No Exit Seen
China has taken economic retaliatory measures against Lotte Group’s affiliates, including Lotte Mart and Lotte Duty Free, over the deployment of an advanced U.S. missile defense system, known as the Terminal High Altitude Area Device, or THAAD, in South Korea, for three months now.
As the Chinese authorities ordered Lotte Mart to close its stores from March, Lotte Mart will lose at least 300 billion won (US$263.97 million) in revenues and run short of emergency funds injected in March. Given the early deployment of the THAAD system by the U.S. and the current political situation of the presidential election in South Korea, China is least likely to lift restrictions on Lotte Mart or South Korea tourism this month as well.
According to Lotte Mart in China and South Korea on May 5, out of its 99 stores, 74 are forcefully shut down in the name of fire inspections and 13 closed temporarily due to anti-Korea protests. Nearly 90 percent of its hypermarket Lotte Mart outlets in China halted operations, while the remaining 12 are operating but struggling due to a fall-off in customers.
If the stores remain closed for three months until the end of this month, Lotte will suffer a lost revenue of 300 billion won (US$263.97 million). Considering the fact that Lotte Mart raked in 1.13 trillion won (US$993.4 million) in sales a year and 94 billion won (US$82.71 million) a month in China last year, the figure is a minimum estimated loss.
Lotte has more money coming out than in. This is because the group needs to spend on fixed costs for operation, such as wages and rents. Lotte is still paying wages to its Chinese employees, even though they don’t come to work. A total of 13,000 employees work at Lotte Mart branches in China making around 700,000 won (US$616) per month on average.
Chinese law obliges companies to pay employees 100 percent of their salaries during the first month of business suspension. If the suspensions are prolonged, wages can be gradually reduced on a monthly basis starting with 70 percent of full pay in the second month.
However, Lotte is still paying its employees a higher percentage of their full wages than the legal level in order to remove the disturbance of Chinese employees and understand the atmosphere in China.
With almost zero revenue, Lotte Mart will spend around 10 billion won (US$8.8 million) a month in wages alone.
When the lost sales for duty-free, food and other businesses are included, Lotte Group’s combined losses related to the THAAD issue are predicted to reach 500 billion won (US$439.95 million) from March and April. If the current trend continues, the group will lose at least 1 trillion won (US$879.9 million) in revenues for four months in the first half of this year from March to June alone.
Considering such estimated losses, Lotte will run out of 300 billion won (US$263.97 million) of funds injected. On March 24, board of directors of its parent company Lotte Shopping decided to come up with funds, including 230 billion won (US$202.38 million) from a capital increase and 158 billion won (US$139.02 million) from provision of deposit security, to keep Lotte Mart afloat in China, but it won’t last long if branches can’t reopen.
An official from Lotte Group said, “Imagine a manufacturing firm with annual sales of 1.2 trillion won (US$1.06 billion) is closed all through the quarter. Most of its emergency funds raised from capital increase and security loan have been used to purchase products and the group is hitting the limit.”
A report titled “Recent mutual economic losses between South Korea and China and Countermeasures” released by the Hyundai Research Institute, a private think tank in Seoul, on the 3rd suggested that China’s retaliation over the THAAD system could cost South Korea as much as 8.5 trillion won (US$7.48 billion) in lost sales this year, or about 0.5 percent of South Korea’s gross domestic product (GDP).
When China’s retaliation continues by the end of this year, Lotte will lose at least 2.5 trillion won (US$2.2 billion) in revenues for 10 months from March to December. In short, 30 percent of South Korea’s overall losses worth 8.5 trillion won (US$7.48 billion) can come from Lotte.