Structural Changes in the Retail Industry and Korean GovernmentÕs Industrial Policy subsequent to Opening the Domestic Market
Seong Mu Suh (Choong-Ang University, Korea)
Abstract
Background
Since Korea joined the World Trade Organization in January 1995, industries such as finance, education and retail were exposed to world-class competition. While the automobile, electronics and ship-building industry have been competing in the global market, the service industries were not competitive. For example, Korean retail workers were just as productive as 32% of American retail workers. Many believed that the retail industry would be swamped by foreign capital when the government opens the domestic retail market.
The financial crisis brought by foreign capitalists in 1997 hit hard on KoreaÕs economy. The retail industry was almost devastated as predicted. One leading retailer and many local retailers went bankrupt one after another. However, the crisis was a lucrative business opportunity for foreign investors; the Korean currency won lost half its value and many Korean companies and real estates were put on fire sales. The leading French retailer Carrefoure and the American Wal-Mart strengthened their presence around this time. The British Tesco joined the two retail giants in 1999. They comprise the Big Three Foreign retailers in Korea.
From Department Stores to Discount Stores
The two major types of retailers in Korea are department stores and discount stores. A typical department store is located in the central business district of major cities and is about 5,000 pyung or 15,000 square meters large. Unlike U.S. department stores, Korean department stores feature a grocery store in the basement to draw more customers. Grocery sales amount approximately 15% of the total sales while clothing is about 50%. Lotte, Hyundai and Shinsegae are the Big Three department stores in Korea.
The department stores in Korea are more like real estate developers in the United States. They provide floor spaces to individual merchants and collect rent based on the sales volume. Only a small part of a Korean department store business comes from buying and selling of the goods at their risk. When real estate industry was booming as in the last 30 years in Korea, the department stores could enjoy a healthy growth rate by securing shopping facilities through financing. Since financing was critical to their business, the financial crisis in 1997 had a devastating impact on department stores. Their status as the retail industry leader was slumped.
Discount stores are the newest business model introduced in Korea. When industry experts warned the imminent inroad of foreign giants like Carrefoure and Wal-Mart, the discount stores began to emerge in Korea. E-mart is considered to be the first major local retailer considering the fact that most goods in the floor are managed by the company. The stores are typically located near the residential areas of the major cities and draw customers in 10km radius. They are about 3,000 pyung or 10,000 square meters large. Grocery captures approximately 50% of the total sales while clothing is approximately 15%.
Among the major discount stores, E-mart has the highest sales and profits. The total sales for its twenty-seven stores were two trillion and 358 billion won or about two billion US dollars. E-mart also has a franchise in Shanghai, China opened in 1995. LotteÕs Magnet is the second local company. It was opened in 1998 as a sister store to Lotte Department Store. Its 17 stores sold one trillion won in 2000. However, their financial performance does not look as impressive as E-mart.
Carrefour has 20 stores as of 2000 with a sales volume of on trillion Won. The company strives to implant its French management style in Korea. It is reported that they are involved in legal conflicts with local suppliers and that the fair trade committee has ruled against them. Wal-Mart made its presence by taking over a Dutch retailer in 1996. As of today, their challenge is to promote their brand and reputation. Wal-Mart reported a net loss of nine billion Won in 1000. In 2000, their six stores earned four hundred billion won in sales and seven billion won in profit. Homplus (Tesco) is the rising star in the retail industry. It was established in 1997 by the largest Korean chaebul, Samsung. In 1999, the English retailer Tesco took over its management by purchasing 80% of the companyÕs stock. It opened five new stores in 2000. By 2005, Tesco plans to operate 55 stores.
Korean Government Industrial Policy
Changing the industrial policy to open the domestic market for direct foreign investment has shown several positive impacts. First, local companies responded to the challenge in a healthy manner. In realizing the need to compete with merchandising skills, the retailers invested in streamlining the merchandise flow, controlling inventory, and developing merchandise sources. Another positive effect was the decrease in the general price level resulting from the increased competition in the retail industry. According to the Bank of Korea, the discount stores have contributed to stabilizing the consumer prices in the past few years.
On the other hand, the development had a negative impact on small retailers. According to the Korea Chain-store Association, the number of retailers was reduced by 12%, that is, approximately by 90,000 during the years from 1966 through 2000. Experts believe that the intensified competition in the retail industry accounts for the decreased figures in retailers. Aggressive business practices brought by big retailers provoke outcries from small-sized stores.
Small retailers have been the largest work force in Korea. Since Korea lacks social safety net compared to Western countries, their sudden decline can be burdensome to the government. The governmentÕs support policy includes assisting management practices, modernizing store facilities and systems, and enforcing fair trade law. Management development centers owned by the government provide small merchants with training and consulting services. In addition, the government also provides special funds to support remodeling facilities and organizing voluntary chains. Fair trade law is enforced to prevent big-sized stores from aggressive business behavior. For instance, the Supreme Court recently ruled against the discounterÕs promotion practice of providing free shuttle bus services for customers.
