Wal-Mart Is Changing the Country’s Retail Landscape

SEOUL —  There is nervousness in the halls of corporate Korea about a powerful name from Arkansas, and it isn’t Bill Clinton.

Here in the capital, books about Sam Walton, the late legendary salesman, are flying off the shelves. And his name--more specifically, his namesake Wal-Mart Stores Inc.--is being scrutinized, analyzed and criticized in newspapers on a daily basis.

For Bentonville, Ark.-based Wal-Mart, its move into South Korea this July added another nation’s flag to a global empire that already employs 115,000 people in more than 600 overseas stores in seven countries.

South Koreans, however, see Wal-Mart as a fearsome foreign invader that is disrupting a retail landscape long dominated by a small group of powerful conglomerates and a huge network of mom-and-pop stores.

In just a few short weeks, the aggressive retailer has upset competitors by launching a vicious price war, angered some of Korea’s biggest manufacturers, and been the target of complaints to the country’s Fair Trade Commission.

“Korea is a country of history and tradition,” said J.B. Chun, president and chief executive of Daewoo Electronics Co., which has cut off sales to Wal-Mart’s Korea stores because of a dispute over price cutting. “We can’t just change our ideas immediately.”

While Wal-Mart’s take-no-prisoners attitude is riling its competitors, South Korean consumers are voting yes with their feet, clearing the company’s shelves of sale items in a matter of hours and causing traffic jams near its four stores in the Seoul area and the central Korean city of Taejon.

Patriots Up in Arms

When the dust settles, analysts such as T.W. Song predict, South Korea’s retail market will be dominated by the hardiest of the giant chaebol, or conglomerates, and foreign multinationals, with many smaller and less competitive stores falling by the wayside.

“When Wal-Mart comes into the market full-scale, it will be hard for even the big three [Samsung, Hyundai and Lotte] to maintain their superior position,” said Song, a retail analyst for SsangYong Investment & Securities Co.

In a deeply patriotic country where national pride has occasionally erupted in anti-foreign sentiments, the possibility of these changes are worrisome. Reform-minded President Kim Dae Jung has urged citizens not to blame foreigners for their financial problems but to embrace foreign capital as the best--and perhaps only--way to rebuild their battered economy.

But even Korean consumers who are benefiting from Wal-Mart’s aggressive price slashing remain apprehensive about a powerful American company’s flexing its muscle in a marketplace that has seen the bankruptcy of two dozen major retailers in the last two years.

Other foreign companies are also investing in this uncertain market. France’s Carrefour chain came to South Korea in 1993, and U.S. retailer Costco Inc. purchased three Korean-owned Price Club stores earlier this year. American Malls International, a leading U.S. shopping mall developer, and Promodes, a French retailer, are negotiating with cash-strapped South Korean retail companies looking for a cash infusion.

But none of them has generated the excitement that greeted Wal-Mart, whose price-cutting zeal is feared by competitors from Brazil to China.

When asked about the impact of Wal-Mart’s entry into South Korea, Han Mi Yong, a 36-year-old mother of two, shook her head. “It’s not that welcome a development,” she said. “You know, we Koreans are patriotic people. We want our local companies to make money.”

One South Korean entrepreneur has gone to extremes to keep Wal-Mart out of her turf. In 1992, Kim Hee Jung registered the Wal-Mart name with the Korean Bureau of Patents and opened a small Wal-Mart discount shop in Inchon, a port city south of Seoul.

When Wal-Mart figured out that its name had been hijacked, it filed a complaint with the Korean patent office and a lawsuit challenging Kim’s use of the name. Although Wal-Mart prevailed at the patent office, Kim has appealed the decision, and a hearing is supposed to be held soon. Wal-Mart is waiting for a ruling on its legal challenge.

In the meantime, Wal-Mart isn’t about to let a tiny dispute over a name get in its way, particularly when the stars have aligned so favorably for its entry into South Korea.

After the Asian financial crisis pushed South Korea to the brink of insolvency last fall, newly elected President Kim moved quickly to pass laws making the business environment more friendly to foreigners, including lifting restrictions on foreign ownership and relaxing labor laws.

At the same time, cash-strapped retailers were eager to sell off assets to pay their debts, and real estate prices fell 20% to 40%. The cost of entering the Korean market fell by half.

And as South Korea’s overall economy is undergoing a severe contraction--consumer spending shrank 12.9% in the second quarter of this year--the quest for bargains has dramatically boosted sales at discount stores in recent months.

The timing was ripe for Wal-Mart to make a move. In July, the chain bought four Korea Makro discount warehouse stores and six undeveloped sites owned by H.S. Chang, a South Korean businessman who has retained a minority interest in the operation. The total price tag was about $181 million, according to local newspaper reports.

Last year, those Makro membership stores generated revenue of more than $160 million.

Price Wars

Wal-Mart wasted no time in launching its first competitive strike. Makro sent fliers to its warehouse members offering popular items such as televisions and instant noodles at prices up to 30% less than other discounters.

For E-Mart, South Korea’s largest discount store, which is owned by one of the country’s largest retailers, Shinsegae Department Store, it was a declaration of war. E-Mart immediately slashed its prices; other local discount stores followed suit. Shinsegae, once part of the Samsung Group, is now a separate company.

