Costco Korea hit by falling profits
By Lee Hyo-sik
Costco Wholesale Korea is beginning to feel the fallout from the prolonged consumption slump as more and more consumers tighten their belts amid growing economic uncertainties.
The Korean unit of the Seattle-based warehouse chain is also facing stiffer competition from e-mart’s Traders and other homegrown rivals, making it more difficult for the company to make money in the increasingly saturated consumer market.
According to Costco Korea, Thursday, its operating profit reached 160 billion won ($138 million) from September 2015 to August 2016. But this was down 8.5 percent from the previous corresponding period, marking the first decline since 2001 when it posted a 790 million won operating profit.
The firm’s sales rose 9.3 percent to 3.5 trillion won, 3.6 times Traders’ 960 billion won.
But analysts say the local unit of the American membership wholesale operator, founded in 1998, will even suffer further sales declines in the coming years as more Korean consumers purchase goods online rather than visit offline stores.
In addition, Traders, Lotte VIC and other domestic wholesalers who have aggressively expanded their operations have been stealing shoppers from Costco by offering more diverse products at lower prices.
Currently, Costco Korea operates 12 stores across the country. Of the 12, three stores in western Seoul, Daegu and Daejeon were set up on borrowed property from e-mart. The lease contracts will all expire in May 2018.
If the country’s largest discount store, which holds a 3.3 percent stake in Costco, decides not to extend the contracts, this would deal a severe blow to its business.
Many analysts predict that e-mart will not likely renew the lease agreements with Costco, and instead set up Traders’ outlets as the discount store relies more on its wholesale unit, which has expanded at a double-digit rate in recent years.
“It is too early to say whether to extend the lease contracts with Costco or not,” an e-mart official said. “We first have to study which is more profitable, running our own Traders stores or receiving rent from Costco. We have a plenty of time to do so.”
Traders’ sales have increased by as much as 40 percent in recent months, attracting larger numbers of consumers looking to buy diverse consumer goods in bulk, the official said. “Traders has emerged as a popular shopping place where people can get attractive deals. We charge no membership. Anybody can freely come to our stores and buy what they need.”
In contrast, those who shop at Costco outlets must pay a 35,000 won annual membership fee and pay for purchases with cash or credit cards issued only by Samsung Card. These less customer friendly policies have often invited protests from consumer advocacy groups.
The e-mart official stressed that Traders does not intend to compete directly with Costco, saying its 11 outlets are relatively far away from Costco’s.
“It is not the time for Traders to compete directly with the American wholesaler. But we will probably have to in the future after increasing our size and strengthening our competitiveness,” he said. “We will continue to offer a range of high-quality consumer goods at lower prices.”