More small businesses can’t pay their bills

A for-rent notice at a commercial space near Ewha Womans University in western Seoul. [KANG JUNG-HYUN]

The number of small business owners who can’t afford to pay rent or electricity bills is on the increase.

As business owners struggle to deal with the minimum wage hike, properties up for lease are piling up in major business districts in Seoul, such as Nonhyeon-dong in southern Seoul and the university area of Sinchon in western Seoul.

“Business is so bleak that I haven’t been able to pay rent [3 million won, or $2,670, per month] or maintenance bills [800,000 won per month] for three months,” said Mr. Kim, the owner of a medical device store in Gwanggyo New Town, Gyeonggi. “Since the minimum wage hike, I’ve had to run the store myself because I can’t afford a part-time worker. As a result, I’ve had to shorten my business hours and my profit keeps going down. It’s a vicious cycle.”

“We are going to have to close soon because we are having difficulties running our store,” said Mr. Park, who owns a Chinese restaurant in the same building as Kim’s. “We’re already several months behind on rent and maintenance costs.”

Currently, about 30 out of around 150 businesses in the building are overdue on their utility fees. It is likely that these business owners are behind on rent as well.

“The amount of overdue fees increased to 90 million won in June from 53 million won at the end of last year,” said Mr. Park, a manager of the building’s maintenance center. “We send a reminder letter if someone is overdue by 3 months or more on their bills, but it’s only getting worse.”

The amount of overdue utility fees is also snowballing at a 90,000-square-meter (22-acre) commercial building in Wirye New Town, Gyeonggi, which houses around 400 small businesses. The building’s total overdue utilities nearly doubled from 111 million won at the end of last year to 206 million won in June. Considering that monthly utility costs for a store are usually 10,000 won per 3.3 square meters, two-thirds of the building’s monthly utility fees of 300 million won are currently outstanding.

“If the monthly rent is delayed, it can be deducted from their deposit later, but if the utility fees accumulate, eventually the electricity and water will be cut off and owners won’t be able to operate their businesses,” said Park Dae-won, the head of a commercial building research and review institute. “If all these business owners are behind on their utilities, it means a lot of small businesses are really struggling.”

Cho Hyun-cheon, 38, the owner of a pizza restaurant in Gyesan, Incheon, is struggling to make ends meet as well and has turned to a strange solution. On the back of his delivery motorcycle, he has two pizzas - one from his restaurant and one from a rival pizzeria.

“While delivering pizza for my restaurant, I also deliver the products from a rival establishment as a part-time job,” Cho said. “I know at least three or four other people who are small business owners and also part-time workers at the same time.”

Mr. Cho and his wife opened their pizzeria last October. In the nine months since then, they’ve had exactly six days off, working an average of 29.3 days a month. But they still barely earn minimum wage-level incomes and can’t afford to take on any part-time help. “For small businesses like ours, the profits would be cut in half if we hired a part-time worker,” said Cho. “With the minimum wage hike, we won’t be able to hire help anytime soon.”

Vacancies in commercial buildings are also increasing rapidly as struggling businesses close down. According to the Korea Appraisal Board, the vacancy rate in major commercial districts in Gangnam District, southern Seoul, in the second quarter of the year jumped from the previous quarter to the highest rate in years. There was an 18.4 percent vacancy rate in Nonhyeon-dong and 9.5 percent in Sinsa-dong. Empty stores are now a common sight on the road between Nonhyeon Station and Shinnonhyeon Station.

The Sinsa area, including the Garosu-gil commercial strip, is facing the same problem, with a 1.7 percent rise in vacancy rate from the first quarter of the year to the second. Even when a space is filled, they are often occupied by pop-up stores that typically close within two to three months, leaving the space empty again.

“The economy is so bad that nobody is even inquiring about empty spaces,” said Mr. Kim, the owner of a commercial building in Nonhyeon. “I’m debating about how low I should make the monthly rent, because everyone seems to be down in business.”

“The lease market for small commercial buildings is directly linked to the domestic economy,” said Roh Kyung-seok, a department head in the Korea Appraisal Board. “The spike in vacancy rates and overdue payments in major commercial districts is a red flag for both the domestic economy and small business operators.”

Industry experts stress that, in order to revive their businesses, owners must cut their expenses, including sales costs, labor costs and administrative expenses, to become more sustainable.

“One way for small business owners to save money is through the joint purchase of goods and cooperation in brand development with other self-employed business owners in the area,” said Choi Kyu-wan, a professor at Kyung Hee University. “If small businesses reduce costs through joint logistics, it will improve the difficulties they are facing in management.”

“High rent is also one of the main factors behind the unusually high vacancy rates in areas like Sinchon and Nonhyeon,” said Yoo Seon-jong, a professor of real estate at Konkuk University.

Yoo urged building owners to lower rent, stressing that, while the profitability of commercial spaces has recently decreased, building owners did not lower the rent, which led to the absence of tenants and left stores empty. “Rent can always be raised again when the market picks up again, so it’s necessary to make an effort to attract tenants by lowering rent according to the current economic situation.”

Because of difficulties in the job market, people are rushing to start their own businesses despite the risk. Recently retired baby boomers typically set up restaurants, cafes and convenience stores, which is one of the reasons why competition in these industries is exceptionally fierce and profitability is low.

“We need to promote research and development jobs and professional service jobs that can employ senior employees who have retired early in order to curb the number of small businesses,” said Jeong Yeon-seung, a professor at Konkuk University.

BY HAM JONG-SUN, KIM YOUNG-JU AND CHANG CHUNG-HOON [ebusiness@joongang.co.kr]