Large Retailers and SSMs Hampered by Late-Night Operation and Mandatory Closure [Regulations Backfiring in Distribution]

① "The Era of Finger Shopping"... 'Mart and SSM' Losing Competitiveness

Controversy Reemerges Over Effectiveness of Large Mart Late-Night Operation Restrictions and Mandatory Closing Days
E-commerce Market Shifts Focus to 'Online Grocery Shopping' with Claims of "Unfair Treatment in Dawn Delivery"
Number of Large Mart and SSM Stores Decreasing Annually…Last Year Sales Down 2.3% and 9.1% Respectively
"Closing One Store Results in 1,374 Job Losses...Undermining Neighborhood Commercial Area Development"
"Outdated Regulations Need Revision for Domestic Market"

On the 2nd, ahead of the announcement of the April consumer price inflation rate, customers visiting a large supermarket in Seoul are purchasing groceries. Photo by Jinhyung Kang aymsdream@

The COVID-19 pandemic accelerated the paradigm shift in the distribution industry. Online grocery shopping grew so rapidly that it began to threaten offline grocery shopping, and with the rapid changes in the media environment, purchasing products through mobile live commerce anywhere, not just in front of the TV, has become commonplace. However, regulations across the distribution industry have failed to keep pace with these changes and remain stuck in the past.Large supermarkets are hampered by the Distribution Industry Development Act introduced in 2010. The law restricts operating hours from midnight to 10 a.m., mandates two compulsory closure days per month, and limits the opening of stores larger than 3,000㎡ within a 1 km radius of traditional markets. Although intended to revitalize traditional markets and protect small and medium-sized merchants, the effectiveness of these measures has recently been heavily questioned. TV home shopping must be reapproved every five years under the Broadcasting Act and is subject to over 60 regulatory reviews by bodies such as the Korea Communications Standards Commission, the Fair Trade Commission, and the Ministry of Food and Drug Safety. While the exclusive position of broadcasters as distribution operators has been eroded amid the rapidly changing media environment, the industry argues that regulations remain excessively stringent compared to other channels. In the alcoholic beverage industry, the focus is on updating regulations to reflect market expansion and the controversy over traditional liquor standards derived from these regulations. Under the Liquor Tax Act, classification as traditional liquor grants benefits such as tax reductions and permission for online sales, but the criteria are based on production region and producer rather than the type of liquor, leading to frequent fairness issues.There is a growing call to break free from outdated regulations that hinder industry development and establish new standards that reflect current realities. In response, Asia Economy has prepared a special report to assess the situation across different sectors of the distribution industry, convey the realities, and propose alternatives.

143 Supermarkets and SSMs Closed in Last Two Years... Protection of Local Markets Undermined

Large supermarkets and Super Supermarkets (SSMs), which enjoyed their heyday until the early 2000s, have closed 22 and 112 stores respectively in the past two years. This is due to the loss of competitiveness caused by stringent regulations such as restrictions on late-night operations and mandatory closure days twice a month, introduced to protect local markets.

According to the Ministry of Trade, Industry and Energy on the 10th, the number of large supermarket and SSM stores has been declining annually. Large supermarkets decreased from 406 in 2019 to 384 last year, while SSMs dropped from 1,215 to 1,103 during the same period. The decline in the number of stores for large supermarkets and SSMs also negatively impacted sales. Last year, major distribution companies saw growth in both online (15.7%) and offline (7.5%) sales compared to the previous year. However, offline sales increased for department stores (24.1%) and convenience stores (6.8%), while large supermarkets and SSMs experienced decreases of 2.3% and 9.1%, respectively. Consequently, the offline distribution sales ranking, which had been large supermarkets - department stores - convenience stores until 2019, was reshuffled last year to department stores - convenience stores - large supermarkets.

In particular, current laws restricting late-night operations and mandatory closure days have dealt a direct blow to large supermarkets and SSMs. Although dawn delivery services have become mainstream in the distribution industry, these regulations have hindered their operations. Large supermarkets' online businesses mostly operate picking and packing (P.P) centers, which function as fulfillment centers, located in key stores. However, under current laws, large supermarkets cannot process online orders during late-night hours or on the two mandatory closure days each month. SSMs face similar restrictions on store-based dawn delivery services. As fairness issues between online and offline businesses have arisen, legislative bills to ease regulations and allow large supermarkets and SSMs to operate online have been proposed in the National Assembly, but their passage remains uncertain.

The decline of large supermarkets negatively affects not only direct and indirect employment but also employment in surrounding commercial areas. According to a study by the Korea Distribution Science Association titled "Evaluation of 10 Years of Distribution Regulation and Coexistence Measures," the closure of one large supermarket results in the loss of 945 jobs, and within a 3 km radius, 429 jobs disappear. This means a total employment reduction of 1,374 jobs per store closure. This is why the Distribution Industry Development Act is criticized for increasing the management burden on distribution companies and worsening investment and employment conditions.

Research has repeatedly shown that the regulations on large supermarkets have not led to the intended development of traditional markets and local commercial districts. According to last year's survey by the Federation of Korean Industries on consumer perceptions of distribution regulations on large supermarkets, only 8.3% of consumers visited traditional markets to purchase daily necessities on large supermarket closure days. More than half (59.5%) reported visiting small and medium-sized merchant stores and surrounding shops classified as such when visiting large supermarkets and shopping complexes. Additionally, 58.3% of consumers supported abolishing or easing the mandatory closure system for large supermarkets on public holidays.

A representative from a large supermarket stated, "Currently, large supermarkets face reverse discrimination due to distribution regulations and cannot compete fairly with e-commerce and food material marts. The distribution industry situation has changed, but regulations remain stuck in the past. Although legislation to address these issues exists, there has been no progress in discussions, which is regrettable."

Another distribution industry official said, "It is time to revise the representative regulations of the distribution industry that have been left untouched or effectively neglected due to the binary logic of strong versus weak and entangled interests. Loosening outdated regulations that have blocked the rapidly changing distribution environment, including the online market expansion accelerated by COVID-19, will rather serve as a foundation for coexistence and bring about virtuous cycles such as revitalizing domestic consumption and creating jobs."