"Prolonged COVID-19 Pandemic Expected to Cause 42.0% YoY Decline in Profit for Local Businesses in Second Half"

FKCCI '2020 First Half Business Performance and Second Half Outlook'

[Asia Economy Reporter Dongwoo Lee] A survey has revealed that the prolonged COVID-19 pandemic has pushed the performance of neighborhood commercial districts to the brink.

The Federation of Korean Industries announced on the 10th that, based on a survey of associations representing 22 major neighborhood commercial sectors regarding their "business performance in the first half of 2020 and outlook for the second half," the net profit of key neighborhood commercial sectors in the second half of this year is expected to decrease by 42.0% compared to the same period last year, and if the COVID-19 situation worsens further, it could plummet by more than 52.6%.

In the first half of this year, compared to the same period last year, the average sales of major neighborhood commercial sectors fell by -27.2%, and net profit?calculated by deducting various costs such as rent and labor from sales?declined by -32.9%.

Regarding net profit in the second half of this year, all 22 sectors are expected to either worsen or stagnate compared to the first half. Looking at the outlook by sector, the 'entertainment food service industry,' which has effectively ceased operations due to gathering bans, is expected to suffer the most with a -100.0% drop in sales.

Due to the impact of COVID-19, sectors such as 'pet distribution and supplies' (-80.0%), which face limited new demand creation and high substitution rates through online purchases of related products; 'photography' (-80.0%), affected by seasonal factors and demand elasticity; and 'rest food service' (-78.0%), hit by a sharp decline in consumer sentiment and shortened business hours, are particularly expected to experience negative business conditions.

With an increase in consumers purchasing food near their homes, the 'convenience store industry' is expected to see a slight sales growth (+2.8%), but net profit (-28.0%) is anticipated to decline compared to last year due to limitations in reducing fixed costs such as labor.

Additionally, worsening performance is a concern for major neighborhood commercial sectors including boiler equipment (-70.0%), bookstores (-50.0%), flower shops and floriculture (-50.0%), dining out (-45.0%), lodging (-40.0%), and interior design (-40.0%). Respondents indicated that if social distancing is raised to level 3, net profit could further decrease by 0 to 25% from the current expected levels.

Major neighborhood commercial associations cited the biggest recent difficulties as poor business performance due to COVID-19 and economic downturn (42.9%), rent burden (21.4%), and labor cost burden (17.8%).

Regarding the timing of business condition improvement, 64.3% said it is difficult to predict. This was followed by mid-2022 (17.8%), the second half of 2021 (14.3%), and the first half of 2021 (3.6%). The government support measure considered most important for overcoming the COVID-19 crisis and revitalizing neighborhood commercial districts was 'expansion of domestic demand and introduction of demand stimulation systems' (42.8%).

Yoo Hwan-ik, Director of Corporate Policy at the Federation of Korean Industries, said, "Despite the disbursement of emergency disaster relief funds amounting to 14 trillion won in the first half, the prolonged COVID-19 pandemic has pushed neighborhood commercial districts to the edge. Not only urgent financial support for small business owners is needed, but also policies aimed at comprehensively improving the frozen consumer sentiment are essential."