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KOREANS WANT MORE THAN LOW PRICES, DISCOUNTERS LEARN

By Curt Hazlett

Retreat has never been on the list of commands at Wal-Mart Stores. The world’s largest retailer got that way by expanding aggressively and by going head-to-head with the local competition, whether in Sioux City, Iowa; or Shenzhen, China.

So Wal-Mart’s announcement in May that it would sell its fledgling South Korean operation to local retail leader Shinsegae Co. was unusual — though not a complete surprise, since French giant Carrefour had said three weeks earlier that it, too, was selling its South Korean stores.

Was the South Korean economy unable to support the two retailers’ combined 48 hypermarkets? Hardly. Consulting firm A.T. Kearney ranked South Korea, where retail sales grew 19 percent last year and local hypermarket chains are expanding fast, one of the world’s top 15 emerging retail markets.

The real issue, retail observers say, is simply that neither Wal-Mart nor Carrefour appealed enough to Korean consumers, who want not just a discount experience, but also attractive stores and packaging and a wider variety of goods, including groceries. Faced with the prospect of being also-rans, the retailers decided to redeploy their capital in places where it could produce better results.

“One of the issues Wal-Mart had was that it was really focused on price and bare-bones stores, and that really wasn’t appealing to the South Korean shoppers,” said Frank Badillo, senior economist and head of the global retailing program at market research firm Retail Forward.

Foreign ownership itself was not the problem, Badillo and others say, noting that Britain’s Tesco has performed well in South Korea, thanks in part to strong support from its local partner. Last year Tesco opened eight new hypermarkets in the country, bringing its total there to 62.

According to Badillo, Tesco and local leaders Shinsegae and Lotte Mart “do more to look upscale. They’re nicer-looking stores, with not so much of a focus on prices. There are more branded-quality goods, and that more-upscale approach was more appealing to shoppers. Wal-Mart was trying to come up with a new format that would better appeal to those shoppers, but it looks like it decided to bail out instead.”

Wal-Mart opened its first South Korean store in 1998, and the store count eventually grew to 16. But the company was never able to make progress against the better-entrenched local retailers, posting a $10 million loss last year.

Wal-Mart says Shinsegae, formerly a unit of Samsung Group, approached in March to inquire about a sale. The eventual price of $882 million fell short of the approximately $1 billion the Arkansas retailer had invested in the operation.

In announcing the sale, Wal-Mart Vice Chairman Michael Duke said the retailer had decided to focus on areas in which more growth was possible and that it was “increasingly clear that in South Korea’s current environment it would be difficult for us to reach the scale we desired.”

South Korean clothing retailer Eland Group paid Carrefour $1.85 billion for its 32 stores. Carrefour had no comment beyond its statement in a press release that the sale “is part of a wider effort to withdraw from insufficiently profitable or noncore activities.”

To Morgan Parker, president of Taubman Asia, a unit of Taubman Centers, the two retailers’ experiences highlight the risk of competing solely on price, especially without well-developed supply chains. “They have struggled to find the economies of scale and to compete with groups like E-Mart,” he said, “and they’ve struggled just as much with the back-of-house business as much as the front-of-house.” (Shinsegae operates its hypermarkets under the E-Mart name.)

The discount business “is a very different business from something like Louis Vuitton,” said Parker, whose division is developing the retail component of the $20 billion New Songdo City project 40 miles from Seoul. “One involves a brand that people want to have, and the other involves an everyday-low-cost business model that requires a retailer to execute a logistic supply chain perfectly in order to get goods to market at the right price point and quantity.”

In Wal-Mart’s case there appears to be more potential in countries where retailing is more fragmented. One such is China, where Wal-Mart already has 60 stores and where Badillo notes that price is a prime focus. “Even though there is a preference for branded goods in China, shoppers want them at a very good price,” Badillo said.

“It’s clear that Wal-Mart is focusing more on the biggest markets,” Badillo said. “China is one, and India will be a big market for them soon. They’re also focusing on Brazil. They may be letting up in some of these smaller markets, just because the payoff isn’t as big as they need.” In fact, the Korean sale announcement comes as Wal-Mart pushes for higher returns on its invested capital, an attempt to buttress its sagging stock price. At the end of July, the stock was trading at about $44 per share, down from a 52-week high of $51 and a five-year peak of $64.

Parker says Wal-Mart and Carrefour might have been further influenced by the fact that the hypermarket business in South Korea may be approaching saturation. “My sense is that they made a decision that if they can’t be the dominant player in a country because they don’t have the store location or economies of scale of the competitors, then they are better off not being in the market,” he said. As for Wal-Mart, “it’s better not to tie up capital and human resources,” he said. “They have tremendous opportunities in countries like Russia, China and India, and maybe Brazil.”

In fact, Wal-Mart’s future in India may not be so assured after all. Faced with strong opposition from leftist political parties, the Indian government decided in July to review its plan to loosen restrictions on foreign investment, which would have given Wal-Mart and others a limited right to open stores there. At the same time, India’s biggest conglomerate, Reliance Industries, announced plans to launch a hypermarket chain that appears to be modeled on Wal-Mart. Reliance said it will invest $5.6 billion to open groceries, hypermarkets and convenience stores in 1,500 locations across India.

Badillo says he believes the retailers’ departures point to the need for a good partner when entering a market for the first time. “It’s tough to go it alone,” he said. “That’s something you have to give Tesco a lot of credit for. Their approach has been to find a local partner to joint venture with, at least initially, so they can understand the market. That’s what they did in South Korea and Thailand, and what they’re doing in China. More and more you see Wal-Mart and others looking for that kind of help, because they realize they can’t do it on their own.”