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Lotte Mart exits China, other units may follow

Lotte Mart exits China, other units may follow

After retaliation by the Chinese government for the deployment of a U.S. missile shield in Korea, the discount supermarket chain Lotte Mart has given up and decided to essentially pull out.

A former Lotte golf course is being used as the home of the U.S. Terminal High Altitude Area Defense antimissile system.

SEE ALSO : E-Mart to exit China on widening losses, THAAD woes

Over the last six months of 2017, Lotte Mart branches have been shut down for alleged safety violations and consumers have boycotted the stores, encouraged by Beijing.

The company poured 700 billion won (US$618.5 million) into its China operations to keep them going, but finally gave up.

Goldman Sachs has take charge of the sale of Lotte Mart’s China business since 12 September 2017. The company hopes to sell all 112 marts in China, but said the sales could involve part of the business depending on the situation.

Lotte Mart’s China woes began in September 2016 when the Korean government swapped land for a Lotte-owned golf course in Seongju, North Gyeongsang, where the Thaad antimissile system was deployed.

China started imposing strict regulations on Korean companies in retaliation.

In November 2016, Chinese authorities started fire and tax inspections on Lotte Marts.

Several stores were fined and from March 2017 suspensions began. Currently, 87 Lotte Mart branches in China have closed and the situation at the open markets isn’t much better.

“We cannot do anything about the situation when Chinese authorities are suspending our shops saying they use too much electricity,” a spokesperson from Lotte Mart said.

In the second quarter of 2017, Lotte Mart’s Chinese operations reported 21 billion won in sales, about 10 percent of sales in the same quarter last year.

If the situation continued through the end of the year, the Korean retail chain would see a decline of roughly 1 trillion won in revenue compared to the previous year, according to industry insiders.

Lotte Mart had insisted it could not pull out from China because the conglomerate has other affiliates operating there, like Lotte Department Store.

The conglomerate injected 360 billion won in March and another 340 billion won recently to keep the stores operating.

In March 2017, Lotte Group Chairman Shin Dong-bin had expressed his intention to continue business in China in an interview with the Wall Street Journal. But the losses grew too large, industry insiders say.

“As relations between Korea and China that were expected to thaw with the new administration in Seoul continue to be frozen, Lotte has made a decision,” a source from the retail industry said.

According to local broadcaster SBS on 15 September 2017, snack maker Lotte Confectionery and beverage maker Lotte Chilsung  also considered selling their Chinese operations.

Local securities firms are welcoming Lotte’s decision, saying the news will benefit the company’s share price.

“Considering the current atmosphere, Lotte would not be able to maintain a stable business in China even after suspensions are lifted,” said Sohn Yun-kyung, an analyst from SK Securities. “Selling Lotte Mart’s 112 branches will be easier than expected thanks to the economies of scale.”

SEE ALSO : Lotte Duty Free threatens Incheon exit as THAAD crisis deepens

Cindy Yu, an analyst from Daishin Securities, added that while the news will give short-term momentum to the company’s share price, the company will have to find other markets to sustain growth in the long term. And few markets are as good as China.

Shares of Lotte Shopping, of which Lotte Mart China is a subsidiary, rose 18,500 won or 8.41 percent from the previous trading day to 238,500 won on 15 September 2017.