(Today and Tomorrow/Kim Chang-deok) ‘Limits to growth’ faced by the distribution chariot

Lotte Group’s sales last year were KRW 67.7 trillion, down KRW 4.1 trillion (5.7%) from KRW 71.8 trillion the previous year. Shinsegae Group also recorded sales of 35.8 trillion won last year, down 1.3 trillion won (3.5%) from 37.1 trillion won the previous year. Even if this year’s performance rebounds somewhat, there is a general perception that it is difficult to expect the growth rates enjoyed in the past.

The two companies themselves also have a strong sense of crisis. Lotte Holdings entered an emergency management system in August. Lotte Duty Free and Lotte Chemical, affiliates with poor performance, previously declared emergency management in June and July. Executives of Lotte Holdings and its chemical division affiliates have decided to return part of their salaries starting this month.

Shinsegae is no different. Shinsegae Group already changed 9 out of 25 CEOs of its affiliates in regular personnel changes in September last year. After Shinsegae Group Chairman Chung Yong-jin was promoted in March of this year, the CEOs of Shinsegae Construction, G Market, and Seok.com were replaced through regular personnel changes. And in regular personnel changes at the end of last month, the heads of several companies, including Shinsegae Food, Shinsegae International, and Shinsegae Baseball Team, were additionally changed.

Large distribution companies with low vitality

There are various reasons why the two large conglomerates, ranked 6th and 11th in the business world, are performing poorly. For Lotte, the decline in the performance of its chemical affiliates due to oversupply of petrochemicals from China is cited first, and for Shinsegae, the liquidity crisis at Shinsegae Construction, which was directly hit by the spread of project financing (PF) insolvency, is cited first.

However, the most painful thing is that the limitations of growth are being revealed in the distribution sector, which is the foundation of the group. The consumption environment is not easy. The domestic market, which has been frozen due to the high interest rate trend that has continued for a while, is hardly easing. With consumers closing their wallets, distribution companies have no way to do anything. It is also a burden that while consumers are rapidly turning to online platforms such as Coupang, the influence of offline distribution channels is no longer what it used to be.

Wouldn’t there have been challenges for both companies to find new momentum?

Lotte purchased Korea Ministop in January 2022 to increase the size of convenience store chain 7-Eleven. In December of the following year, the company acquired the Syracuse plant of Bristol Myers Squibb, an American pharmaceutical company, to speed up its entry into the bio business. In March last year, it entered the electric vehicle ecosystem by acquiring battery materials company Iljin Materials (now Lotte Energy Materials) for 2.7 trillion won. Shinsegae incorporated women’s clothing platform W Concept in April 2021, and eBay Korea into the group in June of that year for 3 trillion won. In March 2022, it purchased Playgrim, a company specializing in platform construction. In October of this year, we even launched the beauty specialty company Amuse. The problem is that neither entering new businesses (Lotte) nor strengthening digital competitiveness (Shinsegae) has yet been evaluated as ‘successful.’

The answer must be found in the ‘essence of the business’

Amidst the negative outlook for the distribution industry, there are still some vibrant battlefields. It is a shopping mall complex that goes beyond the concept of ‘selling products’ and promotes the concept of ‘providing experiences’.

Shinsegae Property’s Starfield, a real estate development company, opened the Suwon branch, which calls itself a playground for the MZ generation, in January this year, following the Hanam branch, Goyang branch, COEX branch in Seoul, and Anseong branch. New stores are also planned in Gwangju, Cheongna, Incheon, and Changwon, Gyeongnam. Not to be outdone, Lotte also launched a new brand called Time Villas. Starting with the opening of the first Time Villas store in the renovated Suwon branch of Lotte Department Store last month, the company plans to open 13 stores in Korea alone.

Walmart, which was briefly shaken by the emergence of a powerful market disruptor called Amazon in the United States, still firmly maintains its position as the ‘global number one distribution company.’ This was possible because we persistently maintained the ‘essence of the business’ of offline channels while constantly innovating logistics, delivery, and product composition. Isn’t this ultimately the answer that the two companies that have written the history of the domestic distribution industry must find?