Bigger and More Spectacular... Survival Strategies for Offline Stores in the 'Online World'

The retail industry, stuck in a growth stagnation period, is seeking an escape route through larger and more luxurious store strategies. The photo shows the renovated luxury goods hall at Shinsegae Department Store Gangnam branch.

[Asia Economy Reporter Seungjin Lee] Offline stores in the distribution industry have entered a severe growth stagnation period. Since 2016, department stores have virtually stopped opening new locations, and last year, large discount stores recorded losses as sales and operating profits sharply declined. The industry is boldly closing stores with low profitability while introducing larger and more luxurious stores to maximize profitability.

According to Daishin Securities Research Center on the 19th, the provisional sales of all 67 department store locations last year amounted to 30.04 trillion KRW, a 0.8% decrease compared to the previous year. The decline was largely due to the poor performance of mid- to lower-tier stores. However, top-tier stores that strengthened premium brands through renovations showed continuous sales growth.

Shinsegae Gangnam Store, which last year became the first single store to achieve sales of 2 trillion KRW, is a representative example. Shinsegae Gangnam Store focused heavily on attracting major luxury brands including the "big three" luxury brands Louis Vuitton, Chanel, and Herm?s, driving sales growth. Its sales increased by 14% compared to the previous year, showing the highest growth rate among the top 20 department store locations by sales.

Lotte Department Store and Hyundai Department Store also underwent major renovations. Lotte Department Store’s main branch started renovating its living goods section in September last year and plans to break the formula of "1st floor = cosmetics" this year by opening luxury brand stores to transform into a premium store. Hyundai Department Store is putting all efforts into its Yeouido branch (tentative name), scheduled to open as early as the end of this year. Yeouido branch is planned to be the largest department store in Seoul and will host various luxury brands.

The outlet industry, which has also seen slowed growth, is focusing on "premium" and "mega-sized" stores. Last year, the provisional sales of 35 outlet stores totaled 7.0693 trillion KRW, a 7% increase from the previous year. However, excluding Hyundai Daegu Store and Lotte Giheung Store, which opened in September and December 2018 respectively, the growth rate was only 2%. Among them, Shinsegae Simon Yeoju Store, which strengthened luxury brands by opening the second Prada outlet last year, recorded an 11.8% growth rate. Additionally, Hyundai Premium Outlet Yeoju Store, which expanded its existing sales area by about 41% through an extension in 2018, showed a high growth rate of 19.4%.

Customers are visiting the Lotte Hi-Mart Megastore Jamsil branch, which officially opened on the 9th. (Photo by Lotte Hi-Mart)

Hyundai Department Store, which plans to open two new outlets this year, intends to solidify its image by emphasizing premium and mega-sized stores. The Hyundai Premium Outlet Daejeon Store, opening around June, and the Namyangju Store, scheduled to open in November, will have sales areas of 53,586㎡ and 62,150㎡ respectively. Among these, the Namyangju Store will be the largest premium outlet operated by Hyundai Department Store (including Gimpo and Songdo).

Lotte Hi-Mart introduced a mega-sized store called "Mega Store." The Mega Store Jamsil Branch, which opened on the 9th with a size of 7,431㎡ (approximately 2,248 pyeong), is the largest home appliance store in Korea. Sales during the first weekend of opening, November 11-12, tripled compared to the previous weekend of November 4-5. Lotte Hi-Mart plans to close 11 underperforming stores this year and open 10 additional Mega Stores within the year.

Large discount stores experiencing sales declines are focusing on improving operational efficiency through store renovations. Emart plans to close all seven stores under its "Pierrot Shopping" brand. To maximize profitability, Emart will renovate 30% of its existing stores and expand its successful business, Electromart. Lotte Mart, which has opened new stores every year, has no plans to open new stores this year. However, it plans to restructure low-profit businesses and focus on high-profit businesses.

A distribution industry insider said, "Most offline businesses in the industry are facing difficulties in growth, making external expansion challenging. This year will likely be a year to overcome the current situation by closing low-profit businesses and focusing on growing high-profit businesses."