Department Stores Aim to Boost Performance in Second Half with Renovations and Foreign Customers

Disappointing Q2 Results... Cost Increases Hold Back Growth
Expectations for Major Store Renovations and Returning Foreigners in the Second Half

Major domestic department stores received disappointing results for the second quarter of this year. After social distancing measures due to COVID-19 were lifted in April last year, high-margin fashion demand surged, boosting department store performance. However, this year, operating profits continued to decline due to various factors such as the base effect from last year and increases in public utility fees like electricity and gas. In the second half of the year, department stores plan to turn the tide by leveraging major store renovations, the full-scale onset of the endemic phase, increased foreign visitors, and the resumption of group tours from China.

Lotte Department Store Main Branch [Photo by Lotte Department Store].

Second Quarter Results Fall Short of Expectations... Base Effect and Rising Costs Weigh Down

According to the distribution industry on the 11th, the three major domestic department stores?Lotte, Shinsegae, and Hyundai Department Store?reported sluggish results for the second quarter of this year. Lotte Department Store recorded an operating profit of 66 billion KRW and sales of 822 billion KRW in the second quarter, down 36.9% and 0.8% respectively compared to the same period last year. Sales remained at a similar level to last year as food and fashion product sales slightly increased amid weakened consumer sentiment, but sales of home appliances declined due to reduced demand for appliance replacement. Operating profit decreased due to increased selling and administrative expenses caused by inflation.

During the same period, Shinsegae Department Store (including separate corporations in Gwangju, Daegu, and Daejeon Shinsegae) posted an operating profit of 92.1 billion KRW, down 23.9% year-on-year. The increase in management fees, labor costs, and promotional expenses linked to inflation had a significant impact. Sales rose 0.8% to 628.4 billion KRW. Total department store sales recorded -0.7% in April, -2.5% in May, -3.6% in June, and 1.7% in July, while the gross profit margin fell by 1.4 percentage points. Luxury goods grew by only 1%, and women's fashion recorded a negative growth rate (-1%) due to a high base.

Hyundai Department Store’s operating profit for the second quarter was 61.3 billion KRW, down 27.8% from the same period last year. Sales increased by 0.9% to 594.1 billion KRW. Sales slightly grew thanks to strong performance in young fashion, children’s products, and food categories, but the burden of fixed costs relative to stagnant sales led to a larger-than-expected decline in profits. Operating profit also decreased due to the temporary suspension of operations at Hyundai Premium Outlet Daejeon (which had an operating profit of 10.8 billion KRW last year).

Department Stores Eye Renovations and Returning Foreign Visitors in the Second Half

The key themes to turn around the atmosphere in department stores in the second half are renovations and foreign visitors. While focusing on ongoing category-specific renovations at major stores, they plan to concentrate marketing efforts on boosting the effects of foreign tourists, including group tours from China resuming after more than six years since the THAAD (Terminal High Altitude Area Defense) retaliation, and foreign visitors continuing after the endemic phase.

Foreign sales at major department stores have noticeably increased through July this year. Foreign sales at Lotte Department Store’s main branch increased about sixfold compared to the same period last year. Sales at the Jamsil branch also tripled. Compared to 2019, just before the COVID-19 impact, sales rose about 70%. Shinsegae Department Store saw foreign sales increase by 460% and 465% at its main and Centum City branches, respectively, during the same period. Hyundai Department Store also recorded more than a threefold increase in foreign sales at The Hyundai Seoul and Trade Center branches, with foreign sales accounting for around 3% of total sales.

Shinsegae Department Store Main Branch [Photo by Shinsegae Department Store].

Lotte Department Store plans to expand the presence of emerging domestic designer brands mainly at its Myeongdong main branch and Jamsil branch located in tourist districts in the second half. It will also actively introduce pop-up stores featuring K-content such as idols and characters. Renovations of major stores in the metropolitan area, including the food hall at the Incheon branch and the Suwon branch, will be completed. Overseas, it will focus its capabilities on ‘Lotte Mall Westlake Hanoi,’ which had a pre-opening at the end of last month in Vietnam.

Shinsegae Department Store expects the performance burden from last year’s reopening to ease from September and will focus on store renovations and attracting VIP customers. It will also prioritize profitability recovery by reducing promotional expenses. The Gangnam and Centum City branches, major stores in the second half, will renovate their young fashion specialty halls, and the Gyeonggi branch will renew its living specialty hall. Online, it plans to strengthen the gift section, Shinbaek Gift Hall, and develop the next-generation Shinsegae Department Store application (app) to continue growth based on differentiated content.

Hyundai Department Store expects a noticeable effect from the reopening of Hyundai Premium Outlet Daejeon on June 12. Sales growth rates for July and August reached 20%, and operating losses of about 40 billion KRW caused by operational disruptions in the fourth quarter of last year are also expected to be reflected. The new entry of major luxury brands such as Louis Vuitton at The Hyundai Seoul, Dior at the Pangyo branch, and Boucheron in Daegu is also expected to lead to stable sales growth. Hyundai Department Store stated, "Foreign sales growth will continue centered on major stores such as The Hyundai Seoul and Trade Center, following the ‘dailication’ travel trend where foreigners want to experience the daily life of Koreans."

The Hyundai Seoul Photo by Hyundai Department Store.