Why Toys 'R' Us, Tesco Are Hits in Korea

By relying on local partners' expertise, the U.S. toy store chain and the British retailer are succeeding where Wal-Mart failed

South Korea is a notoriously tough retail market for foreign players. Just ask retail juggernaut Wal-Mart Stores (WMT) and France's Carrefour (CARR.PA), which both pulled out of the country in 2006 after years of losses from fierce local competition. Yet some companies know what it takes to succeed in Korea. Tesco (TSCO.L) posted an estimated operating profit of more than $320 million (BusinessWeek.com, 4/15/08) in the year ended in February, up from $249 million in the previous year, on sales of $5.85 billion, up 15%. And Toys "R" Us has rung up record sales since opening its first Korean store last December.

Now the British supermarket company is pursuing much bigger Korean numbers with a strategy that's similar to that of the American retailer. On May 14, Tesco announced a $2.2 billion takeover of Homever discount chain (BusinessWeek.com, 5/15/08). Both Tesco and Toys "R" Us rely heavily on expertise of local partners for their business strategy, and the British company's new acquisition, which will boost its Korean sales by about a third, indicates their common approach is a winning formula. "Tesco is a rare foreign retail player to flourish in Korea, and the key has been its well-executed localization," reckons Park Jean, retail industry analyst at brokerage Woori Investment & Securities.

What have Tesco and Toys "R" Us done right? Unlike Wal-Mart and Carrefour, Tesco didn't try to repeat its strategy from back home. While Koreans were enthusiastic about the massive discount stores that began replacing mom-and-pop shops in the 1990s, they never liked the lofty shelves and concrete floors of the warehouse experience. The local consumers also prefer not to buy in bulk—the method big foreign discount store operators imposed.

To cater to local tastes, Tesco formed a joint venture with Korea's Samsung Group in 1999. The joint venture's Home Plus chain has tried to satisfy the local appetite for fresh fish and vegetables, ensuring that sushi, squid, cucumber, and spinach are restocked frequently. It has also provided such services as a guide to direct shoppers to a parking spot. Tesco has since increased its stake in the venture to 94% from the original 50% and Korea has emerged as the British company's most profitable overseas market, accounting for half of all its Asian sales.

Thriving Franchise Toy Stores

Going local was the approach Toys "R" Us also took in Korea. To capitalize on local expertise, Toys "R" Us struck a franchise deal with Lotte Shopping, a unit of local retail and hotel giant Lotte Group, and let it run the stores as it sees fit. Lotte wanted a completely new setting for the toy stores to create a "theme park" atmosphere and offer experiences to kids, according to James Sung, general manager for Lotte's Toys "R" Us business team. Departing from the warehouse concept, it decorated five of its sections under different themes of star, moon, sun, aurora, and the galaxy, with register stands built in the shape of trains.

In just over five months after Toys "R" Us opened its first store in South Korea on Dec. 8, the retailer has been on a roll. The shop, located in Guro, a mundane residential district of Seoul, has reported average monthly sales of $1.2 million, the second highest in Toys "R" Us' franchise division that involves 212 stores in 24 countries.

In the crucial Christmas week, the Guro shop emerged as the top performer with net sales of $816,000, about 14% more than the runner-up store in Hong Kong, which has been in operation the past two decades and has been the biggest in terms of annual sales.

The buzz underscores the reversal of its fortune vis-à-vis Wal-Mart. Back at home, Toys "R" Us is under fierce pressure from deep-discount chains that beat it at its own game of wiping out competitors with cut-price, no-frills, big-box outlets. Yet in Korea, it is outshining Wal-Mart. Lotte has since opened two more shops in Korea, and in the week ending May 3 all three were among the top 10 in the franchise division. "It is one of the most remarkable success stories in Toys 'R' Us," boasts merchandise director Kyoji Kato, whom the U.S. retailer dispatched to Korea.

A key strategy was to appeal to education-crazed Korean parents. That's important in a country that spends 7.5% of its gross domestic product on education, more than any other industrialized country, and that's even before taking into account the nearly $40 billion Korean parents shell out annually for after-school cram sessions. Included in the learning category, which accounts for about a quarter of Korean sales, are English audio books accompanying cartoonlike illustrations for 1- or 2-year-old toddlers and electronic learning pads aimed at familiarizing prekindergarten children with numbers.

Expansion Plans

The Korean retailer has also tried to make the 36,000-square-foot store a hangout destination for kids. It allows visitors to play such hot electronic games as Nintendo's Wii, Sony's (SNE) PlayStation 3, and Microsoft's (MSFT) Xbox 360, and set up a racing track for remote-controlled toy cars. Other "experience" spots include Lego building tables, sliders, house sets, and LeapFrog's (LF) interactive learning toys. "Toys 'R' Us has become one of my top weekend destinations since my son likes me to bring him here," says 33-year-old Jang Jin Seok as he helps his 2-year-old boy tinker with Lego blocks.

Such positive response is prompting Lotte to speed up its expansion. Although its plan was to run three Toys "R" Us stores this year, it is considering adding two more. Now Lotte, confident that the three stores will exceed their sales target of $30 million in 2008, aims to seize some 17% of Korea's $2.7 billion market for baby products and toys, games, books, and sporting and educational products for children by 2012, when it expects to have 20 Toys "R" Us stores and 100 Toys "R" Us boutiques inside its Lotte Mart discount store outlets.

Sure, competition is bound to mount, with discount stores already representing about half of all toys sold in Korea. "Prices have always been important in this market," says So Jae Kyu, chairman of the Korea Toy Industry Cooperative, "but no one has satisfied this pent-up demand for experiences of fun." Sung at Lotte believes the Toys "R" Us brand has all the ingredients to meet the demand and "all we need is to get creative to connect to customers." Lotte's experiment could well serve as an interesting lesson for Toys "R" Us, which has yet to make forays into the giant markets of India, China, and Russia.

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