Crunch time for retailers as demand dries up

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Crunch time for retailers as demand dries up

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Few customers are seen at the luxury shops in Shinsegae Department Store in Sogong District, central Seoul, on Sunday. The sales of department stores plunged compare to past years as customers are increasingly reluctant to spend their money amid economy recessions. By Kim Do-hoon


* Domestic demand is slumping in Korea in proportion to rising household debt and global economic uncertainty. Statistics issued by the government and predictions from economic think tanks suggest that domestic demand is not as robust as before, with sales of consumer goods like cars and electronic appliances feeling the brunt of the financial pinch.

Will the local economy bounce back? The Korea JoongAng Daily takes a closer look at the sluggish domestic market.

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As economic uncertainty sapped both consumer confidence and sentiment in June, shoppers also exercised caution with their wallets, causing sales to drop at leading department stores run by the country’s top three chain operators compared to a year earlier.

The three main department stores, Lotte, Hyundai and Shinsegae, have been seeing profit-eroding sales despite offering heavy discounts in the unusually dismal holiday shopping season, with many seeming tranquil and devoid of large numbers of shoppers. Despite the scorching heat and banners promoting sales of air conditioners and fans, shops that specialize in the summer appliances at a Techno Mart branch in central Seoul saw only a handful of consumers each on Sunday afternoon.

Sales at the top three department store chains dipped 1.2 percent last month, compared to last year, worse than a 1 percent drop in May, according to a monthly report by the Ministry of Strategy and Finance.

Managers at designer brand shops said their sales have halved compared to last summer, and local customers have dwindled dramatically. Many said they now rely on Chinese and Japanese tourists to drive sales.

“No matter how often we attempt to attract customers by making direct phone calls and releasing a diverse range of catalogues, even the regular customers almost never respond,” said a manager at a luxury brand shop in a Seoul department store.

Household spending among the top 10 percent of income earners has also decreased. Those earning an average of 9.2 million won ($8,000) a month spent 4.02 million, down 78,750 won, or 1.9 percent, from last year, according to a survey by Statistics Korea.

This is the first time consumption among the top income bracket has slowed since the nation experienced a credit card debt crisis in 2002.

As weak global and domestic economic prospects keep eating away at consumer confidence, spending patterns are not expected to improve anytime soon at traditional markets or discount stores.

The Bank of Korea’s Consumer Sentiment Index (CSI) for June fell four points from 105 to 101, just above the benchmark at which pessimists start to outnumber optimists.

“Domestic consumers were expecting a modest economic recovery until May, but with the domestic economy faltering, the index dropped significantly,” said an employee at the central bank.

Meanwhile, only one-fifth of the top 20 percent of income earners said they plan to spend more lavishly in the near future, according to a survey by Samsung Economic Research Institute (SERI) on consumer sentiment in the second quarter.

“The downturn in consumption will likely continue due to the steep recession in the stock and real estate markets, which has forced the upper income groups to cut their spending, not to mention the increasing uncertainty of the global economy with the ongoing euro zone fiscal crisis,” said Lee Eun-mi, a senior researcher at SERI.

But some point out that the economic situation is not entirely to blame. As the rate of consumption among the wealthy has been lower during the current than former administration, some critics wag a finger at government policy for stifling consumer sentiment.

“It dropped partly because government policies shifted from being pro-business to focusing more on regulating businesses, which made life harder for owners,” said Cho Dong-geun, an economics professor at Myongji University.

Car sales in the first half also show how local consumers are being forced to tighten their belts.

According to the Korea Automobile Manufacturers Association, the five local auto makers sold 574,530 passenger cars in the first half of this year at home, down 5.5 percent from last year’s January-June period.

Hyundai Motor, Korea’s biggest automaker, sold 244,475 passenger cars in the first half, about 7,000 units less than last year. Hyundai’s sister company Kia Motors sold 212,562 units in the same period, an on-year decrease of 3.6 percent.

“We’re experiencing domestic sales to fall as the euro zone crisis keeps influencing our nation’s economy,” an official from Hyundai Motor Group said yesterday. “We think uncertainty in the auto market will continue in the second half.”

Renault Samsung Motors (RSM) has suffered the most from the frozen domestic market. Its first-half car sales plunged 41.7 percent on-year. Local buyers purchased just 30,648 vehicles from RSM in the first six months of this year, about 20,000 less than during the same period last year.

GM Korea and Ssangyong Motor were the only two local car makers to see sales increases in the first half. Ssangyong sold 21,841 passenger vehicles, a 7.9 percent rise, while GM Korea sold 65,004, up 4.1 percent on the back of hot sales of its Spark.

However, the public’s financial straits do seem to have benefited at least two car segments, as sales of more affordable city cars have seen considerable gains in the first six months of 2012.

Sales of imported cars also moved up 20.5 percent in the same period, but industry pundits attribute this to the increasing polarization of wealth in the country.

According to a report issued last week by the Hyundai Research Institute (HRI), the domestic car market is expected to remain sluggish in the second half. The think tank said that a slump in consumption, investment, and falling real purchasing power will further diminish demand.

The HRI urged the government to adopt measures to usher in a soft landing for the economy as global uncertainty grows. “The government should lift regulations on consumer goods and the service sector. It also needs to implement stimulus packages,” it cautioned.

Predictions of interest rate cuts are also gaining momentum. The central bank has left the benchmark interest rate frozen at 3.25 percent for 12 months.

By Kim Jung-yoon, Joo Kyung-don [kjy@joongang.co.kr]

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