[Viewpoint] The higher pressure for lower prices

Wal-Mart is the world’s largest corporation, but it didn’t succeed here. When the company withdrew from Korea four years ago, E-Mart bought 16 outlets from the retail giant, prompting the media to cover the story as a main feature with the headline “Indigenous E-Mart Defeats Retail Dinosaur.”

All victories are followed by controversy and debate, but this was different. The media paid attention to why Wal-Mart had failed.

The conclusion was that Wal-Mart did its business as it did in the United States, and that did not work here. Korean consumers want fresh produce, fish and meat in their supermarkets. While E-Mart accommodated the taste of its consumers, Wal-Mart stuck to the American-style strategy of offering a wide range of manufactured goods at low prices. The result was accumulating deficits.

Partly because of the shock of the withdrawal, Wal-Mart’s stock price hit its worst levels that year, falling while the revenue remained static. At the end of 2006, Wal-Mart stocks were nearly 30 percent lower than six years earlier.

So CEO H. Lee Scott brainstormed, and came up with a plan. His choice was the old success model that had worked so well in the past four decades. The tactic was to “sell at a lower price.”

Wal-Mart first pressured their contractors, and those that lowered their prices found themselves in a crisis. In 2006, food and beverage company Kraft shut down 39 factories and laid off 13,500 employees. Anti-Wal-Mart sentiment grew with the thought, “Wal-Mart took away our jobs.”

Next, Wal-Mart increased imports of cheap Chinese goods. However, that strategy did not boost revenue, either, and shrunk the American manufacturing sector instead. Critics said Wal-Mart was ruining America.

Finally, Wal-Mart surrendered and changed course.

It scrapped the old formula and tried to change the perception that Wal-Mart is cheap. It launched more upscale brands, George and Metro 7.

For the first time in its corporate history, Wal-Mart conducted a survey on more than 10,000 consumers. The fresh food sections were expanded, and stores were differentiated to cater to the main consumer groups according to the region.

Finally, consumers started to come back. While other discount retailers marked negative growth, Wal-Mart grew by 5 percent last year, and is expected to cruise smoothly through 2010.

Now let’s look at Korea. The Korean market is saturated with mega-supermarkets, with more than 400 across the nation. And these chains’ revenues are not growing. E-Mart, the leader in the sector, had to think hard and chose the old success model: “Let’s sell at a lower price.”

In the last 10 days, E-Mart lowered prices on 22 items by 3 percent to as much as 36 percent. It has announced that it will lower prices for all 40,000 items sold at the store throughout the year.

However, it’s not putting the burden on its contractors. E-Mart knows too well the criticism that Wal-Mart endured without accruing much benefit. It is willing to reduce the profit margin - it says “to benefit the consumers,” but the truth is different.

An industry insider said that E-Mart already has the most competitive prices, and it has made a decisive move.

In the past, E-Mart enjoyed success by matching prices if a consumer could find the same product at a lower price at a store within 5 kilometers (3.1 miles) of E-Mart outlets. Competitors were immediately agitated. Lotte Mart announced that its prices would be 10 won cheaper than E-Mart’s, no matter what. I visited a Lotte Mart in Yongsan District, and the claim held up.

The industry insider said he was concerned that the battle would not last long. Sure enough, CJ stopped providing instant rice at discount prices. Lotte Mart brought its pork price back to normal. A Lotte employee said that it could not help affecting the contractors, so it had given up competing with E-Mart’s prices on certain items. He added that E-Mart’s tactic cannot last long.

Reasonable price competition is good for the economy and benefits consumers. However, if the competition becomes too heated and winning is the only goal, it will cause trouble.

The supermarket war is already too intense. Companies act as if they are riding tigers. Someone has to jump off the tiger at the right time at the right place. While it is important to adhere to the original plan, you cannot ride the tiger forever.

*The writer is the business news editor of the JoongAng Sunday.

by Yi Jung-jae