Holding Off the Wal-Marts of the World
Koo Hak Su has a message for the executives at Wal-Mart's Korean subsidiary: Get a new business model. As Koo likes to point out, Wal-Mart Stores Inc. (WMT ), based in Bentonville, Ark., has yet to post a profit in Korea three years after entering the market. By contrast, Shinsegae Co., the Korean retailer of which Koo, 55, is chief executive, has been cleaning up--capturing nearly a third of the country's $10 billion discount retail market and increasing profits nineteenfold since 1997.
When Korea threw open its retail sector to foreign competition in 1996, the likes of Wal-Mart and France's Carrefour were expected to eat the Koreans' kimchi. The last thing they anticipated was that Shinsegae, a stodgy 71-year-old department-store chain, would reshape its business around its own discount unit, E-Mart, and beat them at their own game. But it did, and this year Shinsegae expects to make $140.6 million on sales of $3.9 billion. Says Koo of Wal-Mart's tepid challenge: "While they dithered, we pushed ahead."
To be sure, Wal-Mart could still turn things around; the U.S. giant expects its Korean operation to make money soon. But it's hard to blame Koo for sounding triumphant. Four years ago, Shinsegae was in trouble. At the time, it owned and ran a network of warehouse stores under the Costco Wholesale Corp. (COST ) banner. The setup was far from ideal: Shinsegae wasn't allowed to adapt the stores to local taste. Moreover, Costco, based in Issaquah, Wash., had a big say in management decisions, including a veto over new locations. Then the Asian crisis hit. Shinsegae's finances were decimated, and in 1998 it sold the warehouse business to Costco for $100 million.
That turned out to be a blessing. With the Korean economy poised for an unexpected rebound, Shinsegae was sitting on a pile of cash. It "gave us wings to fly," Koo says. Shinsegae chose to halt expansion in the maturing department-store sector and pump money into E-Mart. With Korean companies selling land to survive, Shinsegae picked up cheap parcels at strategic locations and started building E-Marts at a rate of 10 a year. It now boasts 42 outlets from Seoul to Pusan, or a fifth of Korea's discount stores.
E-Mart (motto: Economy and Everyday Low Prices) has shaken up a retail scene once dominated by mom-and-pop shops and dowdy department stores. Until E-Mart came along, Koreans had limited choice and few bargains. Thanks to its buying power, E-Mart sells everything from clothes to electronics to food at prices that are as much as 30% lower than conventional outlets.
Shinsegae learned plenty from the Costco tie-up. One lesson: While Koreans were initially enthusiastic about the warehouse concept, they prefer not to buy in bulk. "I like E-Mart," says homemaker Kim Young Hee, "because I can buy one watermelon instead of three." Another lesson: Koreans never warmed to the lofty shelves and concrete floors of the warehouse experience. So E-Mart features the more familiar layout of a department store. The company also caters to the local appetite for fresh fish and vegetables, ensuring that sushi, squid, cucumber, and spinach are restocked twice a day.
It all seems to be paying off. Shinsegae's market share is more than twice that of its nearest rivals, Carrefour and Magnet, a four-year-old discounter run by Lotte Group, the Korean retail and hotel giant. Still, competition is mounting. Two years ago, British retailer Tesco PLC (TSCDY ) set up a joint venture with Korea's Samsung Group. Samsung Tesco Co. has since opened 14 Home Plus stores and aims to have 55 by 2005. Tesco has gone local--selling fresh food and providing such services as a guide to direct shoppers to a parking spot. This year the Tesco-Samsung venture nearly doubled its market share, to 11.5%.
In the short term, no one expects E-Mart to lose its supremacy in Korea's hottest retail segment. There's still plenty of room to grow. The discount niche expanded 40% over the past year and is expected to continue its torrid pace until at least 2005--as the big stores gradually drive out the mom-and-pops. Still, Koo needs to watch out. Korean retailing is sizzling, and the industry's global champs won't give up.
By Moon Ihlwan in Seoul