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Korean hypermarket and convenience retailer, Home plus, has opened a new format Home plus Special store in Daegu.

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Korean hypermarket and convenience retailer, Home plus, has opened a new format Home plus Special store in Daegu.

Reinventing its big-box stores

Home plus first announced plans to open new warehouse stores in April. The retailer has now converted a Home plus store in Daegu to its new hybrid wholesale and hypermarket format. Home plus Special targets individual shoppers but also businesses that buy in bulk.

More conversions expected

The retailer plans to covert 15 branches to Home plus Special stores this year. Home plus will hope that its latest initiative will help its hypermarket sales recover, particularly as its Express and 365 Plus convenience stores face stiff competition from the likes of  GS25, CU, 7-Eleven, Emart 24 and Ministop.

 

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We review the latest developments at E-Mart, Lotte, Home plus and GS Retail, the four largest food and grocery retailers in South Korea.

Pepper the robot at E-Mart

E-Mart is working with Japan's Softbank Robotics Corp to test 'Pepper' the robot. 'Pepper' will be stationed at an E-Mart store in Seoul for about three weeks to service shoppers in store. The 1.2m-tall robot will be able to provide product information, answer frequently asked questions and promote items on sale. Pepper first appeared in SoftBank's Ginza store in Japan a few years ago. Its sophisticated functionality creates new opportunities to interact and engage with customers in store. 

This follows the recent trial of Eli, smart shopping trolleys that automatically follow shoppers and help customers browse items. The company is also working with Seoul National University on a joint research project in relation to auto-driving robots in retail. Having pulled its stores out of China, E-Mart signed a deal to return via SPAR by supplying food, personal care and household products.

...Q1 results highlight key growth areas

In the first quarter, E-Mart's top line sales grew 5% to KRW37.2bn compared with the same period last year. Hypermarket sales for Q1 were flat, while the retailer's traders and online operations grew 30.4% and 24.6% respectively. Investment in technology and the development of private labels have been and will continue to be key focus areas for the retailer.

Lotte streamlining at home and overseas

Lotte is trying to sell its Anyang department store. The deal with Enter Six will either sell or transfer the lease rights on the store. The Anyang store is 20km from Seoul, but only 3km from Lotte's Pyeongchon branch and is set to be offloaded due to poor sales performance.

Lotte recently exited its Lotte Mart operations in Beijing and will now sell its stores in Shanghai and nearby areas to Liqun Group for approx. KRW280bn (US$262m). This will leave the retailer with 14 Lotte Mart stores left in the country as it presses ahead to sale its affiliate stores within the first half of this year.

After a challenging FY2017, the retailer will continue to focus on profitability at home (like E-Mart) and in markets like Indonesia and Vietnam, where its operations have shown more encouraging signs of growth.

Home plus to establish REIT?

In 2015, private equity firm MBK Partners bought Home plus from Tesco PLC for US$6.1bn. The retailer revealed plans to open 10 new warehouse outlets stores called 'Home plus special' last month. It is said to be considering the possibility of establishing a real-estate investment trust (REIT) that could acquire around 40 Home plus hypermarkets. If the move goes ahead, Home plus may use IPO proceeds to renovate stores, pay of any existing debt and operate its stores under long-term lease contracts.

GS Retail localising its offer in Vietnam

Last year, GS Retail opened its first GS25 c-store in Vietnam. The retailer is now in talks with Vietnamese producers to localise offerings as it looks to add 30 more GS25 stores this year. It will also look to promote Korean items in Vietnam and take a stronger selection of Vietnamese foods back to Korea.

The retailer also supplies private-label products in Singapore and Taiwan and hopes to expand out to four further markets this year. With the convenience channel growing rapidly in Vietnam, GS Retail has also outlined ambitious expansion plans to reach 2,000 outlets in the country within the next decade. 

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Home plus in South Korea has revealed that it will open 10 new warehouse outlet stores called 'Home plus special'.

New format a hybrid of wholesale and hypermarket

The new stores will be conversions of its 10 discount stores and are likely to be a hybrid format combining the best elements of a wholesale format, with that of a hypermarket. CEO Im Il-soon was clear to point out that Home plus' strategy was not to replicated that of E-mart Traders, the warehouse format of the market leading retailer, but to differentiate itself and create a store that could enable a complete shopping experience. The first three stores to be converted will be Home plus stores in Mokdong in Seoul, Daegu and Seobusan in Busan. 

Private label to play a more important role

Home plus also intends to enhance its private label brands, Simplus and All About Food, in order to better compete with E-mart and Lotte Mart. As part of this, the retailer plans to partner with retailers in 10 European countries to improve its global sourcing and distribution network, although it did not share further details.

Home plus setting out its strategy

Im Il-soon became CEO of Home plus last October and is the company's first female CEO. Under her stewardship and following its seperation from Tesco, the business has been in a transitional period and is gradually starting to re-establish its future direction. New formats and better ranges are clearly a priority, as it looks to compete with the other heavyweights in the market, E-mart and Lotte Mart.

Many of the leading South Korean retailers are turning to ASEAN countries for expansion. We review the latest developments for Korea's five leading retailers. 

