Mixed Fortunes in Retail for Q3... Department Stores Say "Revenge Spending Not Over," Marts Worry About Disaster Relief Fund Impact

Department Stores Smiling at Revenge Spending
Supermarkets Crying Over Disaster Relief Funds

The expressions on the faces of department stores and large discount stores, which received better-than-expected results for the second quarter, are expected to diverge in the third quarter. While department stores are likely to continue strong growth in luxury goods and home appliances driven by revenge consumption in the third quarter, large discount stores are expected to inevitably suffer performance hits due to strengthened social distancing measures amid the spread of COVID-19 and the impact of the Chuseok peak season mutual benefit national support fund (disaster relief fund).

◆Department Stores: "Revenge Consumption Has Not Ended"

On the 13th, the combined sales of the three department stores?Lotte, Shinsegae, and Hyundai?reached 1.7617 trillion won in the second quarter, a 15.6% increase compared to the same period last year. Operating profit surged more than double from 94.1 billion won to 194.3 billion won. Despite the ongoing spread of COVID-19, consumer sentiment revived, leading to revenge consumption. Sales improved significantly not only for high-end luxury goods but also for fashion items that had underperformed last year.

Revenge consumption is expected to continue into the second half of the year. Analyzing Lotte Department Store's July sales data shows that although total sales slightly decreased compared to the same period last year, sales of overseas fashion (+14%), home appliances (+24%), and golf (+24.5%) surged sharply. At Shinsegae Department Store, since the implementation of level 4 social distancing measures on the 12th of last month, luxury goods sales increased by 18.0%, lifestyle categories by 8.7%, and overall sales grew by more than 5% compared to the same period last year.

The effect of new store openings by Lotte (Dongtan) and Shinsegae (Daejeon), scheduled to open this month, is also expected to positively impact second-half performance. Yu Jeong-hyun, a researcher at Daishin Securities, said, "Despite concerns over the spread of the Delta variant, Shinsegae Department Store's basic sales situation in July and August is favorable," adding, "If social distancing measures are eased between September, the month with the highest annual consumption, and the end of the year, Shinsegae's performance improvement will be the most pronounced."

◆Large Discount Stores: "Worried About Disaster Relief Funds"

Large discount stores also saw significant performance improvements in the second quarter due to increased demand for home-cooked meals. Emart's grocery strengthening strategy led to a 15.7% increase in food sales in the second quarter, and overall operating profit turned positive for the first time in three years since 2018. Although Lotte Mart's sales declined due to store restructuring, it was able to significantly reduce its deficit.

However, in the third quarter, the strengthening of social distancing, the impact of disaster relief funds, the full onset of agflation (agriculture + inflation) causing a sharp rise in food prices, and the resulting consumption contraction are expected to be reflected in the stores' performance. With 17 trillion won in disaster relief funds being distributed in the third quarter, excluding large discount stores from the usage destinations, a deterioration in their performance is inevitable. Last year, when disaster relief funds were distributed in the second quarter, large discount stores' performance plummeted. Emart posted an operating loss of 15 billion won on a separate basis in the second quarter of last year, more than doubling the loss of 7.1 billion won in the same period the previous year. Lotte Mart also recorded an operating loss of 57.8 billion won in the second quarter of last year, with the deficit increasing by 23 billion won compared to the same period the previous year.

In the third quarter of this year (from July to August 11), Lotte Mart's (online and offline) sales grew by only 6.4%. Although online demand surged after the strengthening of social distancing, offline visitor numbers declined, leading to this result. Emart's offline sales growth rate is also hovering around 1%.

Lim Su-yeon, a researcher at Hi Investment & Securities, said, "With the resurgence of COVID-19, the third quarter presents a mixed situation of positive and negative factors," and predicted, "Despite the Chuseok holiday effect, large discount stores will be hit as they are excluded from the usage of disaster relief funds."

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