South Korea’s largest multi-format conglomerate Lotte Shopping has published its Q1 results for 2016, indicating the first signs of recovery.
After a long period spent pursuing internationalisation, caution is the watchword and Lotte has signalled specific priorities to ensure profitability, especially after three consecutive years of lower returns due to heavy investments.
Lotte’s hypermarket operations, especially in China, have sustained the overall business for the past three years. Fresh categories were improved in 2015 thanks to product innovations, but big losses occurred in processed food and GM. Lotte has closed four stores in Shandong, China, to cut losses.
“In the past year, Lotte has been enthusiastically developing its latest Convenience Food Store theme across the 7-Eleven franchise business”
However, it was a solid 2015 performance for Lotte’s 7-Eleven convenience arm. It enjoyed a 7.6% net profit at full year, making it Lotte’s only division delivering actual growth at present. This success was built on 769 new store openings and 14% like-for-like gains.
In the past year, Lotte has been enthusiastically developing its latest Convenience Food Store theme across the 7-Eleven franchise business. This has a heavy emphasis on foodservice, with what is called the Seven Café concept. This has successfully differentiated from rivals CU and GS25 by targeting the single-household segment and extending its services, such as home delivery.
Huge investments worth the future rewards?
An ageing population, sluggish economy and restrictive regulation are all cited as pressures that have forced many South Korean operators to abandon their home market for more promising territories in Southeast Asia or across the border in China. Lotte Shopping is no different in this respect. Nevertheless, the need to revamp existing businesses is urgent and still achievable despite the complexity of its operations.
“Many South Korean operators have abandoned their home market for more promising territories in Southeast Asia or across the border in China. Lotte Shopping is no different in this respect”
Time will tell whether investments in new markets and formats will reap Lotte a profitable reward. However, in the short and medium term, the retailer is suffering from both financial burden and poor performance.
Department stores (South Korea and China): Lotte will continue its specialist outlet strategy, including urban outlets, factory outlets and department stores with entertainment brand collaborations, etc. This sector is particularly relevant to tapping tourist spend. Product differentiation will be maintained with an emphasis on premium lifestyle, food categories and profitability, while store efficiencies to streamline the business will also be pushed hard.
Hypermarkets (international): Following the recent successful store renewal scheme in Masan, the retailer extended the concept to 30 other domestic stores, including new openings. The programme has three main areas of focus – in-store interactivity, online distribution centres and local sourcing – in keeping with the overall omni-channel strategy.
Convenience (domestic): Food categories will continue to be developed, with a focus on the lunchbox, fast food and small-bite deli segments. Further brand collaboration with suppliers is planned. Massive expansion is in the pipeline for the Seven Café format from 2,400 stores in 2015 to 4,500 in 2016.
- Anna Hoang is associate analyst at Planet Retail