"Department Stores Stumble in Q1, How to Tackle the Base Effect?"

Resumption of Endemic Overseas Travel, Luxury Revenge Spending Slows Down
Reflecting Changed Consumption Patterns and Customer Types Since COVID-19
Expansion of Renewal, Pop-ups, and Events... Deliberating Strategic Shift

The three major department stores are expected to receive lackluster results for the first quarter of this year. The resumption of overseas travel due to the endemic (periodic outbreak of infectious diseases) has slowed down the explosive luxury "revenge consumption" seen during the COVID-19 period, and the high performance last year has caused a base effect, leading to these outcomes. The industry plans to change department store operation strategies to reflect changes in consumer patterns, customer behavior, and cultural enjoyment methods that have accelerated since COVID-19.

Shinsegae Department Store Main Branch Exterior [Photo by Shinsegae Department Store].

According to financial information company FnGuide on the 25th, the consensus (estimate) for Shinsegae's consolidated results in the first quarter of this year is sales of 1.7285 trillion KRW and operating profit of 154.7 billion KRW. It is expected to decrease by 2.15% and 5.44%, respectively, compared to the same period last year. During the same period, Hyundai Department Store's expected sales and operating profit are 1.1088 trillion KRW and 84.2 billion KRW, respectively, with sales increasing by 18.66% but operating profit decreasing by 5.29%. The consensus for Lotte Shopping's first-quarter results this year is sales of 3.7497 trillion KRW and operating profit of 110.6 billion KRW. Sales slightly decreased by 0.56% year-on-year, while operating profit improved by 60.99%.

The reason for their sluggish performance is analyzed to be that the department store results, which drive the performance of Shinsegae, Hyundai Department Store, and Lotte Shopping, did not meet expectations. In particular, the single-digit growth rate in sales of the luxury category, which had driven department store performance, was a painful point. The luxury sales growth rates for the first quarter of this year for the three department stores?Lotte, Shinsegae, and Hyundai Department Store?were 7%, 7.8%, and 9.1%, respectively. This contrasts sharply with the same period last year, when luxury sales growth rates ranged from 30% to 37%, supporting performance growth. Luxury items have relatively high sales per item and account for about 40% of total department store sales. With the full-scale resumption of overseas travel and concerns about an economic recession, sales growth, including luxury goods, slowed down faster than expected. Worsening consumer sentiment due to high interest rates and inflation, as well as a real estate market downturn, also had an impact.

Shinsegae's first-quarter performance was affected by a slowdown in luxury sales growth despite growth in existing stores and increased costs due to special bonuses. Hyundai Department Store was also negatively impacted by the suspension of operations caused by a fire at its Daejeon branch. Lotte Shopping's increase in operating profit is attributed to the department store placing more emphasis on the fashion category rather than luxury goods, which was less affected by the halt in revenge consumption, along with a reduction in losses in the e-commerce sector. Concerns about the base effect remain for the second quarter of this year as well. This is because the base was high due to the high growth in the high-margin clothing sector last April, driven by increased fashion demand following the lifting of social distancing measures.

Department stores are responding to the expansion of overseas travel by domestic customers by encouraging visits from foreign tourists to Korea, along with store renovations and various experiential events to defend their performance. Even amid growing concerns about first-quarter department store results, foreign sales at Lotte Department Store's main branch increased about ninefold compared to the same period last year. Located in the heart of the Myeongdong tourist district, this increase is attributed to tourists from Southeast Asia, Japan, and other countries visiting the main branch for shopping. Lotte Department Store is also planning the 'Myeongdong Festival' with the Seoul Metropolitan Government starting on the 28th for this reason. The Jamsil branch also sought to expand visits from domestic and foreign tourists by holding events such as the 'Line Friends Lucky House' pop-up store during the golden holiday period in Southeast Asian countries this month.

Shinsegae Department Store and Hyundai Department Store have also embarked on major store renovations and expanded pop-up stores targeting the MZ generation (Millennials + Generation Z) to increase visitor numbers. Shinsegae Department Store Gangnam branch will hold the domestic premiere of the 'Giweon Batch 2 Distillery Edition' starting on the 29th of this month, capturing customers' attention with whiskey, which has recently become a craze among the MZ generation. Hyundai Department Store also opened a 'Disney 100th Anniversary' commemorative pop-up store at its Pangyo branch to attract more family customers. A retail industry official said, "In a situation where first-half performance is expected to be sluggish following last year's high-margin strong results, various eye-catching events are being held to encourage domestic and foreign customers to visit each store in response to reduced domestic consumption," adding, "Performance improvement is expected in the second half of the year."

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