Experts call for regulation changes as hypermarkets face declining foot traffic

Korea’s major retail chains have had disappointing third-quarter results, setting off alarm bells as brick-and-mortar franchises continue to fall behind in the competition against online commerce.

A supermarket is closed on Christmas Eve — due to a government regulation that mandates closing for a day every other week — on Dec. 24, 2023. [YONHAP]

Korea’s major retail chains have had disappointing third-quarter results, setting off alarm bells as brick-and-mortar franchises continue to fall behind in the competition against online commerce.

Analysts attribute the slump in supermarket sales to customer attrition, spurred by the government’s consumer coupon program meant to support households. Industry insiders are calling for relaxed regulations as retail continues its shift toward e-commerce.

According to a public filing on Monday, Emart’s supermarket division posted 2.97 trillion won ($2 billion) in total transaction volume in the third quarter of this year — a 3.4 percent drop year-on-year. Operating profit fell 20.9 percent to 54.8 billion won. This marks the second consecutive year of quarterly decline, a warning sign of a deepening crisis.

However, Emart’s consolidated results — including its warehouse-format chain Traders and Shinsegae Property — showed relatively better performance, with net sales of 7.4 trillion won and operating profit of 151.4 billion won. While sales dipped 1.4 percent, profits rose 35.5 percent year-on-year, largely buoyed by the discount brands' 24 locations, which helped offset sluggish performance at Emart’s 131 supermarkets nationwide.

Lotte Shopping also reported lackluster results, weighed down by underperformance at its supermarkets and the so-called super-supermarkets (SSMs). The grocery division’s third-quarter net sales came to 1.3 trillion won, down 8.8 percent from a year earlier. Operating profit plummeted 85.1 percent to 7.1 billion won. The unit has recorded declining sales and profits every quarter since the third quarter of last year. Industry watchers expect similarly weak results from Homeplus, which remains under court receivership while seeking a buyer.

An employee cleans up the vegetable section at a retail store in Seoul on Nov. 10. [YONHAP]

The disappointing figures reflect both structural issues — such as falling behind in the shift to e-commerce while still subject to regulations requiring two shutdowns per month — and policy factors, such as being excluded from the government’s consumer coupon program.

13 trillion won worth of consumer coupons were circulated to stimulate spending, but hypermarkets were left out of the designated retailers, further dragging down sales and profits. By contrast, convenience stores — which struggled earlier this year — benefited from the coupons in the third quarter.

In response to declining foot traffic, offline retailers have closed underperforming branches and added so-called experience-based offerings, where hypermarkets have extended their focus beyond fresh foods to include pop-up stores and beauty or fashion-focused in-store events aimed at keeping customers on-site longer. Lotte Mart, for example, announced plans to host a “Beautyplex” promotion featuring more than 1,000 beauty products between Thursday and Nov. 26.

Still, experts say such efforts are insufficient to reverse the larger shift toward online shopping. “Amid prolonged economic stagnation, consumers are gravitating toward e-commerce, where price comparisons are easier,” said Lee Jung-hee, a professor of economics at Chung-Ang University. “Despite efforts by hypermarkets to revamp their strategies, it will be difficult to win back consumers who have already experienced the convenience of online shopping.”

According to the government, online shopping penetration in the domestic retail market (excluding automobiles and fuel) reached 45 percent in 2023.

A customer looks at snacks displayed at a CU convenience store in Seoul on Oct. 14, 2024. [YONHAP]

As a result, e-commerce platforms that had long operated at a loss are now posting profits. Coupang, which first turned a profit in the third quarter of 2022, has remained in the black, and Kurly, which marked its first-ever consolidated operating profit in the first quarter of this year, reported its first net profit of 2.3 billion won in the third quarter. With third-quarter operating profit at 6.1 billion won, Kurly is now just 1 billion won behind Lotte’s grocery division.

Large hypermarket operators are now pleading for the government to ease regulations under the Distribution Industry Development Act, which mandates two monthly closures and bans sales from midnight to 10 a.m. “The rule, introduced in 2012 under the pretext of protecting traditional markets, is now outdated,” one hypermarket official said. “Hypermarkets are no longer a threat to traditional markets.”

If the sunset clause on the distribution law is extended on Nov. 23, regulations on hypermarkets and SSMs will remain in place until November 2029.

Another official added, “We need balanced regulations that do not put offline retailers at a disadvantage, ensuring consumer choice and fair market competition.”

BY NOH YU-RIM [yoon.soyeon@joongang.co.kr]