Retail Sector Struggles as Consumer Sentiment Improves but High Exchange Rate Looms

The retail industry is caught between hopes for a recovery in consumer sentiment and the surging won-dollar exchange rate, which has climbed to the upper 1,400 won range. In particular, offline sales channels such as large supermarkets, superstores, and convenience stores-which have been reducing distribution costs by directly sourcing goods from overseas producers or suppliers and offering value-for-money products through large-scale discount promotions-are now focusing their strategies on defending against the prolonged high exchange rate situation.

Citizens are shopping at a large supermarket in Seoul. Photo by Yonhap News Agency

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On November 26, the Bank of Korea announced that the Consumer Composite Sentiment Index (CCSI) for November reached 112.4, the highest level in eight years since November 2017 (113.9), according to the 'November Consumer Sentiment Survey' released the previous day. As the online shopping market expanded following the COVID-19 pandemic, the domestic offline retail sector, which has been struggling with sluggish domestic demand, is now seeing growing expectations for improved performance as consumer sentiment recovers.

The problem lies in the depreciation of the won. According to the foreign exchange market, the won-dollar exchange rate soared to 1,477.1 won on November 24. This marks the lowest value of the won since April 9, when it hit 1,481.1 won.

As a result, major domestic offline sales channels are on high alert. Large supermarkets that sell imported fresh foods such as meat, seafood, and fruit as special offer items are working hard to reduce cost burdens. Emart has responded to the high exchange rate by implementing integrated purchasing, diversifying sources of origin, and responding to tariffs by product category. Specifically, Emart, warehouse-style discount store Traders, and corporate supermarket Everyday are operating an integrated purchasing policy, placing bulk orders to gain price negotiation leverage. For key raw materials such as almonds, frozen fruit, and olive oil, they are securing annual purchase contracts to stabilize prices.

On the 25th, the KOSPI index and other indicators were displayed on the status board in the dealing room at Hana Bank headquarters in Jung-gu, Seoul. On the same day, the won-dollar exchange rate started trading at 1,475.2 won, down 1.9 won from the previous trading day. Photo by Kang Jin-hyung

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For imported meat, which is in high demand, retailers are expanding their frozen meat product lines instead of chilled meat, which is more sensitive to exchange rate fluctuations. They secure five to six months’ worth of inventory during periods of relatively low exchange rates and utilize these stocks accordingly. Additionally, for imported chilled beef, they are considering diversifying sources beyond the traditional U.S. and Australian beef by newly introducing Irish beef.

For fruit, in the case of bananas, they are diversifying sources to Ecuador, Vietnam, the Philippines, and Peru, focusing on minimizing the impact of individual country tariffs or exchange rate fluctuations. In the apparel sector, they are responding by increasing the proportion of production in Bangladesh, where labor costs are lower, compared to the traditional main production bases of China and Vietnam, including for private brand products.

Homeplus has also developed countermeasures tailored to categories such as meat, seafood, and fruit. In meat, they are adjusting the sales ratio of pork, which is currently 90% chilled and 10% frozen, to reduce the volume of chilled meat, which is more exposed to price risk from exchange rate fluctuations, and increase the stock of frozen meat, which can be stored. For imported seafood, they are dispersing exchange rate risk by signing annual long-term contracts for Norwegian salmon. For whiteleg shrimp from Peru and Ecuador, they are securing inventory in advance when market prices are low. In fruit, they are sourcing large quantities of Vietnamese bananas on an annual basis to limit price volatility, while increasing the proportion of domestic seasonal fruits such as strawberries and peaches to minimize the impact of the exchange rate.

Lotte Mart, considering the rise in U.S. beef prices due to the higher won-dollar exchange rate, increased its purchase volume of Australian beef by about 20% year-on-year in July. It also became the first domestic retailer to operate a designated salmon farm in Chile to secure price competitiveness. The company explained that, since designated farms are operated on a pre-contract basis, they are less affected by exchange rate fluctuations and can import salmon at reasonable prices even during periods of high exchange rates. In fact, Lotte Mart has secured advance contracts for around 1,000 tons of salmon, importing it at prices up to 15% lower than international market rates.

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In addition, convenience store chains, which operate direct overseas sourcing for processed foods such as imported cookies and chocolates, are defending prices by diversifying import countries or expanding inventories. A convenience store industry official said, "There is a lead time of up to three months before payment is made, and we stock up in advance considering exchange rate fluctuations, so there is no direct impact on prices in the short term." However, he added, "We will monitor whether the high exchange rate situation continues and respond accordingly."

Another official said, "The selling price of imported fresh products is not determined solely by exchange rate fluctuations; trends in supply and demand and other complex factors also play a role. Therefore, the impact of the high exchange rate will not immediately lead to price increases."

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