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Retail

South Korean retailers bank on megamalls to battle online giants

Department store chains look to woo customers with restaurants and waterfalls

Lotte Department Store's branch in Dongtan features over 100 restaurants in the lower floors. (Photo by Kotaro Hosokawa)

SEOUL -- South Korea's three biggest department store operators have recently opened massive new shopping complexes, complete with indoor parks and scores of restaurants, in a last-ditch bid to win back customers from online retailers.

Shinsegae opened its newest location, the Shinsegae Art & Science, in the city of Daejeon on Friday. At the cost of 650 billion won ($555 million), it is the first mega development for the company in five years.

With 92,900 sq. meters of retail space, the complex is more of a shopping mall than a department store. Services and restaurants occupy nearly half the area. The name "Shinsegae Art & Science" itself projects the idea that the center shares little resemblance to conventional retail outlets.

The biggest draws are the sixth and seventh floors, which are focused on learning. Named the "culture and science" floors, they contain a museum, exhibition space and lecture rooms.

The complex has partnered with Korea Advanced Institute of Science and Technology, a top-tier university, to provide classes on programming, robotic engineering and advanced sciences.

The area houses English language and art schools for children that will target business from high-income families with equally high educational demands.

The sixth and seventh floors of the Shinsegae Art & Science department store contain English schools and other spaces for learning. (Photo by Kotaro Hosokawa) 

Lotte Department Store opened its new Dongtan branch on Aug. 20. Food is the location's biggest theme, boasting over 100 restaurants. Many of them are popular eateries that have set up shop in a department store for the first time.

The sprawling food court, which also includes 10 bakeries serving every taste, takes up two basement floors covering 25,000 sq. meters. Lotte calls it the largest food court in the region.

Dongtan, a suburb of Seoul, is close to an area known as South Korea's Silicon Valley where Samsung Electronics, Naver and other tech companies have sites. High-rise condominiums being built in Dongtan have brought in high-income earners in their 30s and 40s.

Lotte aims to capture mothers with the new branch's lineup of food and household products. Women's clothing, once synonymous with department stores, is found only on the third floor of the eight-floor structure.

Hyundai Department Store opened the largest facility in Seoul in February, aiming to provide a relaxing setting for shoppers. Central to the project is an indoor park covering more than 3,000 sq. meters and containing 30 species of trees. A 12-meter waterfall accentuates an atrium.

Operating results have been strong during the first six months. Hyundai Department Store says it will "easily" surpass its sales target of 630 billion won for the first full year of operation.

It is not a coincidence that three of the country's biggest department store operators are pivoting from traditional physical stores that only sell goods. The pandemic-fueled rise of e-commerce has factored heavily in their decisions.

The e-commerce industry experienced a 25% jump in sales last year following constant growth in the 2010s. Meanwhile, sales at department stores plunged 10% in 2020. The coronavirus crisis landed a near-fatal blow to the industry after several challenging years.

Shinsegae and other peers have attempted to adapt to the changing environment by investing in digital sales. But they remain far removed from the likes of Coupang, the nation's leading e-tailer. While Coupang enjoys revenue growth topping 70%, department stores are outmatched in terms of prices, product selection and delivery speeds.

Traditional retailers realized that in addition to expanding online sales, they need to maximize the value of brick-and-mortar stores and offer experiences not found on digital platforms.

Conspicuous consumption is recovering in South Korea thanks largely to the bull market and rising property values.

"The asset-rich affluent are unable to go on trips overseas, so their spending is being directed toward brand-name products," said a securities analyst.

Hyundai Department Store's newest location in Seoul contains indoor greenery and a waterfall. (Photo by Kotaro Hosokawa)

Thanks to that trend, the earnings at the three department store operators is rebounding to pre-pandemic levels. If the COVID-19 pandemic passes, revenues would rise further with the return of foreign tourists, especially those from China.

Because outbreaks have reoccurred in South Korea since July, it is uncertain if the gains will be sustainable. Another headache are the much-needed reforms to existing locations.

The three operators are apparently planning to de-emphasize the retail sales in favor of services at their legacy stores, but that approach depends on the rapid success of the new megastores. Otherwise, there will be limited funds available for store remodeling.

Department store operators around the world have been engaging in a series of trial and error to differentiate themselves from online retailers and to turn around their businesses. The success or failure of South Korea's experiment will have deep ramifications for the industry as the whole.

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