"Not Even Shopping at Department Stores, Only Grabbing Discounted Goods at Marts"... Worst 'Disappearance of Consumption' [Domestic Shock] ①

The Worst Consumption Slump Hits Retail Industry
Major Department Stores See Negative Growth in Q1 Sales
Fashion and Hypermarkets Also Feel the Pinch
Overseas Expansion Not Enough for a Turnaround
Desperate for Profit Through Ultra-Low Prices, Discounts, and Cost Reduction

A 'domestic consumption slump tsunami' has swept over the retail industry. As consumers have closed their wallets when it comes to purchasing goods necessary for daily life?clothing, food, beverages, and other essentials?the first quarter management results announced by retail companies this year clearly reflect the impact of the domestic market downturn. Since the end of last year, consumer sentiment has frozen due to the impeachment crisis, and on top of that, erratic weather has caused even seasonal consumption to vanish.

Major retail companies have expanded discount events targeting consumers whose purchasing power has been eroded by high inflation, and are seeking breakthroughs through cost reduction and overseas markets. However, faced with both the aggressive expansion of online platforms and the wave of sluggish domestic demand, their profitability has significantly declined. Experts interpret the first quarter 'earnings shock' of major retail companies not as a temporary economic downturn, but as a sign of structural stagnation in the domestic market.

According to the industry on May 16, the three major domestic department store companies all saw negative growth in sales in the first quarter of this year. Lotte Department Store's first quarter sales amounted to 806.3 billion won, a 1.1% decrease compared to the same period last year. While overseas department store sales, including Lotte Mall West Lake Hanoi, which opened in Vietnam in September 2023, increased by 6.2%, domestic department store sales fell by 1.4%. During the same period, domestic department stores' operating profit was 127.9 billion won, up 39% from the previous year, but this was due to tightened cost controls, such as improved operational efficiency and reduced selling and administrative expenses.

Citizens are shopping at a large supermarket in Seoul. Photo by Yonhap News

Weak Fashion Sales... All Three Major Department Stores See Negative Growth

Shinsegae Department Store recorded first quarter sales of 659 billion won and operating profit of 107.9 billion won, down 0.8% and 5.1% respectively from last year. The company analyzed that sales remained relatively strong, at a level similar to last year's record high for a single quarter, despite severe consumption stagnation. The decline in operating profit was attributed to increased depreciation expenses following investments in Gangnam branch's Suite Park, House of Shinsegae, Shinsegae Market, and the main store's The Estate.

Hyundai Department Store also saw double-digit increases in both sales and operating profit in the first quarter compared to the same period last year, thanks to a rebound in subsidiaries such as Zinus, which operates the mattress business, and its duty-free shop. However, its core department store business posted sales of 589 billion won and operating profit of 97.2 billion won, down 0.8% and 5.7% respectively from the previous year, reflecting the impact of the economic downturn.

An industry insider said, "In January this year, performance was not bad thanks to the Lunar New Year holiday effect, but in February, when spring/summer (SS) new product marketing began in earnest, unfavorable conditions such as a prolonged cold snap led to sluggish fashion sales." The insider added, "Compared to last year, which was a leap year, there was also one fewer business day in the first quarter, which contributed to the sales decline."

In fact, fashion companies saw a sharp drop in demand for transitional season clothing due to abnormal weather, resulting in a significant decline in both top-line growth and profitability in the first quarter of this year. Fashion companies with a high reliance on the domestic market were hit especially hard. Hansome, a Hyundai Department Store Group affiliate, posted first quarter operating profit of 21.8 billion won, down 32.9% from the previous year, and sales of 380.3 billion won, a 3.4% decrease. During the same period, Samsung C&T's fashion division recorded operating profit of 34 billion won, down 37%, and sales of 504 billion won, down 2.5%.

Shinsegae International's operating profit was 4.6 billion won, down 59% year-on-year. Sales amounted to 304.2 billion won, a 1% decrease from the previous year. F&F's operating profit was 123.6 billion won, down 5.1% year-on-year, and sales also decreased by 0.3% to 505.6 billion won. Kolon FnC posted an operating loss of 700 million won, turning to a deficit, and sales fell 4.1% to 262.9 billion won. These companies all cited weakened consumer sentiment and the impact of weather as the main reasons for the deterioration in performance.

According to the Bank of Korea, the Consumer Composite Sentiment Index (CCSI) has remained below 100 for five consecutive months, from December last year to last month. After plunging to 88.2 in December last year due to the aftermath of martial law, the index is still hovering in the 90s. A reading below 100 indicates a pessimistic outlook for the economy.

Large Discount Stores Survive Through Promotions

The situation was no different for large discount stores. Hypermarkets, which handle food and daily necessities, have tried to defend their performance since the beginning of the year through large-scale discount events. However, the consensus is that profitability has deteriorated to the point of crisis, as evidenced by the number two player, Homeplus, entering corporate rehabilitation proceedings in the first quarter of this year.

In the case of Emart, consolidated first quarter operating profit surged 238.2% year-on-year to 159.3 billion won, marking the highest first quarter result in eight years since 2017. This is analyzed as the result of focusing on boosting profitability relative to sales by strengthening discount events and reducing costs. In fact, by business segment, discount store sales amounted to 816.2 billion won, up only 0.3% from the same period last year.

Warehouse club Traders saw sales rise 9.9% to 190.6 billion won, thanks to the opening of the Magok branch in Gangseo-gu, Seoul in February. Operating profit grew even more sharply, up 36.9% to 42.3 billion won, which is interpreted as the result of cost efficiency improvements achieved by establishing a unified purchasing system for Emart and Traders since last year. An industry insider said, "By integrating purchasing, companies can streamline distribution procedures and reduce overall costs through stronger price negotiation with suppliers, which significantly contributes to improving retail companies' performance."

The number three player, Lotte Mart and Lotte Super, were hit even harder by the consumption slump. Lotte Mart's sales increased 0.3% year-on-year to 1.4873 trillion won, but operating profit fell 34.8% to 28.1 billion won. Lotte Super's sales and operating profit dropped 7.2% and 73.3% respectively, to 305.2 billion won and 3.2 billion won. In particular, domestic market mart sales fell 3.4% to 1.0184 trillion won, while operating profit plunged 73.5% to just 6.7 billion won. This includes a loss of 10.9 billion won from transferring the 'e-grocery (online grocery business)' from the e-commerce division to the mart division in October last year, as well as costs related to standard wage adjustments. In the case of Lotte Mart, the cost-offsetting effect of the integrated purchasing system was also limited, as its implementation was already completed in 2023.

Homeplus applied for sudden corporate rehabilitation proceedings in early March, citing concerns over a liquidity crisis following a credit rating downgrade. Since then, the company has continued to hold weekly discount events, stating that it will use cash generated from normal business operations to pay manufacturers and in-store partners. An industry insider said, "Homeplus filed for rehabilitation proceedings in March, and by boosting sales through large-scale discount events, the company likely did not suffer a major blow to its first quarter results." However, the insider added, "It will be difficult to maintain this sales strategy indefinitely, so the company may soon hit its limits."