This article was first published in Caijing Magazine (ID: i-caijing) By Yu Le / Edited by Mark Lotte Mart was already in a dilemma in China, and the THAAD incident merely gave it a step down. On the afternoon of September 20, 2017, in Beijing's Chongwenmen district, Guorui City, this fashionable shopping center was bustling, except for a corner on the basement level that was deserted. Rows of shelves stood empty, and the wide corridors were silent. In the large fresh food section, only one weighing attendant watched over a sparse selection of vegetables and fruits. Counters for meat, staples, pastries, and milk were all closed, and rows of freezers held only frozen dumplings of unknown age, serving as decoration. This vast store was clearly not always so quiet; the 18 checkout lanes seemed to tell of past bustle. Now, only about 10 employees could be seen in the entire supermarket, and only two checkout lanes were open, and they were severely underused: customers were not much more numerous than employees. Some seemed prepared, their carts filled with boxes of discounted daily necessities, while others stared blankly at the empty shelves, occasionally looking puzzled. "Is this supermarket closing soon?" In response to customers' inquiries, the cashiers remained expressionless and silent. This bleak scene may be the last image Lotte Mart leaves in China after a decade. The large supermarket chain, owned by South Korea's Lotte Group, had 112 stores in China, of which 87 had already closed, leaving only 25, including the one in Guorui City, struggling to survive, but their days were undoubtedly numbered. From the outbreak of the THAAD incident to now, this avalanche-like retreat took just over half a year. Lotte Mart opened its first store in Seoul in 1998 and entered the Chinese market in 2007 by acquiring Makro. In 2009, it acquired Jiangsu Times Supermarket, which had 68 stores, quickly expanding its store count to over 100. In July 2016, South Korea announced it would deploy the THAAD missile defense system domestically with U.S. assistance. This decision was met with strong opposition from the Chinese government and public. On March 2 this year, Lotte Group signed a land swap agreement with the South Korean Ministry of National Defense, making one of its golf courses the deployment site for THAAD. After the news broke, Lotte Mart became the primary target for Chinese government and public discontent. Boycotts against Lotte Mart were launched across the country. To date, 74 stores have been closed for reasons such as fire safety or other issues, and another 13 have been temporarily shut down by Lotte due to revenue problems. As a result, Lotte Shopping's second-quarter 2017 earnings report showed that its supermarket revenue in China fell 94.9% year-on-year, nearly to zero. To cover costs such as store rents and employee wages in China, Lotte Group has twice injected emergency funds into Lotte Mart China this year, with the first round of 360 billion Korean won (about 2.1 billion yuan) in March already fully used. At the end of August, Lotte Group injected another 340 billion Korean won (about 2 billion yuan) to tide over. From early September, media reports began to circulate that Lotte was preparing to sell its supermarket business in China. Lotte initially denied the reports, saying it would not exit China, but soon could not hold out. On September 14, a Lotte Group spokesperson officially confirmed the news, but said it had not yet decided whether to sell all or part. National Grudge and Family Feud Besides the THAAD incident, which could be seen as a "national grudge," there were also "family feuds" that prompted Lotte's decision. Lotte Group's founder is Shin Kyuk-ho, a Korean-Japanese, and his family members hold many key positions in the group. However, like many family businesses, as the group grew larger and more complex, the internal strife among the Shin family members intensified, with plots as intricate as any palace drama. (2007, the grand scene when Lotte entered China. Photo/Lotte official website) The protagonists of this drama are Shin Kyuk-ho and his two sons: eldest son Shin Dong-joo and second son Shin Dong-bin. Their strategies were similar: both used their 90-something-year-old father's name to pressure the other, "holding the emperor hostage to command the lords." In early 2015, Shin Dong-bin claimed he was acting on Shin Kyuk-ho's orders to remove Shin Dong-joo from his position at Lotte Japan. A few months later, Shin Dong-joo took Shin Kyuk-ho to Japan and announced the dismissal of Shin Dong-bin's close aides. Shin Dong-bin did not back down, manipulating the board to veto Shin Dong-joo's decision and making Shin Kyuk-ho the honorary chairman, while he himself took over as the group's top leader. In 2016, Shin Dong-joo continued his efforts. He released a video to the public in which the 93-year-old Shin Kyuk-ho personally announced his intention to pass the throne to Shin Dong-joo. Months later, South Korean prosecutors joined the fray, announcing an investigation into corruption and tax evasion involving several Shin family members, including the three men. From then on, the situation spiraled out of control. In April 2017, just over a month after Lotte Mart faced boycotts in China, Lotte Group announced a major restructuring plan to reduce the complex cross-shareholding relationships among family members from 67 to 18, which would further strengthen Shin Dong-bin's control over the group. By September 12, the day after media reports that Lotte was preparing to sell its supermarket business in China, the elder brother Shin Dong-joo, who was losing the internal struggle, announced he would sell most of his shares, seemingly a "concession speech." The younger brother Shin Dong-bin won temporarily, but the family business was severely weakened by the prolonged brotherly war. At this critical juncture for the entire group, Lotte's most urgent task was clearly to protect its core domestic business, and as for an overseas business that was not profitable anyway, the sooner it was disposed of, the better. Foreign Guns Cannot Beat Local Cannons In fact, for Lotte, internal strife and the THAAD incident may have been just the last two straws on the camel's back. Lotte Mart's performance in China had been unsatisfactory since its entry, with store openings and revenue indicators far from expectations. Since acquiring Times Supermarket in 2009, Lotte's Chinese supermarket business had been in the red, with annual losses exceeding 100 billion Korean won (about 580 million yuan at current exchange rates) in the last three years, and the number of stores hovering