Breaking the 'Lotte Man' Purity and Simplifying the Decision-Making System

Replacement of Underperforming Affiliate Heads... Kang Hee-tae Steps Down as Head of Distribution BU
Dissolution of Existing BU Structure... More Authority Granted to Affiliate CEOs

Lotte Group has embarked on a major personnel overhaul through organizational restructuring and executive appointments. The existing Business Unit (BU) system, which had been criticized as an 'overhead' in the decision-making process, was abolished to simplify the structure, and affiliated companies that had been artificially grouped together were boldly separated. At the same time, moving away from the traditional method of nurturing internal talent, the group is actively entrusting key businesses to external personnel and appears determined to evaluate them strictly based on a 'performance-oriented' principle.

Abandoning Pure-Bloodism and Actively Recruiting External Talent

The organizational restructuring and executive appointments of Lotte Group, to be implemented on the 25th, can be summarized as a break from pure-bloodism and an influx of external talent. As the prolonged COVID-19 pandemic transitions into a phased return to normal life (With COVID), internal and external uncertainties continue, reflecting an urgent need to revitalize the stagnant organizational atmosphere and accelerate change.

First, in accordance with the principle of 'reward and punishment based on performance,' the heads of the Distribution and Hotel & Service BUs, whose performances were poor, were abruptly replaced. Although the special circumstances of COVID-19 were considered, the decisive factor was the third-quarter performance. Lotte Department Store's sales in Q3 were 656 billion KRW, a 5.9% increase compared to the previous year. While it had the largest sales scale among the three department stores, its growth rate was below the average of the three. Operating profit turned to a loss of 21 billion KRW. Considering the 60 billion KRW cost of voluntary retirement, this was a relatively decent performance, but compared to Shinsegae Department Store, which recorded sales of 509.6 billion KRW and operating profit of 72.7 billion KRW during the same period?an increase of 15% and 81.3% year-on-year respectively, marking the highest quarterly performance ever?Lotte's results were modest.

Moreover, the integrated online mall 'Lotte On' continues to struggle. As 11st partners with Amazon and Shinsegae accelerates market restructuring by acquiring eBay Korea, Lotte On's position has further narrowed, which appears to be one of the main reasons for the replacement of Vice Chairman Kang Hee-tae.

Hotel Lotte also recorded Q3 sales of 3.1624 trillion KRW, a 12.4% increase year-on-year, but still posted an operating loss of 247.6 billion KRW.

The appointment of Jung Jun-ho, CEO of Lotte GFR, as head of the department store division also stems from this background. Before moving to Lotte in 2019, Jung had worked for over 20 years at Shinsegae Group, making him a 'Shinsegae man.' Traditionally, the head of Lotte Department Store has been a 'Lotte man,' so Jung's appointment indicates a heightened sense of crisis over the poor performance in the distribution sector.

Earlier, in March this year, Lotte Group appointed Na Young-ho, formerly of eBay Korea, as Vice President of Lotte Shopping's e-commerce division, and in September, Professor Bae Sang-min from KAIST was appointed as head of the Design Management Center at the president level. This suggests that the recruitment of external experts to lead other affiliates and senior executive positions within the group is expected to increase.

Towards a Faster and Stronger Organization

Lotte Group is abolishing the BU system for the first time in about five years since the organizational restructuring in February 2017. The group plans to reorganize its affiliates into four HQs (△Distribution △Chemicals △Food △Hotel). The existing four BUs (△Distribution △Chemicals △Food △Hotel & Service) will be eliminated. Under the previous organizational system, there were many stages to go through in the decision-making process of each affiliate, which was criticized for reducing business execution power within the group. Especially, due to the deteriorating performance of the Distribution BU and Hotel & Service BU, it became difficult to expect any synergy effects, leading to the judgment that a new organizational management strategy was necessary.

It is reported that Chairman Shin Dong-bin specifically instructed to improve these issues. The BU system was introduced by Chairman Shin in 2017 when management was disrupted due to a prosecution investigation, establishing independent systems in four areas to create a horizontal business structure.

A Lotte official said, "Since the group has various industries, there are cases where exchange and cooperation between affiliates are necessary, but for swift and flexible decision-making, it is also necessary to delegate more authority to the CEOs of each affiliate," adding, "Accordingly, the responsibility for management and performance of each company will also become heavier."