GS Retail faces questions over profitability
Citizens walk past a GS25 convenience store in Sogong-dong, Seoul, in this July 12, 2017, file photo. / Korea Times file
By Nam Hyun-woo
GS Retail, the operator of the GS25 convenience store chain, is facing questions over its profitability, as it posted contracted numbers in its earnings last year amid a worsening domestic business environment for retailers.
According to a regulatory filing, Thursday, GS Retail logged 30.96 billion won in operating profit last year, down 19.3 percent from 2016. Its net profit also skidded to 10.7 billion won in 2017, down 92.4 percent from a year earlier.
The contraction stems from slumps in its core business of convenience stores, which account for 70 percent of its earnings.
Last year, GS Retail posted 1.57 trillion won in sales from the convenience store business, up 6 percent from 2016. The number of GS25 stores also increased from 12,199 in 2016 to 12,429 last year.
Despite the sizeable growth, the operating profit at its convenient store business declined by 6 percent to 37.1 billion won during the same period. Per-store sales also shrank by 9 percent.
Analysts say GS25’s weakening profitability is related to the saturation of the domestic convenience store industry.
The number of convenience stores in Korea stands at around 40,000, with three big players -- GS25, CU run by BGF Retail and 7-Eleven run by Lotte affiliate Korea Seven -- having more than 30,000 stores.
This means there is one convenience store per 1,250 Koreans, far more than the one per 2,200 in Japan.
As the number of stores grows, however, the costs for opening new stores and maintaining them are outweighing the profits coming from the advantages they obtain due to their scale of operation, hampering sustainable growth.
Casting a thorny issue for GS Retail is the government’s minimum wage hike. In part of its plan to raise the minimum wage to 10,000 won by 2020, it increased the wage by 16.4 percent to 7,530 won at the start of the year.
As the hike is expected to place additional burdens on franchise owners, GS Retail decided to spend 35 billion won to support them, meaning additional costs will be incurred.
“Due to the minimum wage hike, expenses will likely increase for GS Retail and cannibalization may occur between stores,” KB Securities analyst Park Shin-ay said. “Though the company plans to streamline its cost structure, uncertainty still remains.”
Another concern for GS Retail is the poor performance of its health and beauty products store chain. GS Retail has been the sole operator of Hong Kong-based Watsons in Korea since February last year.
Despite its ambitious bid to overtake No. 1 health and beauty store here, Olive Young of CJ, analysts say Watsons only remains as a loss incurring factor for GS Retail.
“The continued operating losses from Watsons and decline in earnings from leasing as GS Retail sells its mall in Pyeongchon, Gyeonggi Province, badly affected the company’s performance last year,” Park said.
GS Retail sees its subsidiary Parnas Hotel’s hotel and leasing business will become a breakthrough for its earnings deadlock.
Parnas Hotel currently runs the Grand Intercontinental Seoul Parnas, the Intercontinental Seoul Coex and a number of other hotels and malls in Seoul. Also, it is in charge of leasing Parnas Tower in Gangnam.
According to its filing, Parnas Hotel logged 75.4 billion won in sales last year, up 15 percent from a year earlier. Its operating profit also improved significantly to 17.1 billion won, up 141 percent during the same period, as the leasing rate at Parnas Tower rose to 98 percent.
In part of its efforts to diversify revenue sources, GS Retail signed a memorandum of understanding with Kakao Jan. 11 for the development of a chatbot for the retailer.