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Shifting Korean Retail Industry

By Tom Coyner

Korea Times

March 21, 2007

 

Consumer product distribution is by far the most rapidly changing factor in the Korean market. Korea's opening to new retail models from corner convenience stores to mega warehouse discounters has created a revolution. But even that is only second to the sea change being created by television, the Internet and wireless phone retailing.

 

It was not so long a go when the manufacturer was king and set most of the terms and conditions to the wholesalers and retailers. The reason was simple. Manufacturers were the heroes of Korea's ''economic miracle'' with the best even exporting goods in exchange for badly needed hard currency. The logistics systems were multi-layered, strangled on an evolving transportation infrastructure with most goods destined for final sale via tens of thousands of tiny retailers.

 

Since the 1970s, Korea's highways, railways, ports and airports have matured to be world class. While ''Mom & Pop'' retailers are still largely responsible for most point of sales, they are under a multi-front attack that dooms most to extinction in the coming decades. Two of their three largest competitors, convenience stores and discount warehouse retailers, have been around for a quarter century. But the traditional retailer's executioner may be the third competitor, online retailing, which will achieve its full potential in the coming five to 10 years.

 

Major Retail Chains

 

Historically and even to this day in rural Korea, the traditional retail exchange has been the village market day (changnal) that takes place about every five days. Surrounding the market square have been small retailers who have serviced the consumers on non-market days as well as during changnal.

 

The first major advance from this retail model came during the Japanese occupation when the first department stores, such as Mitsukoshi, established Seoul branch stores. Since the Japanese managed these operations, only Seoul benefited from this kind of consolidated retailing. Unlike Western department stores, however, manufacturers and wholesalers establish individual retail operations under a single roof in these high-rises rather than selling to the department store at wholesale. In other words, one may say that the village market place had been consolidated, to a large degree, into a single building.

 

In 1945, the Korean government took over Mitsukoshi Department Store in Seoul. The store was eventually sold to the Samsung Group who renamed the store Shinsegae. While for many years, Shinsegae continued to be the epitome of Korean retailing, most of the old Mitsukoshi practices continued essentially unchanged. From this model, other department stores were established.

 

 

Today, Korean department stores are sparkling merchandisers of the widest array of goods in a single location. But, since they actually comprise of competing retailers on each floor, there is often a great deal of redundancy that offers the consumer the benefits of price competition but often the buyer must work to find the right item among the superfluity of vendors. While there is prestige in giving gifts or being known to being a regular customer of a major department store due to the products' general quality and often premium pricing, the stores are rarely near-by to most consumers. Consequently, except for those wealthy in time as well as money (and an interesting class of addicted department store buyers who shop at least every other day), buying at a department store has been more of the exception than the rule.

 

In more recent years, specialized super department stores have evolved, as mega electronics or garment markets. While successful as attractive consumer magnets, these specialized markets have greatly emulated and amplified the department stores' redundancy factor. In recent years, the major mega electronics stores have fallen behind the discount warehouse stores. Whereas these specialized super department stores need to retain 25 percent of retail prices to survive, the new discount warehouse stores can do well with only 10 to 15 percent margins due to high volume and stronger price negotiating power with manufacturers. Nonetheless, department stores' sales remain impressive. The total sales for these stores in 2005 was 16.5 trillion won - more than $16 billion.

 

Given this background, the first of two competitors arrived in the mid 1990s.

 

Convenience Stores

 

The first Korean convenience store, an investment by Japan's Seven-Eleven chain, began operation in 1989 in the Chamsil part of southeastern Seoul, shortly after the 1988 Olympics. One year later, the first truly Korean convenience store, GS Retail's LG25 (forerunner of GS25) began operations. While making steady progress during the first years, 2001 was a turning point when new store numbers began to skyrocket. In 2006 alone, over 10,000 new (not net additional) stores were added at a growth of more than 12 percent over the previous year's number of stores. In 2005, a total of 9,085 convenience stores' turnover totaled 4.6 trillion won _ almost $5 billion. In November 2006, the Chosun Ilbo reported estimates that the 2006 annual total would be greater than 5 trillion won with more than 10,000 stores in operation by year-end. As of January 2006, about five million people stopped by convenience stores per day _ compared to four million at discount stores and three million at traditional department stores.

 

Korean convenience stores are following the Japanese example in many ways. Besides providing the most common goods in an efficient manner, Korean convenience stores now offer consumers the convenience to pay for utility bills, cell phone charges, Internet use, newspaper subscriptions, etc. Varying on the chain, these stores are providing local outlets for banking, the post office, photo finishing, and even auto and accident insurance. In July 2006, Shinhan Bank installed retail-banking services in Lotte Mart, Korea's third largest convenience store chain. If successful, other banks are sure to follow.

 

While large discounters and department stores offer a larger variety of goods at often-cheaper prices, they almost invariably require a special effort to commute and find parking. And once inside, it can be a major physical effort for the consumer to track down the targeted product. Most convenience stores, on the other hand, are roughly 82.5 square meters in size and within a minute's walk from one's residence or place of work. In fact, many people pick up their prepared breakfast and lunch meals from these mini retailers.

 

Today, the top five convenience store chains are Family Mart, GS25, Seven-Eleven, Mini Stop and Buy The Way. But there are several smaller chains as well.

 

The second of the two competitors arrived in the mid 1990s was the first of several, major discount warehouses. More recently, television and Internet shopping have become popular in this online, broadband consumer market. But these phenomena will have to be dealt in a future column.

 

 

Tom Coyner, a long-term resident in Korea, runs consulting firm, Soft Landing Korea. Coyner can be reached on softlandingkorea.com.

 

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