Restructuring Chinese Business: Lotte Group Begins to Consider Reduction of Stores and Employees | BusinessKorea

Saturday, November 18, 2017

Anti-South Korea protestors are confronting Chinese riot police in front of a closed Lotte Mart store in Jilin province, northeast China in March.
Anti-South Korea protestors are confronting Chinese riot police in front of a closed Lotte Mart store in Jilin province, northeast China in March.
SEOUL,KOREA
7 August 2017 - 3:00am
Michael Herh

The Lotte Group began restructuring its business in China. The decision was made as the top management of the group judged that they can stand no longer as the China's economic retaliation for the deployment of the Korea-US terminal high-altitude area defense (THAAD) system has been continuing for six months, and the decision to deploy the THAAD was decided.

"As the suspension of Lotte Mart’s business in China has been prolonged, the damage has become too large to cover," said a high-ranking Lotte official on August 4. "We are considering restructuring to reduce store sizes or reduce personnel. But we are considering restructuring, not execute a complete withdrawal from China."

Lotte Mart has been negotiating to sell 20 to 30 Chinese stores which suffered from long-term deficits to local companies. Immediately after China’s retaliation against Korea for the deployment of the THAAD, China's largest distribution company, the Hualian Group invested in by the Chinese Commerce Ministry was mentioned as a strong candidate to take over Lotte Mart stores in China.

Currently, 74 stores of a total of 112 Lotte Mart stores in China are shut down and 13 are inactive due to boycotts. However, 70% of the minimum wage is paid to local workers every month. This is because a company has to pay wages if the company’s is suspended due to its fault in accordance with the Chinese Labor Law.

As a result, Lotte Mart in China suffers sales loss of 100 billion won (US$90 million) each month, and posted operating loss of over 83 billion won in the first half. About 10% of Chinese workers of Lotte Mart are also reported to quit after their stores’ shutdowns. In March, Lotte Shopping injected an emergency fund of 360 billion won (US$327 million) to Lotte Mart in China through a capital increase and borrowings. Even the fund is running out. "We will be able to hold it until the end of this month," said an official at Lotte Mart. "We should discuss alternative measures."

Lotte is not the only one. China’s retaliation for the deployment of the THAAD system became prolonged, impeding both Korea’s exports and domestic consumption. Hyundai Motor’s sales in China dipped by 190,000 units in the second quarter, losing 850 billion won (US$765 million) in net profit. Korea’s exports of farming and fishery products to China dwindled for three consecutive months -- 17.3 percent in May, 11.3 percent in June and 11.2 percent last month. Exports of agricultural and fishery products to China fell 6.5% in the first half of this year.

The situation is getting worse against expectations that the inauguration of the new Moon Jae-in government will weaken the level of retaliations by China. In June, China imposed a customs clearance ban on 48 Korean products.

As Chinese tourists stopped visiting Korea, the Korean duty-shop industry was also hit hard. Recently announced operating profit of Hotel Shilla Duty-Free Shop was halved to 47%. Lotte Duty-Free Shop, the number one company in the duty-free shop market, is expected to suffer a bigger drop than Hotel Shilla Duty-Free Shop even though its data are not publicly disclosed yet. During the same period, Lotte Department Store which enjoyed shopping by Chinese tourists suffered from a 49% drop in its operating profit.

On the other hand, the duty-free industry in Japan is raising sales by receiving reflected effects from a slump in Korea's duty-free shop industry. In particular, the number of Chinese tourists visiting Japan in the first half of this year hit 3,281,700, up 6.7% from the previous year. This figure is a contrast to a 41% decline in Chinese tourists visiting Korea from the same period of last year.

"Chinese retaliations for the deployment of the missile defense system are turning Chinese tourists to Japan from Korea," an industry official said. “In 2012, when the Japanese nationalized the Senkaku archipelago, the Chinese government banned Chinese tourists from visiting Japan so a cruise ship en route to Shimonoseki Port changed its route to Jeju Island and the domestic duty-free shop industry started to revive in earnest. Now the situation is the other way around.”

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