South Korea's department store industry appears to be pausing after a stretch of rapid growth, as third-quarter operating profit estimates for the country's three largest retailers — Lotte Shopping, Shinsegae and Hyundai Department Store — were all revised downward. A decline in the domestic stock market has weakened the wealth effect, while a stronger won has made prices less attractive to foreign shoppers, fueling concerns about slowing growth. Still, the industry expects department stores to return to steeper growth in the fourth quarter, supported by the year-end shopping season and spending tied to corporate bonus payouts.
Third-quarter operating profit estimates for the three retailers were all cut over the past month, according to an analysis of major listed retailers by financial data provider FnGuide released on the 19th. The estimate for Lotte Shopping fell 1.4% to 179.7 billion won from 182.3 billion won a month earlier, while Shinsegae's was revised down 1.9% to 178.1 billion won from 181.5 billion won over the same period. Hyundai Department Store saw the steepest cut among the three, down 5.6% to 91.1 billion won from 96.5 billion won.
Third-quarter operating profit at the three companies is still expected to rise by double digits from a year earlier. But with consumer spending growth losing steam, analysts say the sharp expansion is gradually easing. The won-dollar exchange rate is cited as a particular drag, closing at 1,331 won on the 16th, its lowest level in two years. A stronger won has made goods at Korean department stores relatively less attractive in price terms for foreign tourists.
A sharp drop in the KOSPI has also weakened the boost to consumption that comes from rising asset values, analysts said. The index topped the 9,300 level in June before falling to around 5,660 as of this month.
Kiwoom Securities said domestic department stores are seeing slower sales growth, centered on home appliances and luxury goods, as the wealth effect has narrowed with the domestic stock market's rally losing momentum and demand fading after promotional events by major appliance brands in June and July. Daishin Securities also said expectations for the wealth effect have dimmed as the KOSPI's upward momentum has weakened, adding that growth in department store sales is slowing from the first half.
Sales data show the same trend. Department store sales in Korea rose 24.5% from a year earlier in May and 22.2% in June, according to the Ministry of Trade, Industry and Energy's data on sales at major retailers. The pace then narrowed for two straight months, to 17.9% in July and 11.9% in August. August marked the slowest growth so far this year.
The industry nevertheless expects consumer sentiment to recover around the end of the year, putting department stores back on a steeper growth path. Shoppers may buy luxury goods and other high-priced items in advance of corporate bonus payouts, and spending could pick up again alongside the year-end shopping season.
An industry official said it is true that concerns exist about slowing growth at department stores, with the wealth effect partly eroded by the recent fall in the exchange rate and greater stock market volatility. But the official said an influx of foreign tourists, preemptive spending ahead of bonus payouts and rising year-end gift demand are expected to offset the impact of the asset market slowdown and keep the industry on a solid growth track.