By Park Si-soo
Some might say it’s a bloodless victory. Others might say it’s a violation of business ethics.
The debate is heating up after leading national retailer Lotte Group recently agreed to purchase a 77,800 square-meter plot belonging to the state-owned Incheon Terminal Complex that includes a seven-story building currently occupied by the second-largest retail outfit Shinsegae.
The deal worth 875.1 billion won ($786 million) is set to be finalized by January and, if Lotte buys the property, Shinsegae will have to pay rent of some 15 billion won to its archrival each year until 2017 when its lease expires and move out that year. Lotte is expected to open its department store there at that time.
Shinsegae opened the department store there 15 years based upon a long-term rental contract with Incheon City. The Incheon store posted 760 billion won in sales last year, accounting for 14 percent of the entire sales of Shinsegae Department Stores nationwide.
Incheon City said it had decided to sell the state property to help resolve its chronic financial difficulties and there is no legal problem with the deal.
“We selected Lotte as the preferred bidder after contacting 159 companies, including dozens of stockbrokerages, asset management firms and retail giants including Shinsegae,” Incheon City Spokesman Huh Jong-sik said. “Shinsegae was included in five candidates for the preferred bidder. But it withdrew its offer at the last minute, citing financial conditions. Of the remaining four, Lotte made the best offer.”
A Lotte spokesman echoed this view saying, “We won the contract in due process.” The company has unveiled a plan to develop the site in the long term as an entertainment complex with a department store, discount mall, movie theaters and other recreational facilities.
Shinsegae is furious with Lotte, calling the deal a “grave violation” of business ethics.
“We opened the Incheon store 15 years ago when there was nothing in the area. Our consistent investment there has played a critical role in making it Incheon’s most advanced shopping district. But we face the risk of losing everything in an instant,” a Shinsegae spokesman said. “In addition, we spent nearly 100 billion won last year refurbishing the building. Even though the deal is justifiable by law, it’s clear that Lotte ignored the basic ethics of the business world.”
The spokesman said the company has yet to decide whether to take the case to court.
Market insiders have ruled out the possibility that Shinsagae’s two other department stores ㅡ one in Gangnam and another in Gwangju ㅡ would be exposed to similar risks since Shinsegae doesn’t own those buildings either.
Financial analysts have expressed a negative outlook on Shinsegae, but added the incident would not hurt the company’s growth potential too much.
“Obviously it is bad news for Shinsegae. But it will have a limited impact in the long term because the company is considering opening six more department stores on the outskirts of Seoul and in rural cities. Revenue from the new stores will cover the loss from the Incheon branch,” said Lee Sang-gu, a researcher at Hyundai Securities.