Shinsegae spokesman Kang Sung Deuk said his company is prepared to “match eye-to-eye whatever Wal-Mart presents.” But he said Korean retailers cannot slash prices indefinitely without cutting costs elsewhere.

These guerrilla tactics caught Daewoo Electronics and other manufacturers by surprise. Wal-Mart was selling one of Daewoo’s hottest items, a 29-inch television, for $290, about 10% less than its wholesale price. The same television was priced at $343 to $365 at other discount stores and at $589 at regular department stores, according to a Daewoo official.

Wal-Mart’s arrival has forced Shinsegae, which operates one discount store in China, to temporarily shelve its own foreign expansion plans.

“Because of Wal-Mart coming to Korea, we have to concentrate on the domestic market first,” Kang said. “Then if there’s some power left, we will concentrate on China.”

Other Korean retailers complained that Wal-Mart’s price war was cutting deeply into their sales by unfairly luring away their customers and that the company was poaching their best employees.

As the price war escalated, several major South Korean manufacturers--including Daewoo Electronics--refused to supply Wal-Mart unless it agreed not to sell below the prices they had set for their products.

J.S. Lee, a Daewoo Electronics spokesman, said Wal-Mart’s aggressive price cutting was causing too much pain, hurting Daewoo’s other customers and severely disrupting its distribution network.

“Our basic position is that we will provide any consumer product to Wal-Mart if Wal-Mart will sell at the regular price,” he said.

South Korea’s chaebol, the giant conglomerates whose vast network includes manufacturing, distribution and retail outlets, are accustomed to setting prices because they dominate the market and have their own distribution outlets.

Until it went bankrupt in December, New Core, a retail conglomerate that owns the New Core department store and Kim’s Club discount store, was the only major retailer that wasn’t a subsidiary of a chaebol.

Outside of the chaebol-controlled retail network, the bulk of sales in South Korea are made through thousands of small family-owned shops that lack clout in the marketplace.

“My biggest advice to Wal-Mart is to consider this local environment more seriously and take this into account if they want to be a success,” said Chun, the president of Daewoo. If Wal-Mart doesn’t play by the local rules, he warned, it may find itself blacklisted by Korean manufacturers and forced to rely on imported products.

But Wal-Mart isn’t backing down. Instead it argues that steep discounting is the name of its low-price game.

“We want to give the customer a better price,” said Dale Ingram, a Wal-Mart spokesman in Bentonville. “We’re committed to do that, and we’ll continue to find ways to lower our prices.”

Ingram downplays Wal-Mart’s dispute with Daewoo and several Korean manufacturers, pointing out that there are hundreds of other vendors who are happy to provide products to the giant retailer.

“Either we will sell their products or find an equivalent or better product elsewhere,” he said.

Minn Choong Kee, executive director of the Korea Chamber of Commerce & Industry, worries that Wal-Mart’s confrontational strategy is poisoning its relationship with South Korea’s suppliers. He said manufacturers are already under keen pressure to cut prices because they are battling plummeting sales at home and elsewhere in Asia, their biggest foreign market.

“Korean manufacturers are not accustomed to bargaining with such a potentially big purchasing power like Wal-Mart,” he said. “No business can sacrifice indefinitely.”

A Growing Giant

But Wal-Mart doesn’t sound too worried about taking on South Korea’s powerful chaebol. In addition to its stores in Korea, it has 3,414 outlets to supply around the globe. Manufacturers find it hard to resist the demands of the world’s largest retailer.

“There’s bound to be some disagreement from time to time in Korea as elsewhere,” Ingram said. “We’re confident that that’s going to be resolved.”

This nasty dust-up has caught the attention of South Korea’s Fair Trade Commission, which is investigating complaints from other retailers that Wal-Mart and E-Mart have abused their dominant market positions by requiring vendors to supply merchandise at unreasonably low prices, an act banned under the fair-trade and monopoly laws.

The commission is also looking at complaints from customers that the stores are using bait-and-switch tactics by wooing customers with low prices on products that are in short supply.

Even more worrisome for South Korean firms is what Wal-Mart has planned for the future. Although the U.S. retailer has said it will build six additional stores on its undeveloped sites, it has not disclosed whether they will be Wal-Marts, Sam’s Club warehouse stores or super-centers--grocery and general-merchandise mega-stores. And it has other plans for expansion, though its officials will not disclose where or when.

“We are a $100-billion growth company, and we intend to grow in every market we serve,” Ingram said.

This kind of talk makes Lee Kang Tae, vice president of LG Mart, the retail subsidiary of LG Group, nervous. He doesn’t think Wal-Mart’s existing stores will steal much market share from his 60 supermarkets and 510 convenience stores in the near future. But Lee is confident that Wal-Mart will eventually make a grab for his customers, so his company is already beefing up its perishable goods section, which is a difficult area for mass marketers to compete in. Consumers in South Korea, as in many other Asian countries, have small kitchens and tend to shop daily because they prefer fresh produce and meats.

Lee acknowledges that his weapons of defense are limited against a company that has the resources and sophistication of Wal-Mart.

“We are confronting a ghost,” he said. “Wal-Mart has not yet shown its teeth. They are testing the market through Makro, but we don’t yet know their true identity.”

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Chi Jung Nam of The Times’ Seoul bureau contributed to this report.