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Over the last six months, we have seen increasing number of Lotte Mart stores close in China. We review the impact and latest update to this ongoing saga.
Tensions arose when when a former Lotte golf course was used as the base for US THAAD missile-defence system, one of the major factors causing relations between South Korea and China to sour. This has impacted some of the leading South Korean retailers operating in China, while a ban on Chinese travel agencies selling package tours to South Korea has led to a huge fall in tourist numbers, compounding the effects further.
Since March 2017, we have seen over 75% of Lotte Mart stores in China close until further notice. Of its 112 stores, some branches have been shut down for allegedly breaching safety violations, whilst others have temporarily closed due to difficult business conditions. Earlier this month, Goldman Sachs were appointed to take charge of the sale of Lotte Mart in China.
Lotte Mart in China reported 21 billion won (USD $18.3mn) in sales in the second quarter, about 10 percent of sales in the same period last year. Lotte has other affiliates operating in China like its department store and may be weary of pulling out all its Lotte Mart stores in China completely.
It was only in May when E-Mart announced that that were exiting operations in China by end of the year. This has been validated by a recent agreement to sell its five remaining stores in China to Thailand's Charoen Pokphand Group, with approval from Chinese regulators pending.
While Lotte's sales at home in South Korea accounted for over 90% of its total sales in 2016, overseas sales growth remains an important driver for the business. Current relations in China would mean difficult trading conditions for at least the short term even if the suspensions are lifted. Lotte will look to reduce and minimise the impact of store closures in China in H2, turning to other markets to maintain growth. Therefore sales diversification by channel and private label development will be an even focus in Vietnam and Indonesia.