[Desk Column] Costco and Traditional Markets

[Asia Economy Reporter Myung Jin-kyu] Amid the retail industry suffering from the impact of COVID-19 last year, leading to massive deficits and restructuring, there is one company that stood out with success. That is Costco Korea.

Costco Korea, which entered the domestic retail market in 1998, conducted its first-ever cash dividend in 23 years at the end of last year. The dividend amounted to 229.4 billion KRW. The U.S. headquarters announced a special dividend for the first time in eight years, distributing nearly twice the annual net profit. Even after paying this dividend, Costco Korea holds over 1 trillion KRW in cash. Its retained earnings amount to 1.3623 trillion KRW.

For the fiscal year ending in September (September 2019 to August 2020), Costco Korea, which closes its books in September, posted sales of 4.5229 trillion KRW and an operating profit of 142.9 billion KRW, up 8.4% and 6.2% respectively compared to the previous year. During the same period, the three major domestic marts?Emart, Lotte Mart, and Homeplus?all recorded losses.

Costco, known as the "Apple of the retail industry," is widely recognized for its capabilities, but the playing field itself is tilted when competing in the same market.

Two years ago, Costco opened a new store in Hanam City, Gyeonggi Province. At that time, Costco Korea was unable to open a store due to the "Act on the Promotion of Mutual Growth between Large Enterprises and Small and Medium Enterprises" (Mutual Growth Act), which requires large marts to consult with nearby small business owners before opening new stores. Over 1,000 small business owners opposed the opening, and after four rounds of mediation, the government requested a postponement of the store opening. Despite the pressure from the government and political circles, Costco went ahead with the opening, paying a fine of 40 million KRW. This was not surprising, as Costco had previously paid fines and opened stores despite similar issues in Songdo.

For the same reason, Lotte Shopping has been unable to develop a site of about 20,000 square meters (6,245 pyeong) in Sangam-dong, Seoul, purchased eight years ago for 197.2 billion KRW for a shopping mall. Although Lotte reached mutual growth agreements with 16 out of 17 nearby traditional markets, Mangwon Market opposed, and Seoul City did not approve the land use change.

In 2019, the Board of Audit and Inspection pointed out that "Seoul City unjustly delayed the review process, damaging administrative credibility and restricting Lotte's property rights," and that "the opportunity for local economic revitalization, including consumer rights of nearby residents and job creation, was lost." Two years later, in 2021, Seoul City approved the review for Lotte's complex shopping mall development project.

Despite this situation, the political circles plan to push through amendments to the Retail Industry Development Act this month. While the ruling party threatens to impose business regulations on complex shopping malls, department stores, and outlets, the opposition party goes further by proposing to include food material marts in the regulation. There is a foreign company that benefits from this as well: IKEA.

IKEA sells furniture, interior accessories, bedding, small appliances, and even operates restaurants, making it no different from department stores or large marts, yet it is classified as a specialty store. Once again, only domestic companies suffer while foreign giants laugh and grow as the ultimate predators. The more new regulations are created, the more this phenomenon will repeat itself.

If traditional markets in 2021 are the same as those in 2000, there is no reason for people to visit. Twisting the opponent’s wrist will not create self-sustainability. If the reason to go to large marts is not replaced with a compelling reason to visit traditional markets, no matter how stringent the regulations are, they will not be able to revive traditional markets.