Climate still harsh for retail giants

A sluggish domestic market and widening calls for “economic democratization” are creating tough times for Korea’s top three retail groups, Shinsegae, Lotte and Hyundai.

Shinsegae’s discount chain E-mart saw its operating profit shrink 8.2 percent in the last three months of 2012 compared to the same period the year before. The situation is expected to worsen after the passage of a law that forces the nation’s big stores to close twice a month to boost business at smaller shops.

Lotte Shopping is struggling in both domestic sales and also with its overseas operations. The retail industry estimates that Lotte Shopping last year suffered something like 100 billion won ($91 million) in loss on its operating profit overseas. This is double the 50 billion won of 2011. Half the losses came from its China stores.

Sales at Hyundai Department Stores during the New Year’s discount event, held in the first two weeks of January, were down nearly 9 percent compared to the same period last year. The store was hoping that the discount campaign would boost sales, but a growing fear of a recession has forced consumers to tighten their belts.

The disappointing discount campaign affected the company’s stock. It fell for five consecutive trading days since Jan. 21, the day after the campaign ended.

Tough times are forcing the retailers to get tough with each other and Shinsegae and Lotte are locked in a vicious legal battle in Incheon.

Lotte Department Store recently signed an agreement with Incheon’s government to build a major shopping center starting in 2017 at the Incheon Terminal. Lotte has agreed to pay 900 billion won for the land. Rival Shinsegae, which already has a department store in that location and the right to use the land until 2017, has filed an injunction against the agreement.

All of the retailers are concerned over pressure from political parties in the name of so-called economic democratization.

Last month the prosecution proposed fining Shinsegae Vice Chairman Chung Yong-jin 7 million won, Lotte Chairman Shin Dong-bin 5 million won and Hyundai Department Store Chairman Chung Ji-sun 4 million won for failing to attend a National Assembly hearing last year on economic democratization and how the retail groups help or hinder small businesses such as neighborhood bakeries. The three executives said they were traveling outside the country on business and couldn’t attend the hearing.

The simple opening of a small new store has become fraught with peril for the retail giants since President-elect Park Geun-hye has been empathizing with small neighborhood businesses.

“If all of the neighborhood businesses crumble, there will be no one who would be interested in learning bakery skills,” Park said last month, meaning that mom and pops don’t want to open stores in neighborhoods in feat of being crushed by retail giants.

“Measures that would practically protect neighborhood commerce should be made,” Park added.

Compared to its two rivals Lotte is particularly nervous about the incoming government. Lotte is viewed as having received the most favors from the outgoing Lee Myung-bak administration. The approval to build a second Lotte World in Jamsil, southeastern Seoul, the acquisition of duty free AK Global as well as approval for the Lotte Group to construct a highway along the west coast were all made during the MB administration.

Lotte is worried that approvals made by the previous administration will be branded “special treatment.”

Lotte says no illegal favoritism was involved.

“We could expand businesses because our cash situation was better than others,” said a Lotte Shopping official.

By Yum Tae-jeong [ojlee82@joongang.co.kr]