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South Korean retailers get squeezed at home and abroad

Companies grapple with the new president's agenda and Seoul-Beijing tensions

SEOUL Shinsegae Vice Chairman Chung Yong-jin is a popular figure on social networks, boasting 125,000 followers on Instagram. The 48-year-old heir apparent of the South Korean retail group regularly posts pictures of his daughter and her puppy, as well as of new products and stores, on the photo-sharing site.

But Chung had less cheerful news to share on May 31 when he announced that Shinsegae's discount chain affiliate E-Mart will exit the Chinese market, hit by mounting losses amid souring relations between Seoul and Beijing over the deployment of a U.S. anti-missile system.

"E-Mart will withdraw from China completely," Chung said during the group's job fair at the Korea International Exhibition Center northwest of Seoul, acknowledging its failure in that market.

Sales of E-Mart's Chinese business tumbled 23.1% on the year to 44.2 billion won ($39.3 million) in the January-March quarter, according to the company. Its operating loss, meanwhile, came to 4.3 billion won, compared to a 4.5 billion won loss in the first quarter of the previous year.

The situation is no better for compatriot Lotte Shopping, the retail arm of Lotte Group. Chinese authorities in March suspended operations at 75 of the company's 112 discount stores in the country. These closures seriously undermined Lotte's Chinese supermarket business, with sales tumbling 23.7% on the year in the first quarter.

Earlier that month, Lotte had handed over its golf course in Seongju to the South Korean defense ministry, which then offered it to the U.S. military for the deployment of the Terminal High Altitude Area Defense system, or THAAD. The missile system is intended to counter the North Korean nuclear threat, but China, Pyongyang's only major ally, has raised strenuous objections to its deployment.

Since THAAD was deployed, Lotte has also been hit with boycotts in China. The backlash has spread to other South Korean businesses, and even duty-free shops are suffering from the political turmoil between the two countries. According to a report from Mirae Asset Daewoo, sales at South Korean duty-free shops fell to 1.1 trillion won in March from 1.3 trillion won the previous month, a 19% drop. This, the report noted, was due largely to retaliation over THAAD, as Beijing has banned all group travel to South Korea since March 15.

DOMESTIC DIFFICULTIES In addition to turbulence in China, South Korean retailers are also facing challenges at home. The country's new president, Moon Jae-in, took power on May 10 vowing to tame the chaebol, or family-run conglomerates, with retailers forming no exception.

During the election campaign, Moon's Democratic Party said it would take steps to protect small business owners, including limiting the launch of new shopping complexes in cities and restricting their operating hours to between 10 a.m. and midnight.

Another concern for retailers is Moon's promise to raise the minimum wage to 10,000 won per hour by 2020, up from 6,470 won per hour this year. That translates to a 16% rise every year for the next three years.

Changing demographics and a shifting way of life in South Korea are also pressuring retailers to shift their focus to online and convenience stores, with single-person households accounting for more than a quarter of the 51 million population.

Lim Soo-hyang, a 35-year-old housewife in Ilsan, a town north of Seoul, said she goes to a CU convenience store in her neighborhood every day. Her two daughters, age 6 and 3, love to have ice cream or cookies from the shop, which is one block from her home, she added.

For grocery shopping, Lim uses E-Mart's online service, which offers same-day home delivery. "I like online shopping because it's a pain to go to a chain store with little children," Lim said. "It's convenient to shop online, and the company doesn't charge delivery fees on orders of 40,000 won or more."

ONLINE UPTICK Market leader E-Mart said sales at its brick-and-mortar discount chains increased just 1.6% on the year to 2.9 trillion won in the first quarter, while sales from its online business jumped 25.1% to 243.8 billion won during the same period. Sales from With Me, its convenience store brand, spiked 140.9% to 130.1 billion won over the same period.

The picture is similar at Lotte Shopping. Sales at discount chain Lotte Mart reached 2.07 trillion won in the January-March period, down 5.3% from a year ago. But its convenience store business, which runs the 7-Eleven brand, saw sales rise 4% to 864 billion won during the same period.

Despite its setback in China, E-Mart said that on the domestic front the company is responding to rising demand from its online platform and strengthening its related marketing activities. "We are offering a wide range of promotions targeting specific groups, such as single-person households and senior citizens. We also improved our logistics chains to better supply to online shoppers," said Joo Kyung-don, an E-Mart spokesman.

Analysts say E-Mart's strategy to strengthen its online division has helped boost its market share. For the past two years, the company has topped its peers in year-on-year sales growth, with 3.5% in 2015 and 5.7% in 2016, compared to Homeplus, which saw its sales drop 1.4% in 2015 and 2% in 2016. Lotte Mart's sales slipped 0.5% in 2015 and increased 0.2% in 2016.

"It has introduced new formats that have captured the growth owing to the changes in the consumption pattern in [South] Korea," said Cara Song, a Nomura analyst. "We believe the pace of margin recovery is faster than our expectation at new formats due to E-Mart's significant market-share gain."

On the back of increasing online sales, shares of E-Mart have risen 16.8% over the last three months, hitting a one-year high of 243,500 won on May 31. Lotte Shopping saw its shares spike 24.0% during the same period, outperforming the 12.2% rise in the benchmark KOSPI, a sign that both retailers are rising to the challenges they face.

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