Convenience store stocks in Korea plunge by more than 20% this year

[Courtesy of BGF Retail and GS Retail]

The growth in South Korea’s convenience store industry is slowing after a boom during the pandemic led by high prices as an ease in inflation affects profit and they face higher marketing costs amid fierce competition for the top spot.

According to the Korea Exchange on Monday, shares of GS Retail Co, operator of GS25, closed at 21,300 won ($16.6), down 24.3 percent in the seven months of this year, while those of BGF Retail Co., operator of CU, finished at 164,000 won, down 22.1 percent.

Over the past one year, shares of GS Retail dropped 7.4 percent while BGF Retail rose 44.7 percent.

This huge fluctuation of both stocks came as convenience stores have performed exceptionally well during the pandemic and benefited from high inflation.

As the cost of dining out skyrocketed, the low-cost lunchbox craze helped convenience stores become a key source of food for workers and households.

However, minimum hourly wages, a major variable in the industry‘s profitability, was raised by 5.1 percent last year and 5 percent this year. They have increased even further for next year to 9,860 won, up 2.5 percent from this year.

GS Retail operates in diverse business segments, including convenience stores, which account for 69 percent of total sales, followed by supermarkets, television home shopping, Parnas Hotel Co., and digital commerce.

Yet, brokerages see that the performance of its main business, convenience stores, has yet to recover.

According to financial data tracker FnGuide Inc. on Monday, at least three securities firms projected GS Retail to post sales of 2.97 trillion won in the second quarter, up 5.36 percent from a year earlier and operating profit of 80.3 billion won, up 69 percent.

Shares of BGF Retail have also fallen more than 20 percent this year, but analysts say that the recent decline is somewhat excessive and is only attributable to overheating from a surge in the company’s operating profit in the past two years. The company’s operating profit rose 23 percent from a year ago in 2021 and 27 percent last year.

For the second quarter, sales of BGF Retail are expected to rise 9 percent year over year to 2.09 trillion won and operating profit by 13 percent to 80 billion won.

The company’s business segments are processed food, which accounts for 43 percent of total sales, followed by tobacco with 38 percent, food with 13 percent, and non-food with 6 percent.

“Despite the slowdown in food inflation that peaked in the first quarter this year, CU’s customer transaction continues to grow, driven by a higher proportion of food sales, including high-cost home meal replacements,” said Park Eun-kyung, an analyst at Samsung Securities Co. “A structural growth continues in the course of transformation to a grocery store from a tobacco store.”