hwang Kag-gyu, Shin's right-hand man, was appointed to head the group management office. He is tasked with mapping out the group's business and acquisition strategies as well as with looking for promising new businesses.

     Earlier this year, Kyuk-ho and Dong-bin quit as temporary directors at some group firms, including Lotteria and Lotte Aluminium. The moves are "designed to reduce the founding family's involvement in business management," a Lotte representative said, "and to increase the roles of professional business managers."

     Shin Dong-bin, 59, is hedging about his own retirement plans, saying he is designating 65 as his retirement age but that he may work as chairman until he reaches 70. The longer he remains chairman, the more powerful he will become, making it impossible for those around him to correct him when he makes poor decisions.

     Will Lotte be able to create a new management structure that retains the advantages of family control while also exploiting the expertise of professional managers? Success in this quest could be the key to Lotte's growth strategy going forward.