[Why&Next] "Domestic Demand Frozen"... Major Retail Corporations Reattempt 'Dark History' Overseas Markets

Retail Sales Hit 21-Year Low Last Year
Domestic Market Unlikely to Recover This Year
Distribution Companies Rush to Expand Overseas
"Localization Strategies Considering the K-Culture Wave Are Key"

Following the strong dollar, the impeachment political turmoil, and the Jeju Air disaster, consumer sentiment is expected to weaken further, making the economy more difficult. Amid this, the area around Myeongdong shopping district in Jung-gu, Seoul, was quiet at the end of last year. Photo by Jo Yong-jun

From the beginning of the year, major domestic distribution companies are accelerating their overseas expansion. This comes as the domestic market recorded its worst performance in 21 years last year, with no signs of recovery this year. The popularity of Korean content, including K-pop, in the global market has also contributed to the increase in overseas exports of cosmetics and food products, motivating distribution giants to cross the seas. Since domestic distribution companies have previously launched aggressive overseas market entries only to withdraw one after another, experts point out the need for localization strategies that consider the K-culture wave.

According to the industry on the 10th, CJ Olive Young established a local subsidiary, 'CJ Olive Young USA,' in Los Angeles (LA), California, earlier this month and is preparing its first offline store. Given the size and influence of the U.S. in the global beauty market, the plan is to use the U.S. as a forward base to leap to the number one position in K-beauty.

Domestic Market Hits 'Worst' in 21 Years... Rush for Overseas Expansion

Earlier, Shinsegae Group also decided to establish a joint venture with Alibaba International, a subsidiary of China's Alibaba Group. Through this partnership, Shinsegae Group expects sellers affiliated with Gmarket to utilize Alibaba Group's global network to expand into over 200 countries worldwide.

Emart has targeted Southeast Asian countries where the K-culture wave is strong. Currently, Emart operates 5 stores in Mongolia, 3 in Vietnam, and 16 in the Philippines. In December last year, it entered Laos by opening its first No Brand store and plans to open about 20 additional stores within five years. This year, Emart plans to open a store in Laos and add 2 to 3 more No Brand specialty stores. In the Philippines, it plans to open 2 to 4 additional No Brand specialty stores.

Convenience stores are also actively expanding overseas. As of the end of January, GS25 operates 270 stores in Mongolia and 355 in Vietnam, exporting products to over 35 countries. It aims to increase the number of overseas stores to 1,500 by 2027. CU operates a total of 624 overseas stores as of the end of January: 451 in Mongolia, 149 in Malaysia, and 24 in Kazakhstan. CU aims to open its 500th store in Mongolia this year, with plans to reach 500 stores in Malaysia by 2028 and in Kazakhstan by 2029.

Expanding overseas presence is considered a key task for the distribution industry this year. This is due to the continued population decline and low growth, which have led to a sluggish domestic consumer market. According to Statistics Korea's 'December 2024 and Annual Industrial Activity Trends,' the retail sales index, which reflects consumer trends, decreased by 2.2% compared to the previous year. This is the largest decline since the credit card crisis in 2003 (-3.2%). Particularly, semi-durable goods such as clothing and footwear led the decline with a 3.7% decrease year-on-year. Semi-durable goods typically shrink easily when prices rise or the economy worsens.

The domestic consumer market is likely to remain sluggish going forward. The Ministry of Economy and Finance lowered South Korea's GDP growth forecast for this year to 1.8%, below the potential growth rate of 2%, in its '2025 Economic Policy Direction' released last month. Domestic economics professors also forecast a 1.6% economic growth rate this year. This is because, even after examining all GDP components such as household consumption, private investment, and government spending, domestic demand is unlikely to improve this year. South Korea's population is currently in a structurally declining phase, and corporate restructuring is underway due to economic downturns. A distribution industry official evaluated, "Consumption is unlikely to improve in the first half of this year due to rising import prices caused by high exchange rates and weak government budgets."

