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     Oct 26, 2012

Korea shops till the mom 'n' pops drop
By Aidan Foster-Carter

A battle is raging in Korea. Unless you live there you may have missed it, for fortunately this isn't a real war. We're not talking about the North, and its outrageous threat to rain artillery shells and rockets on peaceful activists exercising their lawful - albeit provocative - right to launch propaganda-laden balloons across the Demilitarized Zone (DMZ). Cravenly, I'm glad the Southern authorities blocked them. Sometimes discretion really is the better part of valor.

So let's refocus away from the humorously named DMZ to the upmarket suburbs of Seoul. Like their equivalents elsewhere in our Identi-Kit world, these are full of people whose idea of a good time, pathetically, is shopping. South Korea is quite a rich country these days, so this basic activity no longer means


popping out to the corner store for this and that when needed.

No sir, or rather no ma'am. These days, it goes like this. You get in your shiny car or sport-utility vehicle (Chelsea tractor, we call them in my country). Other folks have the exact same idea, so you sit in traffic, wasting time and money while polluting the air. Eventually you reach Shangri-la.

And what is this temple of earthly desires? Why, a hypermarket, of course. Here every need can be sated, every want satisfied. Quality is assured, prices are competitive. The aisles may be crowded, but hey, this is how modern families live. Full fridge, full freezer: Full life.

I'm not knocking, much less mocking. We all do this. Me, I'm lucky to live within walking distance of a Waitrose, the best British supermarket. Carrying all those bags home - plus my toddler, for a real challenge - is good exercise. But most people don't have this option, so if you have a car (OK, we're not talking village India here), it makes sense to drive. There may be nearer, smaller shops - but the range is less, the price is higher, the quality variable.

Hence the rise of hypermarkets. This is a global phenomenon, but with local characteristics. A store brand may flourish in its own country or continent, yet stumble if it ventures further afield and makes the mistake of thinking it had found a formula that works worldwide. We all consume, but not identically. In everything from diet to layout, cultural difference is key.

That's certainly how it has proved in South Korea. Your Korean friends may tell you theirs is a small country, but they are mistaken. Fifty million people is not few; and average income per head above US$20,000 - or $30,000 if measured at purchasing power parity (PPP) - is too big a market to ignore. Two global retail giants - Walmart (US) and France's Carrefour - came in and tried their hardest. But neither could make a go of it, so they sold up and quit.

Why did they fail? Do non-Koreans just not get the Korean market? True, up to a point. Or did Koreans gang up against the intrusive foreigner? Not that time - although read on.

By contrast, another global major, Tesco of the UK, has been very successful in South Korea. It first arrived in 1999, initially as a joint venture with Samsung, but it is now wholly owned. With 458 Homeplus stores, this is Tesco's biggest market worldwide outside its UK home base. In 2010 sales topped $10 billion, generating profits of more than $500 million.

Fresh octopus, twice daily
What then is Tesco's secret? Fresh octopus twice daily, so I once read. Meaning: Know your customer and give her what she wants, only cheaper and better. It's not rocket science, really.

There may be another ingredient. Click on homeplus.co.kr, and all manner of bargains fill your screen - in Korean, naturally. I can't see an English option, nor even the name Tesco. This is Homeplus, and it's perceived as Korean. Smart move, as we shall see in a moment.

On a smaller scale, another foreign retailer has been doing well in South Korea. Costco has a different formula: It's a membership warehouse club, notionally serving small businesses but open to retail customers too. With only eight stores so far in Korea, turnover in 2011 reached a healthy 2.86 trillion won ($2.57 billion). Just one of its three outlets in Seoul, at Yangjae - in now-world-famous Gangnam, naturally - chalked up sales of 500 billion won last year.

But in Korea, as everywhere, there is a downside. What's good for Costco or Tesco, and the consumers who flock to buy there, is bad news for small independent shops. Most of them just can't compete, especially as Tesco and its Korean rivals - the two main ones are E-mart and Lotte Mart - operate not only hypermarkets but also smaller local stores, which in Korea are rather confusingly known as super-supermarkets (SSMs). More than 300 of Homeplus' outlets are neighborhood SSMs, branded Homeplus Express (just like Tesco Express in the UK).

Large and small shopkeepers have been skirmishing for a few years now. The big battalions at first seemed unstoppable, but as elections drew nearer politicians started worrying about fairness - or perhaps votes. In November 2010 the National Assembly passed a law banning supermarkets from opening within 500 meters of traditional markets or family-run stores, unless they got consent from local authorities and small-business associations. In July 2011 the distance bar was doubled to a kilometer. Naturally that has slowed the opening of SSMs.

