Brutal retail market awaits buyer of Tesco South Korea business
In this article (5)
Any buyer of Tesco’s $6 billion South Korea unit will need a strategy to boost returns in a lethargic and saturated market for traditional retailers, likely involving real estate sales and a greater focus on Internet shopping.
Britain’s Tesco has hired HSBC to advise on a potential sale of its South Korean unit, Homeplus, Reuters reported this month, in what could be Asia-Pacific’s largest private equity deal and the No. 2 merger in the Asian consumer sector.
Given the scarcity of big buyout targets in Asia, the sale is generating strong interest among buyout firms including KKR & Co and Carlyle Group CG.N, sources with knowledge of the sale process said. That’s despite difficulties posed by South Korea’s crowded retail sector, a sluggish and fast-aging economy, plus regulatory and labor challenges.
“Anyone going with the view of closing unprofitable shops, cutting work force, will be in for a surprise,” a senior Hong Kong-based investment banker familiar with the process said, citing likely opposition from labor unions.
“It’s a tough market but there are some low-hanging fruits in terms of stripping property assets,” said the banker, who declined to be identified as the discussions are confidential.
Homeplus Co Ltd’s property holdings, consisting mainly of stores, had a book value of 3.09 trillion won ($2.77 billion) as of the end of February, according to a regulatory filing.
With about 400 stores including 140 hypermarkets, 88 of which it owns, Homeplus has raised about 1.2 trillion won since 2012 by selling and leasing back eight of its biggest-selling stores, according to South Korean deal website Invest Chosun.
Its prime real estate holdings include a hypermarket in densely populated Seoul suburb Euijeongbu, which frequently ranks among its top 5 stores by sales.
But it’s a crowded field. South Korea has nearly 500 hypermarkets for a population of 50 million, or twice what the industry considers optimal. The difficulties prompted Carrefour and Wal-Mart to quit the country in 2006.
In a nod to a fiercely competitive market, Homeplus earlier this year sacrificed an equivalent of about 100 billion won in annual profit, or almost half of last year’s earnings, by cutting prices on some 500 kinds of fresh produce.
“It’s a tough market but there are some low-hanging fruits in terms of stripping property assets,”
“Competing by undercutting price has become the norm and is expected to continue in future,” said Lee Kyoung-hee, principal researcher at Shinsegae Research Institute.
ONLINE GROWTH
As the population ages faster than in any other developed economy and households shrink, retail sales in South Korea grew just 1.4 percent in each of the past two years, lagging broader economic growth.
E-commerce, however, jumped 17 percent last year to 45.2 trillion won, or 14 percent of total retail sales, and hypermarkets have been scrambling to build share in a fragmented online segment where most players lose money.
Homeplus’ share of South Korea’s online retail market has risen steadily but was still just 645 billion won last year, according to Euromonitor data in a CLSA report, for market share of just 2 percent, in line with larger rival E-Mart.
“Hypermarket chains like Homeplus have been bolstering online sales as a possible growth solution, among admittedly few options,” said Kim Tae-hong, analyst at Yuanta Securities Korea.
Lower priced warehouses have been another bright spot for Korean retailers, but while both E-Mart and Lotte Shopping’s (023530.KS) third-placed Lotte Mart have warehouse brands, Homeplus does not.
Meanwhile total revenues for existing hypermarket stores have declined since 2012 when new rules required them to close for two Sundays a month to protect traditional markets. Homeplus saw a drop in same-store sales for two straight years.
Questions & Answers
Q.What is the primary challenge facing a potential buyer of Tesco’s South Korean unit, Homeplus?
What is the primary challenge facing a potential buyer of Tesco’s South Korean unit, Homeplus?
The main challenge is the lethargic and saturated retail market for traditional stores in South Korea. The economy is sluggish and fast-aging, with the country having double the optimal number of hypermarkets for its population.
Q.Why would real estate sales be an attractive strategy for a new owner of Homeplus?
Why would real estate sales be an attractive strategy for a new owner of Homeplus?
Homeplus holds significant property assets, valued at around $2.77 billion. The company has previously raised substantial funds by selling and leasing back some of its stores, suggesting a clear opportunity for property asset stripping.
Q.How has the South Korean retail market changed, and what impact has this had on Homeplus?
How has the South Korean retail market changed, and what impact has this had on Homeplus?
Retail sales have grown slowly, but e-commerce has significantly increased, now making up 14% of total retail sales. Homeplus has seen a drop in same-store sales for two consecutive years, partly due to new rules requiring Sunday closures.
Q.What difficulties have other large retailers faced in the South Korean market?
What difficulties have other large retailers faced in the South Korean market?
The fiercely competitive and saturated market led both Carrefour and Wal-Mart to exit the country in 2006. Competing by undercutting prices has become standard, impacting profitability for retailers like Homeplus.
Reader pulse
Homeplus's future under new ownership?
23,505 votes so far