South Korea's hyper-competitive hypermarts
See "Wal-Mart pulls out of South Korea" (business, page 4)By Jon Fernquest
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What was special about the Korean retail market that made them pull out? Are there any lessons to be learned from Korea for Thai retailers?
Here are some questions to guide your reading. Watch out. Answering some of them may require getting information from different parts of the article. (For answers see answer key at end).
1. What reason did Wal-Mart give for pulling out?
2. What markets in Asia does Wal-Mart intend to focus on now? What about Carrefour?
3. What are the differences between the China and Korea's retail sectors?
4. Was Wal-Mart's South Korean subsidiary over-priced, under-priced, or equal to its true value?
5. What is the basic strategy being used by Korean retailers in the Korean retail market? (read closely)
6. How will Wal-Mart's exit change Shinsegae's relationship with vendors and other competitors?
Relevance for Thailand
Let's get back to the original question of how the Korean retail sector is relevant to Thailand. Economic nationalism has become an issue recently in Thailand. South Korea under the leadership of Park Chung-Hee (1961-1971), became the prototype for economic nationalism in economic development, combining it with an export driven growth strategy with countries like Chile in South America following in its footsteps.
Economic nationalism has often prevented any long-term increase in market share for foreign companies operating in South Korea. When I worked in South Korea during the 1990s one of my closest Korean friends was a product manager for a disposable diaper brand of a large American multinational. The disposable diaper brands that he managed had been the first of their kind introduced into the Korea market but had gradually lost market share as Korean disposable diaper products increased in quality and became more competitive. People gradually switched to Korean brands as their quality rivaled foreign brands.
The Korean retail sector like Thailand's is dominated by small local mom-and-pop stores ranging from small grocery stores to pharmacies as well as public markets and slightly larger stores like those in Thailand run by Chinese families (Thai: Haeng).
The low prices and range of products offered by larger hypermarts took away some of the market share of these smaller stores. Local family-run businesses still retained a competitive advantage of convenience because they were located near peoples’ homes where people can use them at night. The retail chain 7-11 chain aimed at obtaining the same competitive advantage with many small stores, each located in a neighborhood near peoples’ homes, open 24-hours a day for convenience.
In today’s news Tesco Lotus announced plans to expand their chain of local convenience stores (business, page 10, May 23). Carrefour has also recently announced its intentions to do this.
Korea and Thailand are, of course, completely different countries with very different cultures, my only point here is to point out some of the factors that have influenced, and may influence in the future, the development of Thailand's retail sector.
Vocabulary (in discussion above)
hyper - excessive, increased, much more thanretail chain - several similar stores in different locations that are owned by one company, for example Big-C, Lotus, Carrefour, SE-ED Bookstore, or Black Canyon restaurants
scale - size
seeking scale - trying to become larger
market share - the percentage of proportion of a market's customers that a company has (See Wikipedia:Market_Share)
foregoing - choosing to use, buy, or consume something
Chaebol - the large conglomerate companies that drive growth in the Korean economy (See Wikipedia:Chaebol)
Dae-Woo Corporation - one the large Korean Chaebol that drive the South Korean economy (See Wikipedia:Dae_woo_corporation)
economic nationalism - government policies, "guided by the idea of protecting domestic consumption, labor and capital formation, even if this requires the imposition of tariffs and other restrictions on the movement of labour, goods and capital" (See Wikipedia:Economic_nationalism)
Park Chung-Hee - the leader who guided South Korea through its most critical period of economic growth from 1961 to 1979 (See Wikipedia:Park_Chung_Hee)
prototype - first and most typical example of something
export driven growth - the government development strategy of promoting export industries to generate foreign exchange which they pour back into new and more advanced forms of exports, until they are self-reliant and producing complicated things products such as chemicals, cars, steel, and machinery all by themselves.
Vocabulary (in article)
pulls out of a market – exits or leaves the marketspoils, the spoils of war – what you gain after winning (the spoils of war are the things that the victor takes away from a conquered country)
deregulation – the government policy of making less rules and regulations to control an industry or market (See Wikipedia:Deregulation)
mom-and-pop stores – small family run stores serving a neighborhood
out-muscle – beat someone in a competition
margin crushing competition – strong competition that destroys profits
book value – an accounting term that means: 1. the value of the company in the company’s accounting system 2. the company’s equity = assets – liabilities on the company’s balance sheet, 3. the value owned by a company's shareholders, 4. the company's base liquidation value, 5. not necessarily the same as the market value (Google: "book value definition", Also see: Wikipedia:Book_value).
Answer Key:
1. What reason did Wal-Mart give for pulling out?
A Wal-Mart executive explained that, “in South Korea’s current environment it would be difficult for us to reach the scale we desired.”
Eight years after entering the South Korean market Wal-Mart had only gained a 4% market share. The article also implies that Wal-Mart will be entering (or has already entered) China’s retail market.
2. What markets in Asia does Wal-Mart intend to focus on now? What about Carrefour?
The sale highlights, “a shift into fast-growing markets such as China and India.” Carrefour which left Korea before Wal-Mart has already entered China’s retail market.
3. What are the differences between the China and Korea's retail sectors?
In China the cost of investment is less and the retail market is potentially larger.
Shinsegae dominates the Korean retail sector which made it difficult for other companies like Wal-Mart to compete and gain market share. China’s retail sector is more fragmented which will make it easier for new entries into the market to compete.
China only deregulated recently in 2005, making entry into the retail sector for foreign companies easier. South Korea’s retail market has been open to foreign companies for at least eight years, since that is when Wal-Mart entered the Korean market.
4. Was Wal-Mart's South Korean subsidiary over-priced, under-priced, or equal to its true value?
According to a securities analyst, “the deal is appropriate, considering the book value of Wal-Mart is about 830 billion won.” Using the online exchange rate: 951.5 won/dollar X $882 million = 839 billion won which is almost equal to 830 billion won.
5. What is the basic strategy being used by Korean retailers in the Korean retail market? (read closely)
According to the article: “South Korean retailers are seeking scale to win greater negotiating power over suppliers as they battle margin-crushing competition.”
“Seeking scale” must mean opening more stores (like Shinsegae just did with the Wal-Mart purchase) and increasing market share. If they have more stores and buy more from suppliers, then they can demand a lower price.
The competition is intense though, so they seem to be foregoing profits in the short-term to gain scale and market share and eventually profitability in the long-run. The large Korean conglomerate Dae-Woo was operating with this strategy when the Asian Economic Crisis struck in 1997.
6. How will Wal-Mart's exit change Shinsegae's relationship with vendors and other competitors?
a. Wal-Mart’s exit will help Shinsegae, “win more negotiating power with vendors to cut prices.”
b. The sale will, “create a wider gap between other competitors like Lotte Mart and Samsung Tesco, helping it increase pricing power against vendors and boost profits.”
c. Increasing scale and market share increases negotiating power with suppliers as noted above.