This April the capital, run by the liberal opposition Democratic United Party, added its own by-law: ordering hypermarkets in Seoul to close from midnight to 8am and alternate Sundays. E-mart, Lotte and Homeplus took the City of Seoul to court. In June the ban was overturned and this trio resumed Sunday trading - as did Costco, which had also been affected.

Bullying bureaucrats
Smarting at its defeat, the city council fought back - and made the foreign firm a scapegoat. Bizarrely, Seoul claims that Costco cannot benefit from the ruling as it was not a party to the original suit. When Costco ignored that, the city first fined it 30 million won and then sent in hit squads of no fewer than 40 inspectors, twice. (Don't these people have real work to do?)

Needless to say they found various minor infractions - parking, hygiene etc: they'd find way more on the latter front in traditional markets. But no one is pretending this is the real issue. It's sheer bureaucratic bullying. Costco is the nail that stands out. As a foreign firm with a foreign name, indeed a foreign chief executive officer, and not one of the big three, it makes an easy target.

This is election year in South Korea. Suddenly everyone, even the ruling conservative party - rebranded Saenuri (New Frontier) this year by its new leader and now presidential candidate, the Delphic dictator's daughter Park Geun-hye - professes to be on the side of the little guy. "Economic democracy" is all the rage, though no one really knows what it means - except dislike of the big conglomerates (chaebol), which frankly have never been loved.
There are real issues here, but they won't be solved by populist slogans or dubious rules. Costco is fighting back: On October 15 it filed suit against the three district councils in Seoul where its stores are. Meanwhile it plans to open as usual next Sunday. So we must wait and see what the courts rule, and also whether Seoul council sends the heavy crew in once more.

Sadly, I'm a bit pessimistic. Costco may win its legal fight, but I hope it hasn't already lost the wider war for hearts and minds. Depressingly, the local press - even The Korea Herald and The Korea Times, read only by expatriates - has been almost all hostile: with much pompous finger-wagging, "when in Rome" homilies and the like. No one sees fit to defend the rule of law (they assume Costco is the lawbreaker, not the council), or the interests of the consumer. The tone is reminiscent of that used against other foreign betes noires like Texan fund Lone Star, harassed for years for the "crime" of making a vast profit on a risky investment.

Thus on September 28 The Korea Herald ran an article headlined "Costco riles customers by defying city ordinance", sub-headed: "Rule breaker operates every Sunday, risks biggest-ever PR crisis." Taking exception to the company's "no comment" policy - "Costco says it has no PR staff"; well, maybe it actually doesn't - this tendentious piece alleged that "even the most loyal Costco customers are bearing a grudge against the retailer's actions".

Fortress Korea
It quotes a couple, in best fortress-Korea mode: "I heard the Yangjae outlet sells more than any other Costco store in the world. Is this why they're treating Korea like a pushover? ... I wonder if they're selling Korea short because we are already buying so much from them."

A further comment is doubly revealing. The paper claimed that "the three domestic retail chains are opening stores on Sundays only in areas where the injunctions were issued", while keeping outlets elsewhere closed. That too is dismal, if even the big three are kowtowing to populist pressure rather than serving their customers and standing up for their legal rights.

But how interesting that the Herald regards Homeplus, like E-mart and Lotte, as "domestic" - when in fact it is 100% owned by Tesco! Clearly foreignness is in the eye of the beholder.

At least one reader of this sort of stuff got riled. On October 22 The Korea Times published a letter headlined "Rule of law in business". Writing from Seoul, Steven Austin accused Seoul Metropolitan Government of using "Gestapo tactics" against Costco. He also had this to say:
Make no mistake; helping mom-and-pop stores is not the issue. They have been suffering for a long time, because they are dinosaurs in a modern economy. Their business model is flawed, as rational people don't want to buy inferior produce or the same products at grossly inflated prices. Most of these shops are rundown, dirty, and cluttered. The service is subpar, and consumers don't actively choose to shop there. They shop there when they are in a pinch. Creative destruction of these mom-and-pop stores is inevitable.
"Creative destruction" was Austrian economist Joseph Schumpeter's arresting phrase for the way capitalism works and has to work. If a trade becomes uneconomic, it makes no long-run sense to protect it. Mr Austin may sound harsh, but empirically and logically he's right.

South Korea's local shops, and traditional markets too, need to find a new business model or viable raison d'etre. Customers are voting with their feet, as they are entitled to, so as to gain choice, value and quality. "Small is beautiful" may be a fashionable nostrum, but I can't see how it applies here. Do other Koreans owe mom and pop a living, no matter what? And however you answer that question, bashing a handy foreign scapegoat is no kind of answer.

Aidan Foster-Carter is honorary senior research fellow in sociology and modern Korea at Leeds University, and a freelance consultant, writer and broadcaster on Korean affairs. He has visited South Korea some 25 times in the past 30 years, starting in 1982.

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