[The Crisis of the Distribution Industry] Chronic Deficits, Malignant Contagion, Acute Store Closures

South Korea hit by 7 years of recession and then COVID-19

Lotte Department Store closes 9 locations in 3 years

Shinsegae and Hyundai open zero new stores

[Asia Economy Reporters Hyesun Lim, Minyoung Cha, Seungjin Lee] Offline retailers are bidding farewell to the era. Department stores, once symbols of the economic powerhouse United States, are disappearing into the annals of history, and retail stores are closing one after another. South Korea’s retail industry, represented by department stores and large supermarkets, is following the same path as the U.S. Since retail regulations were fully enforced in 2012, growth has long since stalled. On top of that, with the rise of non-face-to-face (untact) consumption as a major trend after the COVID-19 pandemic, these businesses now face survival challenges.

◆ 300 department stores and large supermarkets to disappear within 10 years= According to the retail industry on the 22nd, there have been no new openings of department stores or large supermarkets in the past three years, only increasing closures. It is forecasted that about 300 department stores and large supermarkets currently operating will vanish within 10 years. Lotte Department Store closed a total of 8 stores in 2018 and last year. The Young Plaza Cheongju branch is also scheduled to close, making 9 stores gone in 3 years. Lotte Mart has closed 3 stores in the past 3 years and plans to close a total of 15 stores within this year. Lotte Shopping plans to shut down about 200 underperforming department stores and supermarkets within the next 3 to 5 years.

The Shinsegae Group is in a similar situation. Shinsegae Department Store has had no new openings since 2018 and only closures, while Emart closed a total of 8 stores from 2017 through last year. Last year, Emart posted its first quarterly loss since its founding, and its consolidated operating profit plunged 67.4% year-on-year to 150.6 billion KRW, making new store openings difficult for the foreseeable future. Hyundai Department Store has had no closures in the past 10 years but also no new openings.

This situation is also confirmed by precedents in the United States. Neiman Marcus, a U.S. department store chain celebrating its 113th anniversary, is expected to file for bankruptcy protection (court receivership) this week. Last month, Neiman Marcus closed 43 directly operated stores, 20 discount stores (Last Call), and 2 luxury department stores (Bergdorf Goodman). JC Penney and Macy’s are also struggling financially. Sears filed for bankruptcy in 2018. The cumulative number of closed retail stores in the U.S. has exceeded 9,000. Over the past three years, the retail sectors with the most closures were large supermarkets, drugstores, and department stores, in that order. The background for the closures of offline retail stores in the U.S. includes the emergence of the giant e-commerce company Amazon, the expansion of online shopping, and the decline of the middle class. In particular, Amazon’s rise ignited the decline of offline retail, and the COVID-19 pandemic accelerated large-scale restructuring.

U.S. collapses with Amazon’s rise

113-year-old Neiman Marcus files for bankruptcy

Retail cumulative closures exceed 9,000 stores

◆ 20 years of boom, 7 years of recession... shattered by COVID-19= Domestic offline retail exploded in growth after Emart opened the first large supermarket in Chang-dong, Seoul in 1993. Under the offensive of Emart and Lotte Mart, global retailers Walmart and Carrefour were pushed out of the domestic market. Until the late 2000s, companies lined up to enter department stores and large supermarkets. Annual records were broken until 2013. However, growth stopped as retail regulations such as restrictions on new store openings and mandatory closures were strengthened. Meanwhile, the retail paradigm shifted from offline to online, with e-commerce companies like Naver and Coupang encroaching on the market. According to the Ministry of Trade, Industry and Energy, the online share of total retail sales was 28.4% in 2014 but rose to 41.2% last year.

Professor Seungho Ahn of Soongsil University said, "If regulations are strengthened, offline retail cannot survive." Ultimately, Emart’s operating profit, which was 735.1 billion KRW in 2013, was cut to 150.6 billion KRW last year, a fifth of its previous level. Lotte Shopping, the country’s top retail company, also saw its operating profit plunge from 1.4852 trillion KRW in 2013 to 417.9 billion KRW last year.

After COVID-19, foot traffic to offline retail stores stopped. Although strict social distancing was the cause, even if the pandemic ends, dependence on offline retailers is expected to significantly decrease. A senior executive at a retail company explained, "Due to the COVID-19 situation, retail companies’ first-quarter performance is more serious than expected." According to Lotte Future Strategy Institute, the number of department stores, which was 98 in 2020, is expected to decrease by 20 to 78 by 2030. Large supermarkets are also expected to shrink from 499 to 223, a reduction of 276 stores.

Kim Ikseong, honorary president of the Korea Distribution Association and professor at Dongduk Women’s University, cited omni-channel and enhanced consumer-tailored services as ways for offline retailers to survive. Professor Kim advised, "The biggest strength of offline retail is the ability to immediately reflect consumer demands on site," and emphasized, "Customized services should be further expanded." He added, "Omni-channel services linking offline and online should be expanded, and delivery systems for orders made offline should be strengthened to incorporate the reasons consumers are enthusiastic about online shopping into offline retail."

This content was produced with the assistance of AI translation services.