Seoul, July 12 - South Korea's top stores are expanding abroad as growth sags in the domestic $120 billion retail sector, but may find they're too late.
With opportunities to invest running out at home, Shinsegae and Lotte Shopping Co. are joining a global rush into new markets like China, where traditional mom-and-pop stores still make up 90 percent of the retail market.
The China Chainstore & Franchise Association estimates the top 100 retailers account for just 11 percent of China's $240 billion retail market. In comparison, in South Korea modern corporate retailers account for more than half of retail sales.
But Shanghai and other big Chinese cities on the east coast are already saturated, and though there are prospects in the less affluent western area, it will take longer for new entrants to break even since spending power there is not as strong.
"As catch-up players, they will face higher procurement costs and less attractive store sites," said Na Hong-suk, an analyst at Goodmorning Shinhan Securities. "I don't expect them to rack up any profits in the next few years."
That's pretty much the same situation that Wal-Mart Stores Inc., the world's largest retailer, and second-ranked Carrefour faced in South Korea.
Their warehouse-style interiors, bulk packaging and out-of-the-way locations failed to win over South Koreans, who prefer upmarket interiors and shopping every few days somewhere convenient.
Both gave up eventually and sold up. Shinsegae bought Wal-Mart's 16 stores in May and Carrefour sold out to local fashion retailer E-Land Ltd. in April.
Lotte has 40 percent of South Korea's $17 billion department store sector but ranks third in the $22 billion discount store sector, the fastest-growing segment of the retail market with 16 percent annual growth since 2002.
The department store sector has stagnated, growing by just 0.1 percent a year after a credit card debt crisis depressed spending and pushed consumers towards low-priced malls.
Growth options, in a country that already has one discount store for every 170,000 people, seem limited, hence the push overseas.
Lotte's shares have dipped 7 percent since their IPO in January but Shinsegae has risen 8 percent this year, beating the wider market's 5.7 percent fall.
LOSING MONEY
South Korea's retail market is expected to grow about 2.5 percent a year until 2008, while China's market is set to expand 10 percent annually.
However, after 10 years there, Shinsegae Co. Ltd., South Korea's top discount store chain, is still losing money, and a turnaround is unlikely any time soon as Wal-Mart and Carrefour have already secured key sites and stronger pricing power.
Analysts also see little hope for Lotte, the top department store operator, which is belatedly moving into Russia, China and Vietnam with proceeds from its $3.54 billion IPO in January.
In contrast, learning from their experience in Korea where they tried to go it alone and failed, Wal-Mart and Carrefour have allied with local partners in China and got their names known.
"Carrefour or Wal-Mart are the ones average Chinese customers think of in terms of foreign retailers," said Zhang Man, an analyst with Orient Securities in Shanghai.
"E-Mart came to China too late," Zhang added, referring to Shinsegae's hypermarket brand."It is a weak brand."
China, now Asia's second-biggest retail market after Japan, dropped the a requirement that foreign retailers find local partners in 2004, in theory making expansion a lot easier.
Shinsegae is opening its eighth E-Mart store in China this year and aims for 50 by 2012 as China embraces modern shopping.
Shinsegae official Kim Dai-sik said that the firm was using a strategy in China that has worked well in Korea -- keeping prices low but interiors upmarket, with a department store feel.
But Shinsegae's 2005 sales of 100 billion won ($) in China were just 5 percent of Carrefour's $2.2 billion and one tenth of Wal-Mart's $1 billion, and analysts say the firm will find it hard to break even before it has 30 stores -- not until around 2008.
Discouraged by Shinsegae's showing, Lotte has been cautious.
It plans to open a department store in Moscow before Christmas and in China it is considering outlets other than discount stores to avoid direct competition with Wal-Mart and Carrefour.
But it shouldn't dally.
"They (South Korean firms) would better be moving quickly as Wal-Mart, Carrefour and the like are also speeding up expansion in smaller cities," said Zhang Zing, an analyst at Shanghai Securities.