[Why&Next] "No Sale"... Lotte Hi-Mart's Franchise Business 'Way Forward'

Extraordinary General Meeting Held Earlier This Month
Articles of Incorporation Amended to Add Franchise Business
Reviewing New Business Collaboration with Furniture Dealerships

Lotte Hi-Mart held an extraordinary general meeting of shareholders earlier this month and amended its articles of incorporation to add franchise and membership business as a new business purpose. Amid ongoing speculation about a potential sale due to deteriorating performance caused by the stagnation of the domestic home appliance retail market, Lotte Hi-Mart plans to find an offline breakthrough by collaborating with furniture and interior design dealerships.

According to industry sources on the 22nd, Lotte Hi-Mart passed a resolution at the extraordinary general meeting of shareholders earlier this month to add franchise and membership business as a new business purpose in its articles of incorporation.

Expected Synergy from Furniture and Interior Collaboration

As of the end of the third quarter last year, Lotte Hi-Mart operates 327 offline directly managed stores nationwide, but it stated that the amendment to the articles of incorporation does not mean converting these into franchise stores. Instead, it is considering a plan to collaborate with industries that can create synergy by displaying home appliances sold by Lotte Hi-Mart together in furniture or interior stores.

Premium kitchen showroom at Lotte Hi-Mart Hanssem Gwanggyo branch. Provided by Lotte Hi-Mart

In fact, in July last year, Lotte Hi-Mart opened a specialized home appliance and furniture store called 'Lotte Hi-Mart Hanssem Gwanggyo Branch' at 'Design Park Suwon Gwanggyo Branch,' the flagship store of comprehensive home specialist Hanssem. Additionally, in November of the same year, a Hanssem furniture consultation corner was set up at Lotte Hi-Mart Jooan Branch in Michuhol-gu, Incheon. A Lotte Hi-Mart official explained, "Recently, newlyweds and people moving place great importance on interior design when choosing home appliances," adding, "There is significant synergy as customers can purchase matching home appliances while selecting furniture or interior items."

Hanssem is mentioned as a potential partner for collaboration with Lotte Hi-Mart. When Lotte Hi-Mart acquired Hanssem from IMM Private Equity (PEF) in 2021, its parent company Lotte Shopping participated as a strategic investor (FI) and invested about 50 billion KRW, which is a background that raises expectations for collaboration. However, a Lotte Hi-Mart official drew a line by saying, "It is true that we are reviewing collaboration with the furniture and interior industry as one example while adding new business purposes," but "no collaboration with any specific company has been finalized yet."

Starting to Escape from Poor Performance

Lotte Hi-Mart added new business through a 'one-point extraordinary general meeting' due to its prolonged poor performance. Acquired by Lotte Group in 2012, the company flourished by surpassing 4 trillion KRW in sales and 200 billion KRW in operating profit in 2017. However, it turned to a deficit the following year, with sales declining and profitability shrinking further.

Especially, as the e-commerce market rapidly expanded during the COVID-19 pandemic, its scale significantly shrank. Lotte Hi-Mart recorded sales of around 4 trillion KRW in 2020, when the pandemic began, but this dropped to 2.3 trillion KRW in 2023. Operating profit was 160 billion KRW in 2020 but recorded a loss of 52 billion KRW in 2022.

During this period, Lotte Hi-Mart reduced the number of stores nationwide from 427 in 2021 to 327 as of the third quarter last year, and implemented inventory management and voluntary retirement programs, successfully returning to profitability with an operating profit of 8.2 billion KRW in 2023. By the third quarter of last year, cumulative sales reached 1.8 trillion KRW, and operating profit was 18 billion KRW.

Because of this, speculation about the sale of Lotte Hi-Mart has never ceased. Especially at the end of last year, rumors about Lotte Group’s liquidity crisis reignited speculation about the sale of Lotte Hi-Mart. This followed the sale of Lotte Rental to the foreign private equity fund Affinity Equity Partners during Lotte Group’s asset securitization process. However, Lotte Shopping, the largest shareholder holding about 65% of Lotte Hi-Mart’s shares, stated in a disclosure at the end of last year, "It is not true that we are currently considering the sale of Lotte Hi-Mart shares."

Lotte Hi-Mart is expected to accelerate its strategy to create new revenue by collaborating with large furniture and interior companies, leveraging the advantages of offline stores, and increasing sales by displaying home appliance products together. Choosing to amend the articles of incorporation through an extraordinary general meeting instead of the regular shareholders' meeting in March supports this. A Lotte Hi-Mart official hinted, "If we proceed with the business after the regular shareholders' meeting, the timing will shift to the second quarter."

Meanwhile, in November last year, Lotte Hi-Mart announced a 'value-up' plan to enhance corporate value, setting a goal to achieve sales of 2.8 trillion KRW and operating profit of over 100 billion KRW by 2029 through store renewals and strengthening private brand (PB) strategies.