For this reason, Shin Dong-bin, Chairman of Lotte Group, stated at the 2025 first half Value Creation Meeting (VCM) held on the 9th of last month, "Considering the domestic economy and population outlook, overseas market development is the most important goal for future group growth," and urged, "We must carefully analyze overseas markets and establish differentiated business strategies to gain competitiveness in the global market." Min Seung-bae, CEO of BGF Retail, also cited 'Outreach (overseas business expansion)' as one of the convenience store industry's strategies for this year in his New Year's address.

Past Overseas Business Failures... Lessons to Learn

However, domestic distribution companies have faced setbacks in global market entries due to failures in localization, poor partnerships, and inadequate operational strategies.

Emart entered the Chinese market by opening its first store in Shanghai in 1997 but completely withdrew after 20 years in 2017. It was outcompeted by local Chinese companies, and the Chinese government's retaliatory measures against the Terminal High Altitude Area Defense (THAAD) system dealt a critical blow. In Vietnam, Emart opened its first store in Ho Chi Minh City in 2015 but faced difficulties in further expansion due to local permits and other issues. Eventually, in 2021, Emart sold all its shares in the Vietnamese subsidiary to the local company, Taco Group. Instead of direct operation, Taco Group now operates Emart stores locally and pays royalties to Emart.

Lotte Shopping also experienced setbacks in the Chinese market. Lotte Mart, which entered China in 2008, expanded to 119 stores but suffered operational damage after China's strong economic retaliation following the THAAD deployment in 2018. It began selling stores in 2017 and completely withdrew in 2018. The biggest failure was attributed to overlooking local political and economic risks.

The e-commerce sector is no exception. Coupang established Coupang Japan in 2021 to enter the Japanese market, operating quick commerce services delivering food and daily necessities in as little as 10 minutes, but withdrew after two years. The entrenched analog culture in Japan, low app usage among the aging population, and intensified competition from Amazon Japan and Rakuten made digital transition difficult. Currently, Coupang has exited the quick commerce business but is targeting the Japanese food delivery market through services like 'Rocket Now.'

The home shopping industry also faced setbacks overseas. CJ O Shopping entered the Chinese market in 2004 but completely withdrew in 2016 after losing to local platforms like Alibaba. It also attempted home shopping in India but closed the business in 2019 due to failure to keep up with the rapidly changing mobile-centric market. GS Home Shopping first entered overseas by establishing Chongqing GS Shopping in China in 2005 but stopped broadcasting in 2010 after the Chinese government banned home shopping businesses using time rental instead of dedicated channels. Additionally, GS Home Shopping operated nine subsidiaries in eight countries including China, India, and Thailand but faced barriers such as preference for mobile shopping and local entry restrictions, leading to the closure of subsidiaries in Turkey, Russia, Malaysia, and Indonesia from 2017 to last year.

Experts: "Localization Strategies Considering External Variables Needed... Utilize 'Hallyu'"

Experts advise the distribution industry to learn from past failures and establish thorough localization strategies. They emphasize the need to leverage the global K-culture wave to enhance preference for Korean brands. Professor Seo Yong-gu of the Department of Business Administration at Sookmyung Women's University said, "As past cases show, direct entry by Korea has a high chance of failure," adding, "It is most desirable to operate in a franchise form through partnerships with local partners."

He continued, "Except for high-growth countries like North Africa, India, Indonesia, and Vietnam where direct entry can yield results, finding suitable local partners is very important," and added, "Korea should adopt a strategy of supplying brand licenses by leveraging the K-culture wave."

Professor Lee Young-ae of the Department of Consumer Studies at Incheon National University said, "Due to the nature of the distribution industry, it is difficult to generate profits with just one or two stores, and a low-margin, high-volume approach is necessary. If competition with local companies for store openings is intense or if there are many variables such as local government protectionism and regulations, entry is not easy," emphasizing, "Localization strategies must consider external variables such as consumer sentiment toward foreign companies entering their home markets."

She added, "In Korea's case, rather than targeting general overseas consumers, a strategy focusing on countries culturally interested in K-culture is needed," and concluded, "A premium brand strategy centered on K-culture and focusing only on necessary areas through localization strategies is essential."