around 100. Since 2013, rumors that Lotte Mart intended to sell its Chinese business had surfaced from time to time. It was clear that the Chinese market had long been "tasteless" for Lotte, and it was only "a pity to discard" that it had not been abandoned. The THAAD incident undoubtedly gave Lotte Group a step to make a firm decision. "The THAAD incident just added force, causing it to face more serious problems faster, but the main problem is still the company's operations and management," said Bao Yuezhong, a veteran industry observer and founder of the New Fast-Moving Consumer Goods Studio, in an interview with Caijing. "Moreover, from a broader perspective, the hypermarket and department store industry is on a downward trend," he said. "Lotte's own operations were not well done, with many early problems, and it was not accepted by consumers in the local consumer market." Lotte Mart's problems are not unique. In recent years, the industry's downturn and increased competition have made life difficult for foreign supermarkets. Walmart has never been profitable in China, Carrefour's performance has declined for years, and Britain's Tesco was merged into China's local supermarket China Resources Vanguard. Industry analysis reports indicate that the exit of foreign supermarkets may become the norm in the coming years. A retail industry researcher, who could not be named due to company policy, told Caijing that the core competitiveness of supermarkets is the supply chain, and foreign supermarkets are generally inferior to local supermarkets in this regard. "Domestic supermarkets are very flexible. In the past, they were small, but as they grew, their ability to squeeze gross margins is no worse than foreign ones. Their supply chain warehousing and logistics, store renovations, and layout are all good and innovative," he said. "Foreign supermarkets rely on scale and squeeze upstream margins, but they lack flexibility, and their information systems are not as good as domestic ones. This is not competitive in the context of consumption upgrades." The fate of another Korean supermarket chain, E-Mart, seems to prove that the THAAD incident was not the decisive factor. E-Mart, under the Shinsegae Group, has more stores in South Korea than Lotte Mart and entered China 10 years earlier. However, in 20 years, E-Mart's store count in China peaked at only 27, so much so that after the THAAD controversy, few even thought to boycott it. Even so, E-Mart did not survive longer than Lotte Mart. On September 11, E-Mart announced it would sell five of its remaining six stores in China to Lotus Supermarket (00121.HK), under Thailand's CP Group, and the sixth would also be sold. Hard to Find a Buyer Yonhap News Agency, citing a South Korean source on September 18, reported that 5 to 10 companies had been in contact with Lotte through Goldman Sachs. Lotus, Walmart, and Hualian were among the names rumored as potential buyers in various media reports. As of this writing, neither Lotus nor Hualian had responded to Caijing's inquiries, while a Walmart China spokesperson told Caijing they would not comment on market rumors. Regardless of who the final buyer is, it is certain that Lotte has few cards to play in negotiations, and its stores are unlikely to fetch a good price. The result may well be a "bargain basement" sale. According to Yonhap, Lotte Mart recently held talks with some companies, and their offers were more than 30% below book value. On one hand, Lotte's urgency to sell allows buyers to drive prices down significantly. On the other hand, Lotte Mart's assets are indeed unattractive to buyers. Bao Yuezhong analyzed for Caijing that previously acquired foreign supermarkets were taken over while their stores could maintain normal operations, but Lotte Mart's situation is the opposite: most of the stores it plans to sell are already closed, which will greatly shrink its asset value. "The most critical assets of a retail enterprise are intangible assets, namely the trading area effect it has formed and the trust in consumers' minds," he said. "If the stores are already closed, they have almost no value, and the equipment is not worth much, so its losses should be very heavy." It is worth noting that the market responded positively to Lotte's decisive "stop-loss" decision: after Lotte announced the sale of its Chinese supermarkets after the market close on September 14, the next day, Lotte Shopping (023530.KS, which includes Lotte Group's supermarket and department store retail businesses) opened higher and closed up 8.41%, showing investors welcomed Lotte's withdrawal from China. International credit rating agency Fitch also issued a statement that day saying Lotte's sale of its Chinese supermarket business "divests non-profitable assets and uncertainties related to geopolitical issues, which will improve Lotte's financial position in the long run." Perhaps, for Lotte, beset by internal and external troubles, getting a good price is no longer the most important issue. As Eason Chan sings in "Ten Years": "How to say it, it's just a breakup." Lotte may have had fond memories during its decade in China, but when everything is beyond repair, "a hero breaking his wrist" is painful but may be the best choice. The 3rd (CFIC) China FMCG + Internet Conference will be held in Chongqing in November 2017. The conference will closely focus on the theme "New Forces, New Ecology," inviting 1,000+ distributors, 500+ brand owners, 200+ B2B platform founders, and 100+ investment and financing institutions to jointly explore a new chapter of cross-border integration! Core topics of this conference:
How can the FMCG industry leverage B2B to achieve new growth opportunities?
How should the new supply chain behind new retail be built?
How can intra-city logistics help B2B achieve leapfrog development?
Highlights of this conference:
The industry's first "2017 China FMCG B2B Industry Competitiveness White Paper"
Case sharing of excellent distributors in transformation and upgrading
Conference + exhibition upgrade: Hall 6 Internet Technology Exhibition strengthens matchmaking
Alibaba Retail Link, GL Capital, EASIA Supply Chain, Best Store Plus, Yijiu Pi, Hdiping: leaders from the most renowned companies in various fields will deliver speeches and share pioneering views.
November 8-9, 2017 Xinyue Hall, Chongqing Yuelai International Convention Center Registration is now open. Long press the QR code below or click "Read Original" to register. Add friend with note "Conference Registration" Click the links below to review the highlights of the 1st and 2nd FMCG + Internet Conferences: 2016 "FMCG + Internet" Summit Forum -END-