How will the retail market evolve in 2024?
Analysis and Outlook of the Korean Retail Industry by Sector:
Part1. Department Store
February 15, 2024
The high-interest rates and inflationary pressures that significantly impacted the consumer market in 2023 are expected to somewhat alleviate in 2024. However, with persistent internal and external uncertainties, the outlook for the retail market remains somewhat subdued.
Leading players in various sectors of the retail industry are formulating their own survival strategies. In this series of articles, we will explore the performance of each sector in 2023 and examine how the dynamics will evolve in 2024.
A. Department Store:
Upsizing and Polarization
In the wake of the COVID-19 pandemic in 2020, department stores, which recorded sales of 27.4 trillion won, saw consecutive growth over the following two years, reaching 33.7 trillion won in 2021 and 37.7 trillion won in 2022. However, 2023 sales are at around 38 trillion won, representing a modest growth of approximately 0.8%. Department store sales are distinctly declining, with both customer traffic and average spending per customer decreasing.
Examining the sales composition by product category reveals a shift from the luxury goods segment, which had been driving department store growth steadily since 2017, showing a decline in 2023. Household goods, which experienced a surge in demand during the pandemic, also saw a decrease in sales proportion in 2023 following a similar trend from the previous year, while the relative share of food and miscellaneous goods sales has increased.
The Korean department store industry has maintained relatively robust growth despite the rise of online channels, thanks to the department stores' adaptability to trends and resilience to economic fluctuations. From the perspective of product suppliers, global luxury brands have actively entered the Korean market and conducted robust marketing campaigns. Leveraging Seoul's position as a global cultural hub based on K-culture and K-pop, events such as Louis Vuitton's fashion show at the Seokchon Lake and Gucci's fashion show at Gyeongbokgung Palace have garnered significant attention. From the consumer perspective, there has been a positive impact from increasing foreign demand post-pandemic. While in the past, the industry heavily relied on specific countries like Japan and China, there has been a shift with an increasing number of tourists from around the world visiting Korean shopping facilities, with The Hyundai Department Store's role accounting for 12% of sales from overseas tourists. It is expected that the proportion of sales from foreign customers in department stores will further increase in the future.
The most important trend in the department store industry recently is the trend towards "upsizing" and "enhancing attractiveness." After the opening of Shinsegae Centum City in Busan in 2009, large-scale stores exceeding 20,000 square meters, such as Hyundai Pangyo, Starfield Hanam, The Hyundai Seoul, Lotte Dongtan, and Shinsegae Daejeon Expo, have been opening successively. These large-scale stores offer various attractions such as enhanced experiential elements, reflecting trendy tastes, and creating family-friendly spaces as their concepts. They introduce various plans to enhance attractiveness, such as presenting pop-up stores with popular brands among young consumers and attracting popular dining spots featured on social media.
Another large-scale store opened in December. Starfield Suwon, with a floor area of 330,000 square meters is expected to impact surrounding competitors such as Lotte Mall Suwon, AK Plaza Suwon, and NC Department Store Suwon. Shinsegae, which has created a successful formula as the "number one store in good areas," is also pursuing upsizing through the renewal of its Gwangju store.
With the increasing number of large-scale stores, department stores that record 3 trillion won in sales per store have emerged, and as sales from the top 10 department stores in Seoul and the metropolitan area become equal to those from the bottom 55 department stores, polarization within the department store industry is deepening.
It is noteworthy that top-selling department stores are showing signs of nationalization as their negotiating power with brands increases. As powerful large-scale stores emerge, they incorporate surrounding inactive stores into their commercial areas, creating super-large commercial areas, thereby forming stronger commercial areas through the formation of strong stores, known as "the greater the more" phenomenon, which is expected to become more prominent in 2024. Consequently, local department stores may face issues of business deterioration and structural adjustments in 2024.