THAAD may have long-lasting impact on Korean businesses

Relations between South Korea and China soured when a former Lotte golf course was used as the base for US THAAD missile-defence system earlier this year. As the saga unrivalled, many South Korean retailers operating in China were impacted, while a ban on Chinese travel agencies selling package tours to South Korea had impacted sales and the economy further.

Tensions have eased slightly following a recent presidential speech by Xi Jinping, and trading conditions have picked-up. However, there is an inherent feeling of caution after such a prolonged dispute.

Shinsegae

Profitability at home and expansion overseas will become even more important when Shinsegae's E-Mart withdraws from China. At home, they are quickly expanding and rebranding their convenience outlets, With Me, now known as E-Mart 24. Click here to see some of the key differences in rebranded stores. E-Mart 24 has also ventured into unstaffed stores, with currently four nationwide. We are seeing an increasing number of unstaffed stores worldwide, especially in China and Japan in Asia. South Korean retailers are also embracing new technologies, Lotte's flagship unstaffed store in Seoul which utilises an innovative HandPay system is a prime example  

Overseas, E-Mart has recently opened their second store in Mongolia. They are also planning a second store in Vietnam in 2018, with further expansion expected to build on the success of their first store. The shift towards south-east Asia is also evident in their recent announcement to enter Cambodia by 2019.

Lotte

Of all the South Korean retailers operating in China, the adverse impact of the THAAD dispute arguably affected Lotte the strongest. Lotte Mart in China is currently listed for sale and around 75% of their stores remain closed until further notice.

With the profound consequences in China, we have seen a stronger emphasis in Vietnam and Indonesia, not only in food and grocery retailing but also in multi-complex construction projects and ecommerce development. They are building, for example, a large-size shopping mall that will operate 200,000 sq m in Hanoi, which is scheduled to complete by 2020. In Indonesia, Lotte and Salim Group recently launched their ecommerce joint venture iLotte. The fast-growing economies of Vietnam and Indonesia makes further expansion in these countries an exciting opportunity.

Homeplus

Homeplus is still recovering from overall sluggish sales, which triggered Tesco to sell its shareholdings to MBK Partners in 2015. They recently suffered one of the largest corporate fines in the South Korean history and remain under pressure. Their full attention and focus is on their network in South Korea, with no immediate plans to venture overseas. We believe their online portal will have an important role in supporting the future growth of the business.

GS Retail

Multi-format retailer, GS Retail, is well-known for their GS25 convenience outlets (over 11,800 nationwide) and GS Supermarket stores. They do not operate in China, but they are also looking to expand in south-east Asia like other Korean retailers. GS Retail recently opened their third GS Supermarket in Indonesia, after entering the country back in October 2016.

The first foreign venture for GS25 will be in Vietnam, where the retailer plans to launch their convenience banner by end of the year. GS25 will look to offer something different in an increasingly competitive market. Earlier this year, 7-Eleven entered Vietnam and there is strong competition from local and international convenience store operators in the market already.

BGF Retail

BGF Retail operates over 11,800 CU convenience stores in South Korea. Like GS retail, they do not operate in China, but has a more cautious approach to overseas expansion. Earlier this year, they signed a franchise deal with an Iranian firm that will push their convenience stores overseas for the first time. Nonetheless, the geographical location for expanding overseas, as well as a market that suits their brand, will be equally important in the future.

Our view

Trading conditions for Korean retailers operating in China will continue to be tough in the short term. What has happened does raise further questions in terms of future strategy in China. We expect Korean retailers to take a more balanced approach in terms of investment, with some shifting their focus to the emerging giants of south east Asia.

The growing number of single and two-person households in South Korea is driving the growth of smaller format stores. The use of technology in a strong m-commerce market will lead to increased modernisation of mom-and pop stores and drive in-store efficiencies. We believe 2018 could see the country's two leading convenience store chains, GS25 and CU, trial unmanned stores and new technologies to deliver better shopper experience and grow even further.  

 

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Homeplus has been fined KRW500 mn (US$450,000), one of the largest corporate fines in the South Korean history, after providing overstating profit forecasts to its convenience store franchisees.

Deeper concerns at network level

Homeplus are still recovering from overall sluggish sales, which triggered Tesco to sell its shareholdings to MBK Partners in 2015. Since 2012, total sales growth has been stagnant, with hypermarket sales falling year on year. Their 365 Plus convenience store chain has seen moderate growth, but now the retailer is accused of providing misleading information to attract potential franchisees. With small format stores growing strongly across the country, this is a setback to their wider public appeal and recovery.

What next?

Ecommerce in South Korea is another fast-growing channel, with mobile transactions rapidly rising and popular with Korea's increasing number of single and two-person households. We have seen retailers like E-Mart shift their focus on private labels and driving profitability through online sales. Homeplus' online sales account for a small proportion of their total sales. Now that both their hypermarket and convenience formats are under pressure, will they focus on their online portal to drive growth and better serve shopper missions?

We've developed a single, universal methodology for calculating food and consumer goods retail data, supported by our programme of primary and secondary research. This makes Datacentre the most reliable and robust source available for data of this type. 

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