A division of Soft Landing Korea Ltd.
By Tom Coyner
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.